After listening to the energy portions of the presidential press conference last Friday, I found myself confused about the administration's approach to energy. Although I heard the President defending certain US energy policies, they weren't mainly those of his administration, nor were many of the outcomes he highlighted the result of actions he has taken. What's odd about that is that this administration has pursued as clear a set of energy policies, explicit and implicit, as any administration in recent memory; they just happen to be focused on a very different set of goals than attempting "to boost domestic production of oil and gas". And while I haven't agreed with all of them, his administration's actual policies concerning energy are certainly defensible in the context of putting the highest national priority on concerns about climate change. Before looking at this in more detail, I want to share a few thoughts on the aftermath of the quake and tsunami in Japan.
Having spent many years in earthquake country, I have deep sympathy for what the people of northeastern Japan are experiencing. The cleanup and recovery will take years, and the tectonic and emotional aftershocks will persist for a long time. The aftershocks for energy are more difficult to assess. It seems premature to draw conclusions about the impact on Japan's nuclear reactor fleet and the future of the global nuclear power industry. However, if the damage to several reactors is as bad as reports suggest, then the Japanese power grid must make up for the lost generation using either spare capacity at fossil fuel plants or with new technology. That could affect global fuel markets and the global demand for quickly-deployed generation, including both photovoltaic power and conventional small generators. At the same time, the extent of disruption the quake has caused to the global supply chains for such technologies is not yet clear. I'll be watching for discernible trends on these concerns in the weeks and months ahead.
Now back to the press conference. Two years into this administration, it has a track record on energy. The President campaigned on a platform of refocusing the government's energy efforts on renewables and energy efficiency, and he has followed through on that. The stimulus bill enacted in February 2009 included nearly $17 billion for those areas and not a penny for oil and gas. The administration's latest budget proposes slashing funding for R&D on fossil energy technology and ending tax incentives for domestic oil and gas production, using the savings to increase support for renewables and efficiency, consistent with his State of the Union remarks about investing in tomorrow's energy instead of "yesterday's". The President also supported comprehensive energy legislation, the explicit purpose of which was to make energy derived from fossil fuels--especially oil--more expensive. Although I have disagreed with many of these measures because I thought they took too little cognizance of the realities of the energy sector that supports our economy and the length of time a transition to cleaner energy entails, there was at least an admirable--and defensible--consistency to them. I would not have expected the President to tack away from defending these policies the first time oil and gasoline prices seriously spiked since his inauguration.
Then there's the matter of appearing to take credit for the recent recovery in US oil production by citing it twice in his remarks. The increase is real enough, though most experts, including the administration's own Department of Energy expect it to be short-lived, as the lagged effects of the post-Deepwater Horizon deepwater drilling moratorium work their way through the system. In fact, lags are the key to the whole question. If you have had experience with large projects, and particularly oil projects, then you realize that it typically takes a lot longer than two years for them to go through all the stages from inception to first production, including leasing, exploration, permitting, procurement and construction. The last time I looked at this in detail for oil the average time lag involved was around 7 years.
What was happening seven or eight years ago? Well, oil prices were in the early stages of the long climb that peaked in July 2008 at $144. It's no coincidence that a wave of new projects should have been coming onstream over the last couple of years, because the attractiveness of investing in them increased tremendously when prices broke out of their long-standing $20-30 per barrel price range. Yet it can be no more than a coincidence that the resulting increase in production should appear during an administration that has put in place policies restricting access to oil & gas development, delaying permits, and in some cases rescinding previously awarded leases.
The President's statement about undeveloped oil leases is a further reflection of how short his administration is on staff with industry experience. Companies don't lease these tracts with the intention of letting them sit idle. Instead, they continually prioritize their drilling prospects and pursue the best ones first, adding new leases to their inventory when they appear to have higher potential than those in their backlog. This process benefits taxpayers as well as the companies involved by helping to maximize the production on which royalties are paid and displacing more imports. And in the meantime, the Department of Interior continues to collect rental payments on any undeveloped leases, having already pocketed the bid bonuses on the basis of which they were awarded in the first place.
President Obama isn't the first politician to take credit for the results of actions taken in another administration. Considering the blame presidents often receive for events over which they likewise had little control or responsibility, it might even be understandable. Still, I can't help being surprised when the leader of an administration that has focused 90% of its energy efforts on resources and technologies that account for about 5% of our energy consumption and treated oil and gas as a legacy of a previous, less enlightened era suddenly embraces rising oil output. Whatever the reason, the change is welcome. And he has certainly learned the lesson of not being overly specific in explaining the circumstances under which the Strategic Petroleum Reserve would be tapped. All that's needed now is a shift of emphasis to recognize both the large potential of the renewable energy technologies in which we are investing and the enormous contribution of the domestic oil and gas that supply 37% of our energy needs and can do even more in the medium term, under the right policies.
Showing posts with label moratorium. Show all posts
Showing posts with label moratorium. Show all posts
Monday, March 14, 2011
Wednesday, February 16, 2011
Cutting the Federal Budget Wisely
This week the administration issued its third budget since taking office in January 2009. In a year otherwise focused on belt-tightening, the proposal includes a 12% increase for the Department of Energy, focused on additional R&D for renewables and nuclear power. The increase would be offset by cuts in fossil energy programs and the elimination elsewhere in the budget of various tax deductions and tax credits--"tax expenditures" in Beltway parlance--that benefit the US oil and gas industry. Also new for this year are proposed additional fees on the industry to cover the increased cost of issuing drilling permits in the aftermath of the Deepwater Horizon accident, along with another provision to raise the cost of holding inactive oil and gas leases. Aside from the politics involved, this exercise reminds me of the periodic waves of cost-cutting I experienced at Texaco, Inc. in the 1980s and '90s. Unfortunately, the government hasn't yet learned the vital lesson that my former company and many in other industries finally figured out after years of experience: Reducing expenses only helps your bottom line when the items you are cutting contribute less in revenue than they cost.
Start with the oil and gas subsidies, which I've discussed previously. The newly submitted budget estimates these at approximately $4 billion per year. As we heard the President say in his latest State of the Union address, "I'm asking Congress to eliminate the billions in taxpayer dollars we currently give to the oil companies. (Applause.) I don't know if--I don't know if you've noticed, but they're doing just fine on their own. (Laughter.) So instead of subsidizing yesterday's energy, let's invest in tomorrow's." It's a guaranteed applause line, as the White House's own text indicates, despite including potentially serious errors of fact.
Now, one could argue in the abstract whether a tax credit or deduction constitutes a gift of "taxpayer money" (i.e., the government's) or an opportunity for the taxpayer in question to remit less of his own money to the government. I know how I feel about that when it comes to filing my form 1040. One might even arrive at different answers in different situations. As a practical matter, however, what counts in the current context is not whose money this is in the first place, but whether taking more of it leaves either the federal government or the US economy better off. Even from the perspective of tax revenue, a recent study found that after an initial increase, the long-term impact of higher taxes on the oil & gas industry resulted in reduced government revenue. Higher taxes on US oil & gas production will translate into less of both--and so less to tax--while also yielding more future imports and higher trade deficits, along with reduced energy security.
