Thursday, April 01, 2010

Half Full and Half Empty?

Yesterday's announcement by President Obama that his administration would allow new offshore drilling on selected portions of the Outer Continental Shelf (OCS) that had formerly been off-limits yielded a variety of reactions. Energy industry leaders were cautiously optimistic, environmentalists were disappointed or "outraged", and the Washington Post's print-edition headline called it a "political maneuver." From my perspective, it constitutes a welcome concession to the reality that the day when renewable energy sources can pick up the entire load now carried by fossil fuels is a long way off--decades, not just years--and that until then we still have some important levers to pull in minimizing the amount of foreign oil we must import. Yet however it plays in the Congressional dance to devise a "comprehensive energy bill"--the current terminology for describing legislation regulating greenhouse gas emissions--it clearly falls short of what would be required to put the medium-term energy needs of the country on a truly secure footing.

On the positive side, yesterday's announcement sets the stage for oil producers finally to gain access to offshore acreage that had been off-limits for decades as a result of a combination of Congressional and Executive drilling moratoria. So while it does not strictly speaking open up these areas for drilling--that happened in 2008 when the previous bans expired or were lifted--the President made it clear that he will not reinstate a ban for the Atlantic coast south of New Jersey or for the Chukchi and Beaufort Seas off Alaska. If you are concerned about the energy security of this country and the enormous sums we pay to import oil from abroad, that is good news, even if it will take years to go through the process that Interior Secretary Salazar has outlined.

As usual the traditional media has gauged the potential resources involved with its customary lack of insight into how oil & gas are produced in the real world, comparing them to a few years of total US consumption. The subtext here is clear: how much should we risk for a couple more years' supply of a depleting resource? The reality is quite different. Even at the low end of 39 billion barrels of recoverable oil cited by Secretary Salazar, the new zones could eventually contribute several million bbl/day for a couple of decades. If ramped up quickly enough, that could overcome the underlying decline rate of current US output and add significant net production for a decade or two, at a time when competition for the oil we are currently importing is likely to be fiercest: as the growth of Asia continues and the domestic energy needs of exporting countries skyrocket, but before renewables, conservation and vehicle electrification can achieve their full impact.

Perspective is crucial in situations like this, so let's start with some figures already familiar to my regular readers. If 39-63 billion barrels of oil doesn't sound like much compared to the vast energy appetite of the US, which even in last year's recession-dampened economy consumed 18.7 million bbl/day of oil, or when compared to the enormous reserves of the Middle East, consider that cumulative US oil production stands at around 200 billion barrels from reserves that at no point exceeded 39 billion barrels. If that sounds like a contradiction, it's because the industry has always found more oil and more ways to extract it than expected when the resources were first discovered. There is no reason to believe that won't still hold true, particularly compared to resource estimates based on technology that was current when PCs running on Intel's 286 chip were cutting-edge and cellphones were scarce and looked like bricks.

It's also worth thinking about the prospect of an extra couple of million barrels per day of domestic oil in the context of how much renewable energy we'd have to produce to provide a similar quantity of energy. Wind turbines and solar panels don't even enter into this discussion, because they do not displace any meaningful quantity of oil. That's because they produce electricity, and last year oil accounted for less than 1% of all the electricity generated in the US. On an energy-equivalent basis, each million barrels per day of additional oil production equates to the energy content of 27.9 billion gallons per year of ethanol, or more than 2.5 times last year's record US ethanol production. In terms of useful energy contributed after accounting for the energy used to produce it, that comparison grows to more like 5x: the equivalent benefit of more than 50 billion gallons per year of ethanol, or about half-again the ultimate contribution of the entire 36 billion gallon federal Renewable Fuel Standard. And even if we threw away everything but the gasoline yield from this oil, it would still displace as much imported energy as 40 million plug-in electric vehicles--for which we'd still need to come up with an electricity source.

So if there's so much potential in the areas that the President has offered up for drilling, why would anyone be disappointed or see this as a glass half empty? For starters, it imposes new drilling bans on the entire Pacific Coast and carves out of the eastern Gulf of Mexico some of the most prospective acreage closer to the Florida coast, where large natural gas deposits have already been found. And of course it doesn't even mention the Arctic National Wildlife Refuge, which the USGS estimated to contain another 10 billion barrels, give or take a few billion. Simply put, outside of the Gulf of Mexico more acreage will again be placed off-limits than will be made available for drilling, and even the expansion into the eastern Gulf will require the approval of a Congress that has not looked favorably on drilling there since it placed its own ban on that region in 2006. My disappointment at those limitations is mitigated by the knowledge that drilling there now would be a non-starter, politically. Better to begin where state and local governments are willing and some even eager. Closer to home for me, it appears that Secretary Salazar is postponing the bidding on the Lease Sale 220 area off Virginia that I blogged about a couple weeks ago from 2011 into 2012, holding up lease revenues my state badly needs to plug serious budget gaps. (This would also require Congressional approval of revenue-sharing for these bids and royalties, similar to what the Gulf Coast states currently enjoy.)

In his comments at Andrews Air Force Base President Obama made it clear that additional offshore drilling must be viewed in the context of a broader plan for addressing US energy needs. Yet because of the structure of our energy economy and the enormous relative impact of additional oil production compared to renewables at their current scale, only massive fuel economy improvements and conservation can contribute as much to reducing US oil imports, which even after last year's big drop still averaged 9.7 million bbl/day and cost approximately $210 billion. Opening up more of the OCS, which lies beyond visible range from the nation's shoreline, is a good step forward, and it is one that future administrations of both parties can build on.

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