Why a "Drill Here, Drill Now" Approach Will Help America Pay Less at the Pump
Is more drilling for American oil an essential part of lowering
energy costs and freeing us from dependence on foreign sources of
energy? The typical response of critics is a resounding “NO!” and
includes several common arguments, which are not supported by the
facts.
MYTH: Oil companies currently have 68 million acres of
leased public lands that contain large amounts of economically
recoverable oil available. Drilling in these areas could generate 4.8
million barrels a day so opening up more land is not necessary.
FACT: The estimates on the amount of oil available in those
68 million acres have been derived by assuming that the unused acres
can produce the same amount as those acres being used. However, much of
the land leased to oil companies has already been explored and
determined not to carry enough recoverable oil to justify drilling.
This is in stark contrast to the other 97% of currently banned offshore resources and areas with shale oil, where enormous quantities are known to exist.
That opponents to greater U.S. exploration believe they understand
better than petroleum engineers how we obtain oil from drilling is
absolutely ridiculous.
MYTH: Drilling will not provide any short-term relief in
the price of oil because it will take many years before new drilling
will lead to new supplies.
FACT: This same argument has been used for the past several
decades to prevent us from using more of our American oil, leading to
our current dependence on foreign oil and the supply crunch we are
currently experiencing. Does this mean critics of greater American
energy exploration were wrong 10 years ago, 20 years ago, and 30 years
ago but are suddenly right today now?
Drilling more now will increase supplies in the future. And higher
supplies lead to lower prices. Currently, the world is operating at or
near full capacity, so there is very little slack in the system, and
any disruption causes spike in price. This is partly why commodities
and other investors have invested so heavily in oil, driving up prices.
They recognize demand will continue to increase and that current supply
has artificial limits, especially in the United States.
Opening up new oil fields in the U.S., even if new supplies won’t
actually reach our gas tank for several years, would immediately impact
the amount of upward speculation on long-term commodity investment in
oil. Oil speculators will see a greater supply ahead and will see that
the future of oil is less constrained on the supply side. Moreover,
fears of Middle Eastern turmoil or South American unrest that could
disrupt supply shipments will be much less of a reason to drive up the
price of crude if a stable U.S. can supply millions of barrels of
additional oil. Which represents a more stable source of oil, Colorado
or Caracas?
Finally, nobody is suggesting that our nation’s energy strategy
should be solely dependent on domestic production of oil. We all
recognize that alternative energy sources – such as wind and solar -
need to be developed. But more American oil must be a part of an
American energy solution.
MYTH: The U.S. only has a small percentage (from 2-6%) of
the world’s oil supplies, and since oil is a global commodity, our
increased production won’t affect prices much if at all.
FACT: This estimate of 2-6% of the world’s oil supplies does not hold up to scrutiny.
In oil shale alone, found in the Green River Formation in parts of
Utah, Colorado, and Wyoming, the U.S. has approximately 800 billion
barrels of recoverable oil, or over three times the proven reserves of Saudi Arabia. This comes from a midpoint estimate in a 2005 RAND study done at the request of the Department of Energy, and a higher end estimate puts the number at over one trillion barrels.
Furthermore, there are vast areas of the United States and its outer
continental shelf where it is illegal to even look for oil. Exploration
routinely yields additional resources far larger than initial
estimates.
Resources from oil shale and additional oil resources that are
likely to be discovered are not included in the estimates of American
oil supplies.
MYTH: Drilling offshore will lead to ocean spillage, damaging wildlife and beaches.
FACT: In fact, virtually all of the pollution and “spillage”
comes from large tankers transporting oil from other countries and
natural seepages. Thus, drilling for our American oil would actually
reduce the risk of oil pollution by reducing the number of
international oil tankers entering our ports.
Offshore spills have occurred, but offshore drilling companies have
an exceptional record of preventing spills and minimizing environmental
damage, due primarily to technological innovation.
Norway, which is a major exporter of oil and acquires all of it from
offshore, also has an outstanding record of drilling in the sea, and
there’s no reason why we would take fewer precautions than the
Norwegians. Everyone promoting offshore drilling wants to do it in
compliance with environmental safeguards, which in the United States
are some of the most stringent in the world.