The President's remarks also suggested incorrectly that oil and gas are yesterday's energy, and not also today's and tomorrow's. In 2009 oil and gas accounted for 62% of our energy consumption, and the US Department of Energy expects them to continue to supply as much as 57% of our needs in 2035, after subtracting the contribution of liquid biofuels. Treating these key energy sources as undesirable could have serious consequences for our energy and economic security in the years ahead. Nor would it assist our efforts to reduce greenhouse gas emissions. Natural gas can contribute significantly to reducing the emissions from the power sector, which accounts for 40% of US CO2 emissions, and the main opportunities for reducing emissions from transportation, where most of our oil use takes place, are on the user side--conservation and more efficient cars, trucks and planes--and not on the extraction, refining and distribution side of the industry.
If the administration couldn't get these tax changes enacted in the previous Congress, they stand even less chance this term. However, that might not be the case for the additional "user fees" and lease fees, since they are new this year. The former are related to the redesign of the oversight agency for offshore drilling and were recommended by the Presidential commission investigating the accident. As I noted when their report came out, we already have a mechanism for recouping the expenses that the Bureau of Ocean Energy, Management, Regulation and Enforcement (formerly the Minerals Management Service) incurs in the course of reviewing leases and drilling permits and monitoring offshore activity. That mechanism is the lease bids and royalties that brought in $8 billion from onshore and offshore oil and gas in fiscal 2010. In a good year these sums could cover the entire Interior Dept. budget, let alone that of BOEMRE. Adding new fees on top of the existing royalties further reduces the attractiveness of drilling in US waters, on top of the "moratorium/permitorium" --now in its tenth month--for which critics finally received a belated explanation earlier this month. The net result of new fees would be less drilling here and more drilling in places like offshore Brazil.
Then there's the notion of "establishing fees for new non-producing oil and gas leases (both onshore and offshore) to encourage more timely production." This is clearly an outgrowth of the "idle leases" canard that was making the rounds in 2008. However, in light of protracted delays in issuing new permits and the likelihood that fewer permits will be issued in the future than in the past, it seems almost Kafkaesque to penalize companies for not drilling sooner on more of their leases. In truth, companies already pay twice for non-producing leases: once when they pay a bid bonus to acquire the lease, and then every year in the form of a lease rent that is due as long as the lease remains undeveloped. Companies factor this into the bonuses they bid, along with their assessment of the likelihood that a lease contains commercial quantities of oil or gas. Additional fees on non-producing leases seem likely to result in one or more of the following outcomes: lower bonus bids, fewer bids, and an increased focus outside the US. None of that would help either the deficit or energy security.
I'm entirely supportive of the government cutting expenses, including unwarranted subsidies, in order to begin the difficult task of bringing the federal budget closer to balance within the next few years. This seems essential if we're to avoid serious consequences for our credit rating, interest rates, and exchange rate. However, along the lines of what I saw when the oil industry reduced expenses in the aftermath of the big oil price drops of the mid-1980s and 1998-9, it would be counterproductive to do so in a manner that would actually result in lower overall tax receipts, while reducing domestic energy production in the bargain. Ultimately, it makes a lot more sense to target repealing the tax expenditures in question as part of the broader tax reform that seems inevitable if we want to get the deficit under control. That would eliminate specific tax breaks but simultaneously reduce overall corporate tax rates to make US industry more competitive globally, not less. A budget that proposes to double corporate income tax receipts by 2013--to a level higher than their 2007 asset bubble peak--is out of step with the competitiveness agenda that the administration has espoused, aside from its shortcomings in narrowing the long-term deficit.
Start with the oil and gas subsidies, which I've discussed previously. The newly submitted budget estimates these at approximately $4 billion per year. As we heard the President say in his latest State of the Union address, "I'm asking Congress to eliminate the billions in taxpayer dollars we currently give to the oil companies. (Applause.) I don't know if--I don't know if you've noticed, but they're doing just fine on their own. (Laughter.) So instead of subsidizing yesterday's energy, let's invest in tomorrow's." It's a guaranteed applause line, as the White House's own text indicates, despite including potentially serious errors of fact.
Now, one could argue in the abstract whether a tax credit or deduction constitutes a gift of "taxpayer money" (i.e., the government's) or an opportunity for the taxpayer in question to remit less of his own money to the government. I know how I feel about that when it comes to filing my form 1040. One might even arrive at different answers in different situations. As a practical matter, however, what counts in the current context is not whose money this is in the first place, but whether taking more of it leaves either the federal government or the US economy better off. Even from the perspective of tax revenue, a recent study found that after an initial increase, the long-term impact of higher taxes on the oil & gas industry resulted in reduced government revenue. Higher taxes on US oil & gas production will translate into less of both--and so less to tax--while also yielding more future imports and higher trade deficits, along with reduced energy security.
The President's remarks also suggested incorrectly that oil and gas are yesterday's energy, and not also today's and tomorrow's. In 2009 oil and gas accounted for 62% of our energy consumption, and the US Department of Energy expects them to continue to supply as much as 57% of our needs in 2035, after subtracting the contribution of liquid biofuels. Treating these key energy sources as undesirable could have serious consequences for our energy and economic security in the years ahead. Nor would it assist our efforts to reduce greenhouse gas emissions. Natural gas can contribute significantly to reducing the emissions from the power sector, which accounts for 40% of US CO2 emissions, and the main opportunities for reducing emissions from transportation, where most of our oil use takes place, are on the user side--conservation and more efficient cars, trucks and planes--and not on the extraction, refining and distribution side of the industry.
If the administration couldn't get these tax changes enacted in the previous Congress, they stand even less chance this term. However, that might not be the case for the additional "user fees" and lease fees, since they are new this year. The former are related to the redesign of the oversight agency for offshore drilling and were recommended by the Presidential commission investigating the accident. As I noted when their report came out, we already have a mechanism for recouping the expenses that the Bureau of Ocean Energy, Management, Regulation and Enforcement (formerly the Minerals Management Service) incurs in the course of reviewing leases and drilling permits and monitoring offshore activity. That mechanism is the lease bids and royalties that brought in $8 billion from onshore and offshore oil and gas in fiscal 2010. In a good year these sums could cover the entire Interior Dept. budget, let alone that of BOEMRE. Adding new fees on top of the existing royalties further reduces the attractiveness of drilling in US waters, on top of the "moratorium/permitorium" --now in its tenth month--for which critics finally received a belated explanation earlier this month. The net result of new fees would be less drilling here and more drilling in places like offshore Brazil.
