Sympathy for the Oil Industry?

by Bill Chameides | May 6th, 2009
posted by Erica Rowell (Editor)

Permalink | 3 comments

Why isn’t the United States pursuing more of our oil resources? Is it because of the administration — or the economy. Today The Green Grok bores into the details.

The poor oil industry. After years of record profits, things have soured with the collapse of oil and gas prices. And now I read of an Obama “bias” against the industry. Heavens!

Robert Samuelson is an editor at Newsweek and the Washington Post, and, according to his Wikipedia page, he is so dedicated to objectivity that he never votes in an election. On Monday, Samuelson used his bully pulpit at the Washington Post to rail against Obama’s “undermining” of domestic oil and gas exploration. (“The Bias Against Oil and Gas,” Washington Post, May 4, 2009.) Pretty serious stuff; let’s look into this “bias.”

Our “Huge Oil and Natural Gas Resources”

Samuelson quotes some impressive numbers. We’ve apparently got enough stuff in the ground to dwarf Saudi Arabia’s reserves and keep our cars fueled up for many decades. Can this be true? Well, yes and no.

You’ve got to be careful around oil industry terms such as “resources” and “reserves” because they’re not always interchangeable.

There are reserves we know about (e.g., proved reserves, which are estimated, with reasonable certainty, to be there and commercially recoverable with existing technology and unproved reserves, which are slightly more iffy) and resources we think are there but not for sure and even if they are there, we don’t know if they’re recoverable. (For more details, see our glossary of oil exploration terms.)

The numbers Samuelson cites fall into the category of undiscovered technically recoverable resources (UTRR) and thus we don’t know if those potential resources will ever be economically recoverable.

Why Aren’t We Exploiting the UTRR

Samuelson says Obama’s administration is “undermining” the exploration and exploitation of our domestic resources. Really?

The UTRR Samuelson is talking about come in three flavors: natural gas, petroleum, and oil shale. Let’s take a look at how Obama is “undermining” each.

Natural Gas

Estimates of the proved reserves of natural gas in the United States have increased by leaps and bounds in the past couple of years. The bigger estimates are due to the extraction of unconventional resources such as coalbed methane and the development of techniques such as horizontal drilling and hydrofracing that allow easier access to the gas in shales and other low-permeable rocks. 

Folks like T. Boone Pickens have been pointing out how these deposits could be used to power automobiles and end our dependence on foreign oil. (See U.S. map [pdf] of shale gas deposits.) Great idea and it might actually work, so why is the Obama administration standing in the way of exploiting these reserves? The simple answer: it’s NOT.

The leases for drilling for natural gas are in place and ready to go. The problem is that natural gas prices have collapsed, there is an oversupply of natural gas, and companies prefer leaving the gas in the ground until more favorable conditions arise.

Bottom line: Economics -— not the administration — are preventing exploitation.

Oil Supply

Despite all of Samuelson’s arm waving and statistics, America’s oil reserves are relatively small. We have less than three percent of the global reserves, but use more than 20 percent of the global supply (source: EIA spreadsheet [xls]). We can drill and drill and drill, but we will be hard pressed to significantly increase our domestic oil supply. Drilling more and now is more about racing to maintain reserves rather than grow them.

And because oil is a global commodity, our small contribution to the global supply will only have a minor impact on oil prices and the long-term flow of cash to countries like Saudi Arabia with the really large reserves.

The only lever we have in that regard is on the demand side — lowering demand by increasing fuel efficiency of our cars.

Oil Exploitation

According to Samuelson, the Obama administration is also standing in the way of oil exploration. For example, he points to an estimated 3.65 billion barrels of potential oil in the Bakken formation in North Dakota and Montana. 3.65 billion barrels. That’s a lot. Why is Obama preventing us from getting at those gallons? Well, actually he is not. The Bakken formation is already open for exploration. So if the stuff is there and the economics are good, it can and probably will be produced.

The same holds true for the oil on the outer continental shelf (OCS). The vast majority of those resources were never covered by the bans that expired last fall — some 68 billion barrels of the total 86 billion barrels of UTRR in the OCS — and so are already open for exploration.

Bottom line: Why is that potential oil not being exploited? As with natural gas, the economics are not favorable.