This is unlike other nations, such as China, which announced
a partnership with Cuba in 2006 to start drilling for oil in the Gulf
of Mexico. That nation’s dismal environmental record should force
Congress to make a decision: Do we let another nation drill for oil
near us and risk major environmental catastrophe, or do we do it
ourselves with better environmental protection?
MYTH: The price of oil has increased due to
“over-speculation” by energy commodities traders and outlawing or
heavily regulating energy trading is the best way to dramatically
reduce the price of oil.
FACT: When analyzing the effect of speculators on the price
of oil it is important to distinguish between the activity of a healthy
commodity futures market and “over-speculation.”
A healthy commodities futures market responds to the supply and
demand realities of actual commodity suppliers and consumers. As Robert
Murphy from the Institute for Energy Research explains,
a healthy futures market can be a stabilizing influence on oil. By
buying when prices are low and selling when prices are high,
speculators actually push up the low prices and push down the high
prices. America wants a healthy futures market on the price of oil.
So oil speculation does play a role in the price of oil. Single-day
price spikes from supply disruption fears, for example, are often the
work of speculation, but the price typically readjusts. The key
question, then, is if “over-speculation” is occurring.
“Over-speculation” in a futures market is when activity in the
speculative markets themselves cause an artificial, higher demand for a
commodity that does not reflect the demand of actual consumers. This
causes an artificial, real-world price increase.
So have oil speculators distorted the global demand for oil, leading to the sharp price rise?
The data suggest not. If the price of oil truly was above the
natural level dictated by supply and demand, we would see an increase
in global inventory of oil. This is because when prices rise,
production increases and consumer demand falls. If the speculative
markets were adding extra demand to the market, all that oil purchased
would have to be stockpiled somewhere. However, there is no evidence of
any such hoarding, meaning that commercial consumers are purchasing
every barrel produced. By definition, that means that the price is in
line with real-world supply and demand. Despite the rise in prices,
consumers continue to buy, meaning supply and demand fundamentals are
in line. This means the speculative markets are functioning as they
should and are not having a distorting effect on the price of oil.
Furthermore, long-term bets that the price of oil will rise rather
than fall on the New York Mercantile Exchange have dropped over four
fold since the price of a barrel went above $100. Traders are now
shorting oil almost as much as they are betting on its price increase
in the long term. Again, this data suggests that the speculative
markets are functioning as they should.
So if the energy futures markets are operating as they should,
passing new laws outlawing or more heavily regulating these markets
will do nothing to lower the price of oil in the intermediate or long
term. In fact, it would likely have two effects that could actually
drive up the price of oil.
First, new regulations would reduce the stabilizing impact futures
markets play on the price of oil described above. Second, they would
likely drive energy futures markets outside of the United States, where
they would be even less regulated than before. The loss of this
financial activity would hurt America’s already sluggish economy,
weakening the dollar even more. Considering that the decline of the
value of the dollar has been estimated to account for as much as 30% of
the recent surge in oil prices, the long run effect of would be to
raise the price of oil even more.
So if you want the price of oil to be more volatile and ensure that
Dubai and Singapore become the future centers of commodities trading,
passing new laws heavily regulating the energy futures trading is a
great idea. However, it will not lower gas prices.
MYTH: Drilling for unconventional sources, such as tar
sands or shale oil, is too costly and creates a large carbon footprint,
among other environmental problems.
FACT: The aforementioned RAND study
demonstrated that if the price of a barrel of oil was as “high” as $90,
current technology would make oil shale competitive in the market. With
a barrel of oil approaching $140, the notion that extracting oil from
shale is too expensive is simply untrue.
The environmental footprint argument would make more sense were it
not for recent innovations by companies like Shell Oil, which has
developed an in-situ method for extracting shale oil that would use
relatively little water and does not involve making creators on wide
portions of land. Instead, heating rods are stuck into the earth that
heat the shale and then oil falls into a pool below to be collected. It
should also be noted that early research suggests this method could be
competitive even if oil was as cheap as $25 per barrel.
However, opponents of oil drilling are blocking further attempts to
innovate through an amendment to an omnibus spending bill from December
that prevents any further leasing on public lands with oil shale.
It is telling that opponents to greater U.S. exploration would
choose to block shale oil development through a rider to a several
hundred page spending bill instead of through separate legislation that
could be debated purely on the merits of the specific proposal.