Then there's the notion of "establishing fees for new non-producing oil and gas leases (both onshore and offshore) to encourage more timely production." This is clearly an outgrowth of the "idle leases" canard that was making the rounds in 2008. However, in light of protracted delays in issuing new permits and the likelihood that fewer permits will be issued in the future than in the past, it seems almost Kafkaesque to penalize companies for not drilling sooner on more of their leases. In truth, companies already pay twice for non-producing leases: once when they pay a bid bonus to acquire the lease, and then every year in the form of a lease rent that is due as long as the lease remains undeveloped. Companies factor this into the bonuses they bid, along with their assessment of the likelihood that a lease contains commercial quantities of oil or gas. Additional fees on non-producing leases seem likely to result in one or more of the following outcomes: lower bonus bids, fewer bids, and an increased focus outside the US. None of that would help either the deficit or energy security.
I'm entirely supportive of the government cutting expenses, including unwarranted subsidies, in order to begin the difficult task of bringing the federal budget closer to balance within the next few years. This seems essential if we're to avoid serious consequences for our credit rating, interest rates, and exchange rate. However, along the lines of what I saw when the oil industry reduced expenses in the aftermath of the big oil price drops of the mid-1980s and 1998-9, it would be counterproductive to do so in a manner that would actually result in lower overall tax receipts, while reducing domestic energy production in the bargain. Ultimately, it makes a lot more sense to target repealing the tax expenditures in question as part of the broader tax reform that seems inevitable if we want to get the deficit under control. That would eliminate specific tax breaks but simultaneously reduce overall corporate tax rates to make US industry more competitive globally, not less. A budget that proposes to double corporate income tax receipts by 2013--to a level higher than their 2007 asset bubble peak--is out of step with the competitiveness agenda that the administration has espoused, aside from its shortcomings in narrowing the long-term deficit.
Wednesday, January 26, 2011
Sputnik State of the Union
Energy didn't feature as prominently in last night's State of the Union Address as it has in some years, including last year's speech. Rather than making it a primary focus area, the President seemed to mention it more as an example of his broader innovation and competitiveness agenda. That's probably a good thing, because the administration's persistence in pitting conventional energy against renewables reflects the muddle in which US energy policy remains. We're desperately worried that China is getting ahead of us in renewable energy, yet we don't seem to notice that China is hardly treating oil and gas as yesterday's energy. I suspect that from China's perspective, their focus is not especially on renewable energy or clean energy but on cheap energy, which is what their economy needs to grow. I wouldn't think we're so different in that regard.
I won't waste time dissecting the President's suggestion to strip the oil & gas industry of its tax benefits in order to fund a new or expanded clean energy innovation effort. If the administration couldn't make that happen when its party dominated both houses of Congress by large majorities, then this idea is simply dead on arrival in an era of divided government. The best way to address those subsidies, along with the much larger per-barrel subsidy for ethanol, is through the kind of tax reform that would make all US industries more competitive globally. So I was pleased to hear the President suggest simplifying the tax code and reducing the corporate income tax.
Innovation and tax reform will indeed be crucial if the US wants to be a leader in clean energy technology, not just as the favored beneficiary of today's version of our periodic debate over industrial policy--picking winners--but as one part of a more robust and competitive US manufacturing sector. However, it's myopic to compare ourselves to China on infrastructure and clean energy innovation while ignoring China's full-court press to meet its rapidly growing demand for oil and gas. China doesn't have an offshore drilling moratorium or "permitorium"; instead it has focused on offshore drilling as a primary means for expanding its domestic production and limiting its oil imports, which a few years ago eclipsed those of Japan as the world's second largest, behind our own. Chinese companies are investing in oil & gas projects, joint ventures and acquisitions all over the world, because China recognizes that oil wasn't just the dominant fuel of the 20th century; it remains a key energy source in the 21st. And for those worried about China's lead in renewable energy, exemplified by the news that its wind power capacity surpassed that of the US last year, I recommend Michael Levi's article in Foreign Policy.
On a more positive note, President Obama seemed to signal his support for moving the debate on a national renewable energy standard toward encompassing all clean energy. His remarks suggested that this would include not just nuclear power--by far our largest source of low-emission energy today--but also natural gas and clean coal. With those inclusions, the goal he suggested of generating 80% of our electricity from "clean energy sources" by 2035 could be the most achievable energy goal his administration has put forward since taking office. With coal's share of electricity generation currently at 45%, it would require increasing the contribution from nuclear, renewables and natural gas by just under half--or less with some help from efficiency and conservation. Not easy, but not impossible, either, as long as we build enough new nuclear power plants to more than replace the ones that will likely have been retired by then.
Whether or not this is truly "our generation's Sputnik moment", the speech's recurring theme exhorting us to "win the future" was perhaps a bit too reminiscent of another presidential speech centered on a different kind of "WIN". Ensuring that this initiative doesn't share the fate of that earlier one in the Ford Administration might just depend on making sure that in an environment of tightening purse strings, the government's investments in new energy are focused on making clean energy cheap enough to compete without unsustainable subsidies. In the meantime, while we're waiting for that effort to bear fruit, it's worth recalling that America's conventional energy industry is still one sector in which we don't have to catch up with anyone else, unless we deliberately set out to hamstring it.
I won't waste time dissecting the President's suggestion to strip the oil & gas industry of its tax benefits in order to fund a new or expanded clean energy innovation effort. If the administration couldn't make that happen when its party dominated both houses of Congress by large majorities, then this idea is simply dead on arrival in an era of divided government. The best way to address those subsidies, along with the much larger per-barrel subsidy for ethanol, is through the kind of tax reform that would make all US industries more competitive globally. So I was pleased to hear the President suggest simplifying the tax code and reducing the corporate income tax.
Innovation and tax reform will indeed be crucial if the US wants to be a leader in clean energy technology, not just as the favored beneficiary of today's version of our periodic debate over industrial policy--picking winners--but as one part of a more robust and competitive US manufacturing sector. However, it's myopic to compare ourselves to China on infrastructure and clean energy innovation while ignoring China's full-court press to meet its rapidly growing demand for oil and gas. China doesn't have an offshore drilling moratorium or "permitorium"; instead it has focused on offshore drilling as a primary means for expanding its domestic production and limiting its oil imports, which a few years ago eclipsed those of Japan as the world's second largest, behind our own. Chinese companies are investing in oil & gas projects, joint ventures and acquisitions all over the world, because China recognizes that oil wasn't just the dominant fuel of the 20th century; it remains a key energy source in the 21st. And for those worried about China's lead in renewable energy, exemplified by the news that its wind power capacity surpassed that of the US last year, I recommend Michael Levi's article in Foreign Policy.