Oil Shale

The United States has a staggering supply of oil shale, mostly in Colorado. If we fully exploited that resource for oil, we would probably have no gasoline worries for the remainder of this century and beyond.

But here too the economics are unfavorable — the estimated costs to produce a barrel of oil from shale falls in the range of $75 to 90. So oil prices would need to remain high to make this resource worth developing. Nevertheless, it is true that the Obama administration is scaling back Bush administration plans to expand research, development and demonstration leases for oil shale.

Why might Obama do a thing like that? Samuelson is correct in this instance: environmental protection. Converting oil shale into oil is an energy-intensive process that:

  • requires large quantities of water — a commodity already in short supply in dry Colorado, and
  • results in significant pollution — water pollution and global warming pollution.

The latter is especially troubling — a gallon of gasoline from oil shale leads to about 20 to 60 percent more greenhouse gas emissions than a gallon of conventional gasoline.

Bottom line: The Obama administration is blocking exploitation of oil shale for sound environmental reasons. Does that make sense? I think so.

Federal policies curbing carbon dioxide emissions will eventually take effect. It may not be this year, or the next, but it will happen. And if you care about the economy — as Samuelson does — it makes no sense to invest in exploiting a resource whose use will have to be curtailed.

I guess Samuelson thinks it makes sense to go ahead with an investment that has no future. Hey, I’m just a scie
ntist, but that seems like poor economic policy to me.

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  1. Dan
    May 7, 2009

    What gets lost in the debate (purposely or not) is that whatever oil that we do drill for in the U.S. is bought and sold on the world market, so what is drilled here is not what is kept here, necessarily. But that fact succumbed during the last presidential cycle. As always, efficiency, especially starting at a high level of inefficiency, goes a longer way to improving the situation in a way that is cheap, quick and effective. Just like weatherization.

    • JP Dolphin
      Jul 28, 2009

      It doesn’t exactly work as you have presumed. There is no international oil grocery store where oil producers bring the oil and oil users go to buy it. The oil and natural gas industry is made up of some very smart people (they wouldn’t be making so much money other wise). Oil production location and oil consumption location is coordinated, and optimized to minimize oil company’s expense (made up of the prize of the oil as well as travel expenses). Here is a real world example of how cheaper gas could be more expensive for the environment. Oil company Y has oil drills in both Saudi Arabia and Venezuela, the cost of a barrel of oil from Venezuela is $80 while the cost from Saudi Arabia only $60; but the travel expense of the Saudi Arabia oil is higher, let say $20 vs only $8 from Venezuela. Thus although geographically Venezuela oil is closer to the US (reducing the total green house gases emitted), since that is not a factor taken into monetary consideration by the oil company the overall cheaper gas from Saudi Arabia $80 vs $88 is bought. The idea behind increasing domestic drilling is that because the oil would have to travel such a minimal distance before being used in the US, overall cost as well as overall emissions would be reduced. Never mind creating domestic jobs, stabilizing oil prices, national security and slowing the outflow of money from the US via fossil fuels. Domestic drilling is not the answer, but should be part of the equation.

      • Dan K.
        Jul 29, 2009

        You’re confusing physical transport with the actual markets. Point being is that even if this US oil is produced, it maybe sold to someone outside. For all the oil Exxon refines in Baytown, it still doesn’t all go to Exxon franchise stations. There isn’t that level of coordination. Part of the reason it is an ‘efficient’ market is because of such flexibility. As for U.S. oil in particular, it is a waste of time, to put it lightly. We only have 3% of the world’s proven reserves, yet consume 25%. Won’t do a dent when this oil flows in 5, 10 years – no stabilizing oil prices there or nat’l security (that, by the way, can be more done by addressing global climate change than helping perpetuate it unnecessarily. It is such a small amount that in fact, if people inflated their tires correctly and got proper-timed tuneups (yes, THAT issue from the Pres. election which was laughed at but was correct), you can offset that. That is easier, quicker, and we can use the money not to invest in old technologies but in new ones that we need, like CSP for baseload, wind in the Midwest, a smart supergrid and so on. Drilling is not part of the answer, nor part of the equation. No need to spend money recklessly when it can be use for something with a higher marginal benefit. I hope you shop at your local farmer’s market, because your food travels probably more than your oil 🙂

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