Friday, September 19, 2008

Missing the Boat

When I consider what happened in the House of Representatives this week, passing a "drilling bill" that appears highly unlikely to stimulate more exploration and production--and might actually result in less--I look at two factors. Aside from the influence of those for whom the very idea of oil & gas drilling represents an affront to their sensibilities, I see a fundamental misunderstanding among many in Congress of the relative contribution of different energy sources and our structural requirements for them. More importantly, the nation still lacks a coherent energy strategy, which would serve as a guide to the tactics we should pursue. Absent such a plan, the result could hardly be anything but the grab-bag of discrete measures we observe.

Without the least bit of condescension, we should recognize that it isn't easy to compare different forms of energy, or to assess the remaining resource potential of the US. It takes a pretty solid background in science or engineering to be able to put barrels, BTUs, cubic feet, megawatts, and kilowatt-hours onto a consistent energy basis, and that still ignores the effective firewalls between the chemical-fuel economy and the electrical economy, with all their nuances. Few of our elected representatives have that background or experience, and as busy as they are with the numerous problems before them, there is a natural tendency to latch onto handy soundbites, such as the oft-repeated factoid that the US consumes 25% of the world's oil while possessing only 3% of global oil reserves. Unfortunately, this reasonably accurate comparison turns out to be entirely meaningless, because it ignores three much more relevant factors:
  1. Even after steady declines over the last 20 years, the US still produced 10% of the world's petroleum output last year. (That includes natural gas liquids.)

  2. US proved reserves figures are not a reliable predictor of future production. This is amply demonstrated by the fact that in 1997 our proved oil reserves stood at 22.5 billion barrels, compared to 20.9 billion today. Yet in the interim, we have produced 20.4 billion barrels. Coincidentally, this is roughly the quantity of oil estimated to lie under the off-limits portions of the offshore.

  3. Many of the foreign reserves included in the denominator of that widely-quoted 3% figure would not withstand the same scrutiny to which US reserves figures are subjected. In particular, they include some notably suspicious "adjustments" to reserves in key OPEC countries during a period in which OPEC quotas were based in part on each member's relative share of reserves within that body.

In effect, then, our current strategy for future US oil production rests on the interpretation of a marginally-relevant, though satisfyingly-pithy statistic as a verdict of futility. The result is a "drilling bill" that would ensure that drilling can't contribute to reducing US oil imports, by opening up only a fraction of the off-limits portions of our Outer Continental Shelf--and only the most technically-challenging ones, at that--while imposing a permanent drilling ban on everything within 50 miles of the coast, aside from the heavily-explored Western and Central Gulf of Mexico. This is like putting half your net worth into a safe deposit box and then throwing the keys into the ocean.

For a hint of what a real energy strategy might look like, you have only to read yesterday's Washington Post op-ed by Henry Kissinger and Martin Feldstein. They suggest a coordinated response by the large oil-consuming countries to our own out-of-control demand growth and to OPEC's manipulation of the global oil market. Among other things, Drs. Feldstein and Kissinger recognize that opportunities to displace oil with other energy sources are greatest where oil is used to produce heat and electricity, rather than transportation energy and chemicals. While it's not quite an energy strategy in itself, their short essay could provide the guiding principles for an energy bill that would address the economic and geopolitical dimensions of this energy crisis, rather than merely creating the appearance of action prior to a critical election.

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