On a more positive note, President Obama seemed to signal his support for moving the debate on a national renewable energy standard toward encompassing all clean energy. His remarks suggested that this would include not just nuclear power--by far our largest source of low-emission energy today--but also natural gas and clean coal. With those inclusions, the goal he suggested of generating 80% of our electricity from "clean energy sources" by 2035 could be the most achievable energy goal his administration has put forward since taking office. With coal's share of electricity generation currently at 45%, it would require increasing the contribution from nuclear, renewables and natural gas by just under half--or less with some help from efficiency and conservation. Not easy, but not impossible, either, as long as we build enough new nuclear power plants to more than replace the ones that will likely have been retired by then.
Whether or not this is truly "our generation's Sputnik moment", the speech's recurring theme exhorting us to "win the future" was perhaps a bit too reminiscent of another presidential speech centered on a different kind of "WIN". Ensuring that this initiative doesn't share the fate of that earlier one in the Ford Administration might just depend on making sure that in an environment of tightening purse strings, the government's investments in new energy are focused on making clean energy cheap enough to compete without unsustainable subsidies. In the meantime, while we're waiting for that effort to bear fruit, it's worth recalling that America's conventional energy industry is still one sector in which we don't have to catch up with anyone else, unless we deliberately set out to hamstring it.
Monday, October 11, 2010
After the Drilling Moratorium Is Lifted
As I was thinking about the offshore drilling moratoria--both the official one that's scheduled to end in a few weeks and the unofficial one that might drag on for months or years--it occurred to me that the Deepwater Horizon accident couldn't have happened at a worse time, in terms of our grasping its impact on our energy economy. There's never a good time for a tragedy on that scale, but the fact that it occurred during a period in which slack global oil demand and temporarily abundant OPEC spare production capacity have insulated oil markets from its effects has created a misleading impression of its inconsequentiality to our oil supplies. If you doubt that, imagine how the oil market--and the stock market--might have reacted if the accident and our response to it had begun on April 20, 2008, when oil futures traded at $117 per barrel, on their way to $145 a couple months later. Unless drilling resumes fairly soon on something close to the previous scale, or unless expectations of an uptick in global oil demand next year prove premature, we could all be in for a taste of those masked consequences within a year or two.
No one expects drilling to resume as though Deepwater Horizon had never occurred, and the industry has its work cut out for it to restore trust in its capacity to develop this energy in a safe and environmentally acceptable manner. New regulations, more consistent enforcement, and initiatives such as the new Marine Well Containment System, to which several of the major oil companies have committed, should help. But until the government and public are satisfied that all of the key lessons from the Deepwater Horizon disaster have been identified and put into practice, the industry will remain on probation. It's somewhat ironic that while we are still grappling with all this, the Parliament of the European Union--widely regarded as being more environmentally sensitive than the US--just voted against a proposed drilling ban. In the meantime, the effects of delayed development will begin to compound, in the absence of any near-term alternative that can fill the gap at the scale required, other than increased oil imports.
In a posting in May I described the potential impact of a protracted halt in US offshore drilling, particularly from the deeper waters of the Gulf of Mexico, and explained why neither expanded biofuels production nor the deployment of electric vehicles (EVs) or highly fuel-efficient hybrids can substitute for domestic oil production. We require these alternatives in any case, but it will be quite a few years before they could plug the resulting gap in our energy supplies. Replacing the equivalent of each 50,000 barrel-per-day oil field that's not developed in the next year or two would require 20 additional ethanol plants, 1.6 million EVs, or a like quantity of foreign crude oil or imported gasoline, diesel, jet fuel, lubricants and other products. And as I noted at the time, delay amplifies the effects of the decline of existing fields, so that the hole out of which we must dig ourselves grows larger with every month that new exploration and production are deferred.
What makes this particularly worrying now is that it has become evident in the last few months that the scheduled lapse of Interior Secretary Salazar's deepwater moratorium at the end of November will almost certainly not restore drilling even in the Gulf of Mexico to anything close to its former level for some time. The impact on technically non-moratorium shallow water drilling from the reorganization of the former Minerals Management Service into the new Bureau of Ocean Energy Management, Regulation and Enforcement, under new management and with a new, stricter set of regulations to enforce, makes that clear. It's also evident that offshore drilling in the Arctic, which is needed to backfill declining output from the Alaskan North Slope, could be delayed even longer.
For the moment, this might not seem like a big deal, when weighed against the universally-shared objective of reducing the risk of another major oil spill as much as humanly possible. With US petroleum demand still depressed by the aftermath of the recession and financial crisis, and with domestic oil production having recovered to levels not seen since before Hurricane Katrina--thanks in large part to the success of deepwater drilling--our net petroleum imports are actually 2 million barrels per day (bpd) lower than they were in 2007. That has helped set up a global oil market in which OPEC has had to keep a tight lid on its output to prevent prices from falling. However, if the analysis in this week's Economist is correct concerning the significant growth of demand from the developing world this year and next, along with an impending peak in non-OPEC oil production, then OPEC's problem will become much easier to manage and prices will begin to head back upward.
The resulting scenario isn't very appealing, unless you're convinced that higher oil prices are a good thing and perhaps the only thing that will get us to address our energy security and emissions challenges head on--though that ignores the lessons from a couple of years ago concerning how the competitive breakeven price of many alternative energy technologies tends to recede as oil prices rise. The deepwater drilling moratorium has nothing to do with the upward trend of oil prices in the last few weeks, and it probably won't be the actual trigger for higher prices next year. However, if oil prices do resume their pre-recession trajectory, the accumulating lagged effects of the moratorium and its aftermath could reinforce the impact on our wobbly recovery and gaping deficits in very unpleasant ways. By the time we wake up to this, it will be too late for second-guessing whether the US government has moved swiftly enough to get this key industry back to work.
No one expects drilling to resume as though Deepwater Horizon had never occurred, and the industry has its work cut out for it to restore trust in its capacity to develop this energy in a safe and environmentally acceptable manner. New regulations, more consistent enforcement, and initiatives such as the new Marine Well Containment System, to which several of the major oil companies have committed, should help. But until the government and public are satisfied that all of the key lessons from the Deepwater Horizon disaster have been identified and put into practice, the industry will remain on probation. It's somewhat ironic that while we are still grappling with all this, the Parliament of the European Union--widely regarded as being more environmentally sensitive than the US--just voted against a proposed drilling ban. In the meantime, the effects of delayed development will begin to compound, in the absence of any near-term alternative that can fill the gap at the scale required, other than increased oil imports.
In a posting in May I described the potential impact of a protracted halt in US offshore drilling, particularly from the deeper waters of the Gulf of Mexico, and explained why neither expanded biofuels production nor the deployment of electric vehicles (EVs) or highly fuel-efficient hybrids can substitute for domestic oil production. We require these alternatives in any case, but it will be quite a few years before they could plug the resulting gap in our energy supplies. Replacing the equivalent of each 50,000 barrel-per-day oil field that's not developed in the next year or two would require 20 additional ethanol plants, 1.6 million EVs, or a like quantity of foreign crude oil or imported gasoline, diesel, jet fuel, lubricants and other products. And as I noted at the time, delay amplifies the effects of the decline of existing fields, so that the hole out of which we must dig ourselves grows larger with every month that new exploration and production are deferred.
What makes this particularly worrying now is that it has become evident in the last few months that the scheduled lapse of Interior Secretary Salazar's deepwater moratorium at the end of November will almost certainly not restore drilling even in the Gulf of Mexico to anything close to its former level for some time. The impact on technically non-moratorium shallow water drilling from the reorganization of the former Minerals Management Service into the new Bureau of Ocean Energy Management, Regulation and Enforcement, under new management and with a new, stricter set of regulations to enforce, makes that clear. It's also evident that offshore drilling in the Arctic, which is needed to backfill declining output from the Alaskan North Slope, could be delayed even longer.
For the moment, this might not seem like a big deal, when weighed against the universally-shared objective of reducing the risk of another major oil spill as much as humanly possible. With US petroleum demand still depressed by the aftermath of the recession and financial crisis, and with domestic oil production having recovered to levels not seen since before Hurricane Katrina--thanks in large part to the success of deepwater drilling--our net petroleum imports are actually 2 million barrels per day (bpd) lower than they were in 2007. That has helped set up a global oil market in which OPEC has had to keep a tight lid on its output to prevent prices from falling. However, if the analysis in this week's Economist is correct concerning the significant growth of demand from the developing world this year and next, along with an impending peak in non-OPEC oil production, then OPEC's problem will become much easier to manage and prices will begin to head back upward.
The resulting scenario isn't very appealing, unless you're convinced that higher oil prices are a good thing and perhaps the only thing that will get us to address our energy security and emissions challenges head on--though that ignores the lessons from a couple of years ago concerning how the competitive breakeven price of many alternative energy technologies tends to recede as oil prices rise. The deepwater drilling moratorium has nothing to do with the upward trend of oil prices in the last few weeks, and it probably won't be the actual trigger for higher prices next year. However, if oil prices do resume their pre-recession trajectory, the accumulating lagged effects of the moratorium and its aftermath could reinforce the impact on our wobbly recovery and gaping deficits in very unpleasant ways. By the time we wake up to this, it will be too late for second-guessing whether the US government has moved swiftly enough to get this key industry back to work.
Friday, September 03, 2010
Oil Rig Rorschach Test
Yesterday's fire on Mariner Energy's Vermilion 380 production platform in the Gulf of Mexico thankfully resulted in neither loss of life nor another big oil spill. However, the timing of this event seems likely to complicate the debate over the drilling moratorium that has been in place since the Deepwater Horizon accident, and that the government had been showing signs of relaxing or ending early. Based on the reactions so far, this latest accident also provides a Rorschach test on attitudes concerning offshore oil. Those convinced that the risks of offshore drilling outweigh its benefits are citing it as further evidence, while supporters of drilling are likelier to see it as proof that accidents offshore needn't be catastrophic. In reality, the two situations were so different that I'm not sure how much light one sheds on the other.
Although information on Vermilion 380 has been somewhat sketchy, we know from statements by the company and Coast Guard that unlike Deepwater Horizon, which was a floating deepwater drilling vessel, this facility is a fixed production platform in relatively shallow water, tapping a smallish oil and gas field with proved reserves of 33.2 billion equivalent cubic feet of gas--the equivalent of about 5.7 million barrels of oil, with more than half of that consisting of natural gas. The platform had recently undergone restoration work after having been damaged by Hurricane Ike in 2008. It was not engaged in exploration or any other kind of drilling, but instead producing oil and gas from previously-drilled wells. A company press release indicated that production in August averaged 9.4 million cubic feet per day of gas and 1,400 bbl/day of oil and condensate. This is orders of magnitude smaller than the Macondo field and its blown-out exploration well. In its particulars, Vermilion is more typical of the thousands of oil & gas platforms in the Gulf than the big, complex drilling rigs like Deepwater Horizon that we've been focused on since April.
Under the circumstances, another distinction between Vermilion and Deepwater Horizon is even more important than the ones above. While every accident is one too many, the outcome of yesterday's was precisely what the designers of such facilities work hard to enable and offshore oil & gas workers undergo intensive training to be able to execute: The wells were apparently secured, the crew evacuated safely, and damage was limited to the surface hardware.
This accident will be investigated, and I'm sure its lessons will find their way into the ongoing reassessment of offshore oil & gas practices and regulations. But without jumping to conclusions about its causes, yesterday's incident provides no proof at all for the argument that every offshore oil & gas well is a potential Macondo-style blowout, and every facility a potential Deepwater Horizon calamity waiting to happen.
Meanwhile, as my US readers head off for Labor Day weekend I suggest reading Technology Review's assessment of the energy aspects of the US economic stimulus, about which I had originally planned to write today. It raises important questions concerning the impact and effectiveness of the stimulus, including on employment, as well as the sustainability of efforts begun with its impetus. Expect to hear a lot more about this later this year, as eligibility for the Treasury renewable energy grants and other stimulus programs draws to a close, and recipients and their advocates call for temporary or permanent extensions.
Although information on Vermilion 380 has been somewhat sketchy, we know from statements by the company and Coast Guard that unlike Deepwater Horizon, which was a floating deepwater drilling vessel, this facility is a fixed production platform in relatively shallow water, tapping a smallish oil and gas field with proved reserves of 33.2 billion equivalent cubic feet of gas--the equivalent of about 5.7 million barrels of oil, with more than half of that consisting of natural gas. The platform had recently undergone restoration work after having been damaged by Hurricane Ike in 2008. It was not engaged in exploration or any other kind of drilling, but instead producing oil and gas from previously-drilled wells. A company press release indicated that production in August averaged 9.4 million cubic feet per day of gas and 1,400 bbl/day of oil and condensate. This is orders of magnitude smaller than the Macondo field and its blown-out exploration well. In its particulars, Vermilion is more typical of the thousands of oil & gas platforms in the Gulf than the big, complex drilling rigs like Deepwater Horizon that we've been focused on since April.
Under the circumstances, another distinction between Vermilion and Deepwater Horizon is even more important than the ones above. While every accident is one too many, the outcome of yesterday's was precisely what the designers of such facilities work hard to enable and offshore oil & gas workers undergo intensive training to be able to execute: The wells were apparently secured, the crew evacuated safely, and damage was limited to the surface hardware.
This accident will be investigated, and I'm sure its lessons will find their way into the ongoing reassessment of offshore oil & gas practices and regulations. But without jumping to conclusions about its causes, yesterday's incident provides no proof at all for the argument that every offshore oil & gas well is a potential Macondo-style blowout, and every facility a potential Deepwater Horizon calamity waiting to happen.
Meanwhile, as my US readers head off for Labor Day weekend I suggest reading Technology Review's assessment of the energy aspects of the US economic stimulus, about which I had originally planned to write today. It raises important questions concerning the impact and effectiveness of the stimulus, including on employment, as well as the sustainability of efforts begun with its impetus. Expect to hear a lot more about this later this year, as eligibility for the Treasury renewable energy grants and other stimulus programs draws to a close, and recipients and their advocates call for temporary or permanent extensions.
Thursday, July 29, 2010
The Incredible Shrinking Energy Bill
When legislation is introduced in the US Congress, most of the discussion typically concerns its specific provisions. Sometimes, as in the case of the "public option" absent from the final healthcare bill, notable omissions vie for attention. However, in the case of this year's greatly-diminished energy bill released this week by Senator Reid (D-NV), most of the controversy seems to be focused on its long list of missing elements, including but not limited to cap & trade, a national renewable energy standard for electricity, and extensions for various expiring renewable energy incentives. That's not to say that what's left doesn't deserve careful scrutiny, particularly provisions affecting offshore oil and gas drilling. But compared to the energy bill that might have been, this draft looks like a pitiful remnant, even at 409 pages.
Although I can appreciate the frustration of those who expected Congress finally to enact cap & trade this year, I find the convoluted tactical arguments and finger-pointing over its failure to reach consensus on this issue to be mostly "inside baseball" rationalization. The clues adequately explaining its omission from the current bill are on display in the bill's title, "The Clean Energy Jobs and Oil Company Accountability Act of 2010". In other words, what happened to cap & trade this year was the recession and the oil spill. The former made the country less receptive to what is at its core a substantial new tax, while the latter scuttled the best chance for a bi-partisan "grand compromise" based on swapping expanded access to US off-limits oil and gas resources for stronger emissions regulations. Even though the taxation underlying cap & trade is intended to recognize a serious unpriced externality of our energy economy, it still represents a significant redistribution of wealth from energy producers and consumers to the government and the purposes for which the government chooses to spend the proceeds: at best a zero-sum game with frictional losses, and at worst--insert Waxman-Markey--a monumentally-distorting boondoggle.
Then there's the missing national renewable electricity standard (RES), which in clear English is a mandate for utilities to obtain a defined and escalating percentage of the electricity they provide customers from selected renewable sources. The American Wind Energy Association (AWEA), the trade association for the US wind industry, sees this as an absolute necessity for their industry to continue growing and was vexed over its exclusion from the current bill--this in spite of the fact that the wind industry's main federal support, the Production Tax Credit, was previously extended through 2012, along with the valuable option to select an Investment Tax Credit instead. I see two practical explanations for this omission, though it's clear from the efforts of AWEA and other groups that it could still find its way back into the bill. First, the RES is really another tax. Instead of being levied on taxpayers by the government, it would be levied by utilities on ratepayers when the costs of the renewable energy projects or the tradeable Renewable Energy Credits they can buy in lieu of buying green power are passed on to their customers. On a more practical level, with 29 states plus the District of Columbia already having equivalent Renewable Portfolio Standards in place, most of the best US wind and solar resources are already covered by such targets. A national RES might not add a lot more of these energy sources, but it certainly would trigger a scramble for the states with limited renewable resources to line up supplies from elsewhere. That might be good for the renewable energy sector, but it's of questionable benefit to a national economy still struggling to emerge from the recession.
Also absent from this draft are the expiring renewable energy incentives highlighted in yesterday's New York Times editorial. These include the $0.45/gal. ethanol blenders' credit, about which I've blogged extensively, and the Treasury renewable energy grants offering up-front cash for the Investment Tax Credits that would otherwise require waiting for next year's tax return--assuming the recipient company had sufficient taxable income to benefit from the entire amount of the credit. These grants look problematic, as I noted last fall, when reports first surfaced that most of the money paid--approaching $2 billion--had gone to non-US firms. As I discussed at the time, this reflects the reality of a wind energy market in which US firms account for less than half of domestic sales, supported by a thoroughly-globalized supply chain, not unlike many other industries. The arguments pro and con too easily reduce to unappealing sound-bites.
That leaves us with what is currently in the bill, which I have so far only had time to skim. It seems to consist mainly of well-intended but overly-politicized efforts--one section is entitled the "Big Oil Bailout Prevention Unlimited Liability Act of 2010--to hold BP accountable for the Gulf Coast oil spill and to address the liability for future spills, while trying to reduce the chances of another one. That sounds like motherhood and apple pie at this point, but as always the devil is in the details; implementing some of these details would leave the US with a much smaller offshore oil capability. That might appeal to environmentalists but would be catastrophic for energy consumers, our trade deficit, and US energy security. And why would you charge the Secretary of Energy with issuing a monthly report, starting in September or October, on the economic and employment impact of a deepwater drilling moratorium that is only intended to last through November? Interestingly, the bill would also establish a Congressional version of the President's oil spill commission, this time with specific technical criteria for appointment to this body. Alternative, compromise versions of the bill's oil provisions are already emerging from within Senator Reid's own party, and with a lot of luck we could end up with measures that would actually make offshore drilling safer and more responsible without killing it--and the roughly 30% of domestic oil production it provides.
In addition to its oil spill provisions, the bill also offers some generous tax credits for converting heavy-duty trucking to natural gas, along the lines of the Pickens proposals I discussed last Friday, plus similar help for vehicle electrification and infrastructure, yet more energy efficiency measures (this time focused on homes), and funding for an old government program to buy up land and waterways for parks and nature preserves. All of this is notionally paid for ("PAYGO") by raising the Oil Spill Liability Trust Fund fee on all the oil produced and used in the US from $0.08 to $0.45 per barrel, which would directly increase the size of the fund to cover future disasters from $1 billion to $5 billion, while indirectly making all the bill's other provisions appear deficit-neutral. The proposed fee increase has the potential to raise an extra $2.5 billion per year.
It's not clear whether even this slimmed-down bill can garner enough votes to pass in the Senate, let alone do so before the summer adjournment. In any case I'd expect the version that comes up for a final vote--if it does at all--to look somewhat different than this draft. It would almost certainly grow much longer, a malady that has afflicted all major legislation in recent Congresses. Whether it will actually make a meaningfully-positive impact on the serious energy challenges the US faces remains to be seen.
Although I can appreciate the frustration of those who expected Congress finally to enact cap & trade this year, I find the convoluted tactical arguments and finger-pointing over its failure to reach consensus on this issue to be mostly "inside baseball" rationalization. The clues adequately explaining its omission from the current bill are on display in the bill's title, "The Clean Energy Jobs and Oil Company Accountability Act of 2010". In other words, what happened to cap & trade this year was the recession and the oil spill. The former made the country less receptive to what is at its core a substantial new tax, while the latter scuttled the best chance for a bi-partisan "grand compromise" based on swapping expanded access to US off-limits oil and gas resources for stronger emissions regulations. Even though the taxation underlying cap & trade is intended to recognize a serious unpriced externality of our energy economy, it still represents a significant redistribution of wealth from energy producers and consumers to the government and the purposes for which the government chooses to spend the proceeds: at best a zero-sum game with frictional losses, and at worst--insert Waxman-Markey--a monumentally-distorting boondoggle.
Then there's the missing national renewable electricity standard (RES), which in clear English is a mandate for utilities to obtain a defined and escalating percentage of the electricity they provide customers from selected renewable sources. The American Wind Energy Association (AWEA), the trade association for the US wind industry, sees this as an absolute necessity for their industry to continue growing and was vexed over its exclusion from the current bill--this in spite of the fact that the wind industry's main federal support, the Production Tax Credit, was previously extended through 2012, along with the valuable option to select an Investment Tax Credit instead. I see two practical explanations for this omission, though it's clear from the efforts of AWEA and other groups that it could still find its way back into the bill. First, the RES is really another tax. Instead of being levied on taxpayers by the government, it would be levied by utilities on ratepayers when the costs of the renewable energy projects or the tradeable Renewable Energy Credits they can buy in lieu of buying green power are passed on to their customers. On a more practical level, with 29 states plus the District of Columbia already having equivalent Renewable Portfolio Standards in place, most of the best US wind and solar resources are already covered by such targets. A national RES might not add a lot more of these energy sources, but it certainly would trigger a scramble for the states with limited renewable resources to line up supplies from elsewhere. That might be good for the renewable energy sector, but it's of questionable benefit to a national economy still struggling to emerge from the recession.
Also absent from this draft are the expiring renewable energy incentives highlighted in yesterday's New York Times editorial. These include the $0.45/gal. ethanol blenders' credit, about which I've blogged extensively, and the Treasury renewable energy grants offering up-front cash for the Investment Tax Credits that would otherwise require waiting for next year's tax return--assuming the recipient company had sufficient taxable income to benefit from the entire amount of the credit. These grants look problematic, as I noted last fall, when reports first surfaced that most of the money paid--approaching $2 billion--had gone to non-US firms. As I discussed at the time, this reflects the reality of a wind energy market in which US firms account for less than half of domestic sales, supported by a thoroughly-globalized supply chain, not unlike many other industries. The arguments pro and con too easily reduce to unappealing sound-bites.
That leaves us with what is currently in the bill, which I have so far only had time to skim. It seems to consist mainly of well-intended but overly-politicized efforts--one section is entitled the "Big Oil Bailout Prevention Unlimited Liability Act of 2010--to hold BP accountable for the Gulf Coast oil spill and to address the liability for future spills, while trying to reduce the chances of another one. That sounds like motherhood and apple pie at this point, but as always the devil is in the details; implementing some of these details would leave the US with a much smaller offshore oil capability. That might appeal to environmentalists but would be catastrophic for energy consumers, our trade deficit, and US energy security. And why would you charge the Secretary of Energy with issuing a monthly report, starting in September or October, on the economic and employment impact of a deepwater drilling moratorium that is only intended to last through November? Interestingly, the bill would also establish a Congressional version of the President's oil spill commission, this time with specific technical criteria for appointment to this body. Alternative, compromise versions of the bill's oil provisions are already emerging from within Senator Reid's own party, and with a lot of luck we could end up with measures that would actually make offshore drilling safer and more responsible without killing it--and the roughly 30% of domestic oil production it provides.
In addition to its oil spill provisions, the bill also offers some generous tax credits for converting heavy-duty trucking to natural gas, along the lines of the Pickens proposals I discussed last Friday, plus similar help for vehicle electrification and infrastructure, yet more energy efficiency measures (this time focused on homes), and funding for an old government program to buy up land and waterways for parks and nature preserves. All of this is notionally paid for ("PAYGO") by raising the Oil Spill Liability Trust Fund fee on all the oil produced and used in the US from $0.08 to $0.45 per barrel, which would directly increase the size of the fund to cover future disasters from $1 billion to $5 billion, while indirectly making all the bill's other provisions appear deficit-neutral. The proposed fee increase has the potential to raise an extra $2.5 billion per year.
It's not clear whether even this slimmed-down bill can garner enough votes to pass in the Senate, let alone do so before the summer adjournment. In any case I'd expect the version that comes up for a final vote--if it does at all--to look somewhat different than this draft. It would almost certainly grow much longer, a malady that has afflicted all major legislation in recent Congresses. Whether it will actually make a meaningfully-positive impact on the serious energy challenges the US faces remains to be seen.
Thursday, July 15, 2010
Moratorium Follies
This week Secretary of Interior Salazar reissued the administration's deepwater drilling moratorium, with a few new twists and a notional six month limit. This happened in spite of loud protests from the states most affected by the spill, some of their representatives in Washington, and even some skepticism from the heads of the President's own drilling commission. The old ban is still in court, and the new one probably will be soon, but this is really all moot, because whether the Salazar moratorium is technically in force or not, the legal battle over it has created a moratorium limbo that few companies would be willing to test, given the costs involved. One irony of all this is that in addition to the obvious indirect winners in OPEC, there's at least one direct winner in this hemisphere: Brazil, which will be quite happy to export to us their deepwater oil that we're inadvertently helping them to develop quicker and cheaper.
When I read the Interior Department press release on the new moratorium, which was presumably crafted to satisfy the federal judge's objections to the original deepwater drilling ban, several points stand out, aside from the redefinition of the ban to cover not water depth, but the kind of rigs that are required to drill in deep water. In the Secretary's statement that he "remains open to modifying the new deepwater drilling suspensions based on new information", he appears to offer greater flexibility and the prospect of case-by-case exemptions or an early termination. Yet when you read the first item on the list of reforms for which the moratorium is intended to buy time, dealing with "companies demonstrating that they have the ability to respond effectively to a potential spill in the Gulf," the implication seems clear. If an unprecedented response to the Macondo spill using the state-of-the-art technology and techniques has been inadequate to meet the government's implied standard--as seems self-evident--then this is a classic Catch 22. If drilling can only resume when the industry can prove it could contain a blowout like this and any oil spilled within a few days, then we could be waiting a very long time, while technology catches up to that new, higher bar.
When you parse through this document and examine the evidence that's been made available so far concerning the causes of the Deepwater Horizon disaster and spill, it's hard to avoid the conclusion that the main driver behind the moratorium is not technological, or even necessarily environmental, given the extremely low risks of a similar event occurring from a properly managed rig equipped with a properly-maintained blowout preventer. It seems due at least to "an abundance of caution"--that lovely phrase we have heard several times this week--if not ultimately from hard-nosed political considerations. If I were a President whose party was facing a tough mid-term election, I'd be tempted to eliminate any possible risk of another blowout between now and November 2, too.
The problem with that approach is that the administration won't pay the short-term price for that abundance of caution. That burden falls on the economy of the region, which has already been affected by the spill, on the domestic drilling industry--a vital national asset, not just a bunch of corporations--and its employees, and eventually on the entire US, as our domestic energy supply will again begin to dwindle. According to a new study, the economic impact of the moratorium already extends well beyond the region, because offshore oil workers, who typically work two weeks on and two weeks off, live all over the country, apparently in more than two-thirds of Congressional districts. Yet while unemployed oil workers might at least be covered by the $100 million fund that BP set aside for that purpose at the administration's request, the local businesses that employ many of them need help with more than just meeting payroll, if they are to survive until the end of the moratorium, whenever that might be. That's not BP's responsibility; it's the direct responsibility of the government that has taken a calculated decision to impose a blanket moratorium on the entire industry, rather than on individual bad actors.
Meanwhile, aside from OPEC, an indirect beneficiary of the moratorium that understands very well that when you stop drilling your existing production begins to fall away, there is at least one direct beneficiary that is about to take advantage of the opportunity the ban has created. Brazil has discovered enormous offshore oil reserves in the deep waters of the Santos Basin and elsewhere along its lengthy coastline. As I've noted before, it's the exploitation of these resources, rather than its effective but comparatively-small cane ethanol program, that has made Brazil energy independent and is turning it into one of the most important new oil exporters in the world, including to the US. Until recently, the companies exploring for oil off the coast of Brazil faced the same problems that Gulf Coast drillers did, of high rig rental costs and a long queue for hiring them. Our response to Deepwater Horizon is mitigating both issues. So while it might be promoting safer drilling in the Gulf, one of the unintended consequences of the suspension of drilling here is that it will simultaneously create a greater need for the US to import oil, while ensuring that countries like Brazil will have more of it to sell us, sooner than otherwise and at a bigger profit.
I expect to post over the course of the summer on ideas for what it would take to get our government and the rest of the country comfortable with resuming drilling, although some indications suggest that most of our fellow citizens are already there. This is complicated by an opportunistic PR campaign from environmental groups suggesting that this is the moment to get the US off oil entirely, rather than figuring out how to drill more safely. However desirable that might sound, for many reasons, at this point it's about as feasible as suggesting to a hospital patient that this is the moment for him to try living without blood. For good and ill, oil is still the lifeblood of our economy. We should absolutely work on reducing our dependence on it, but we're going to burn many billions of barrels of oil getting there, and that will require continued drilling in the US--unless we're happier than I think to go back to our former pattern of importing more and more of it from other countries. Stay tuned.
When I read the Interior Department press release on the new moratorium, which was presumably crafted to satisfy the federal judge's objections to the original deepwater drilling ban, several points stand out, aside from the redefinition of the ban to cover not water depth, but the kind of rigs that are required to drill in deep water. In the Secretary's statement that he "remains open to modifying the new deepwater drilling suspensions based on new information", he appears to offer greater flexibility and the prospect of case-by-case exemptions or an early termination. Yet when you read the first item on the list of reforms for which the moratorium is intended to buy time, dealing with "companies demonstrating that they have the ability to respond effectively to a potential spill in the Gulf," the implication seems clear. If an unprecedented response to the Macondo spill using the state-of-the-art technology and techniques has been inadequate to meet the government's implied standard--as seems self-evident--then this is a classic Catch 22. If drilling can only resume when the industry can prove it could contain a blowout like this and any oil spilled within a few days, then we could be waiting a very long time, while technology catches up to that new, higher bar.
When you parse through this document and examine the evidence that's been made available so far concerning the causes of the Deepwater Horizon disaster and spill, it's hard to avoid the conclusion that the main driver behind the moratorium is not technological, or even necessarily environmental, given the extremely low risks of a similar event occurring from a properly managed rig equipped with a properly-maintained blowout preventer. It seems due at least to "an abundance of caution"--that lovely phrase we have heard several times this week--if not ultimately from hard-nosed political considerations. If I were a President whose party was facing a tough mid-term election, I'd be tempted to eliminate any possible risk of another blowout between now and November 2, too.
The problem with that approach is that the administration won't pay the short-term price for that abundance of caution. That burden falls on the economy of the region, which has already been affected by the spill, on the domestic drilling industry--a vital national asset, not just a bunch of corporations--and its employees, and eventually on the entire US, as our domestic energy supply will again begin to dwindle. According to a new study, the economic impact of the moratorium already extends well beyond the region, because offshore oil workers, who typically work two weeks on and two weeks off, live all over the country, apparently in more than two-thirds of Congressional districts. Yet while unemployed oil workers might at least be covered by the $100 million fund that BP set aside for that purpose at the administration's request, the local businesses that employ many of them need help with more than just meeting payroll, if they are to survive until the end of the moratorium, whenever that might be. That's not BP's responsibility; it's the direct responsibility of the government that has taken a calculated decision to impose a blanket moratorium on the entire industry, rather than on individual bad actors.
Meanwhile, aside from OPEC, an indirect beneficiary of the moratorium that understands very well that when you stop drilling your existing production begins to fall away, there is at least one direct beneficiary that is about to take advantage of the opportunity the ban has created. Brazil has discovered enormous offshore oil reserves in the deep waters of the Santos Basin and elsewhere along its lengthy coastline. As I've noted before, it's the exploitation of these resources, rather than its effective but comparatively-small cane ethanol program, that has made Brazil energy independent and is turning it into one of the most important new oil exporters in the world, including to the US. Until recently, the companies exploring for oil off the coast of Brazil faced the same problems that Gulf Coast drillers did, of high rig rental costs and a long queue for hiring them. Our response to Deepwater Horizon is mitigating both issues. So while it might be promoting safer drilling in the Gulf, one of the unintended consequences of the suspension of drilling here is that it will simultaneously create a greater need for the US to import oil, while ensuring that countries like Brazil will have more of it to sell us, sooner than otherwise and at a bigger profit.
I expect to post over the course of the summer on ideas for what it would take to get our government and the rest of the country comfortable with resuming drilling, although some indications suggest that most of our fellow citizens are already there. This is complicated by an opportunistic PR campaign from environmental groups suggesting that this is the moment to get the US off oil entirely, rather than figuring out how to drill more safely. However desirable that might sound, for many reasons, at this point it's about as feasible as suggesting to a hospital patient that this is the moment for him to try living without blood. For good and ill, oil is still the lifeblood of our economy. We should absolutely work on reducing our dependence on it, but we're going to burn many billions of barrels of oil getting there, and that will require continued drilling in the US--unless we're happier than I think to go back to our former pattern of importing more and more of it from other countries. Stay tuned.
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