Monday, July 28, 2008

In last week's edition of my local newspaper there was a letter calling for more oil drilling and blaming the Democratic Congress for high gas prices. I wrote a rather lengthy response debunking the myth of "more oil = cheaper gas" and I feel like it's worth posting here.

It's tempting to blame the price of oil and gasoline on what seems like a reasonable assumption, that limiting domestic oil production from areas off-limits for drilling has driven up the cost. The Arctic National Wildlife Refuge (ANWR) and Outer Continental Shelf (OCS) of the lower 48 states are the two largest of these areas. President Bush has made the opening of ANWR central to his "energy policy" and recently lifted the executive ban on offshore drilling, while politicians like Florida Governor Charlie Crist have lifted state bans. All that remains is for Congress to approve drilling measures, and we're in the
clear for oil, right?

Wrong. The idea that drilling offshore and in ANWR would bring down oil and gas prices is little more than a pipe dream. The reality is that ANWR and the OCS do not contain nearly enough oil reserves to affect the United States and global energy markets significantly, if at all. The United States Energy Information Administration (EIA) estimates that total oil consumption in the nation is around 21 million barrels per day. For perspective, 5 million of that is produced domestically and the rest is imported. Were Congress to approve ANWR drilling and refineries opened up tomorrow, the EIA estimates that that ANWR would start producing oil in 2018 at levels of 200,000 barrels per day or less. Production would peak in 2027 at 780,000 barrels daily and decline steadily afterwards. The United States is currently predicted to receive 54% of its oil supply from overseas in 2030 without ANWR or offshore drilling. With the opening of ANWR, that number drops a whopping four percent to 50%, leaving half of all oil supplies to be imported overseas. That does not include the amount imported from Canada or Mexico, the former currently being the largest supplier to the US. Oil coming from ANWR in 2030 would make up about 0.8% of the total world oil supply, and decrease the price of a single oil barrel by about $0.75 in that year. The oil market is not a traditional supply and demand one, as artificial restrictions are a very real possibility for keeping prices steady or driving them higher. The EIA notes that were ANWR to be opened, the amount of oil coming out of it would be so low that OPEC would be likely to slightly decrease supply and therefore neutralize the already tiny impact it would have.

Offshore drilling on the continental shelf is essentially the same situation. A similar report released by the EIA in 2007 estimates the total oil reserves offshore to be 18 billion barrels over a huge area, compared to ANWR's 10.4 billion over a much smaller one. Again, were drilling to begin tomorrow it would take 10 years to begin production and the impact would only show up around 2030. That impact is utterly insignificant to the tune of 200,000 extra barrels daily compared to what current estimates are in the lower 48 states without the OCS. As the report states, "Because oil prices are determined on the international market, however, any impact on average wellhead prices is expected to be insignificant."

The irony of the entire situation is that while we expect Democrats to oppose more domestic drilling and Republicans to generally favor it, a recent bill designated HR 6515 in the House of Representatives calling for oil companies to drill on the 68 million acres of offshore land they lease in the continental United States but do not have wells or refineries on was blocked by Republican representatives. The idea that there is no oil, or comparatively little oil, on this land is a myth. Oil companies ask to lease areas of land for drilling, and the government grants or denies. Geologists and seismologists are hired to assess the potential of an area of land in oil production before the lease, through direct methods like satellite imagery and core samples and through indirect methods of estimating oil reserves based on similar formations. Oil companies do not lease 76% of the land in an area (there are about 90 million acres total leased offshore) without the expectation that it will turn a profit.

So, where does that leave us? We can blame the politicians we elected, like Mr. LaFiandra does, but politicians do not control the price of oil. The price of oil is controlled by the value of the dollar, which is controlled by the Federal Reserve and Chairman Benjamin Bernanke. The entire situation is linked directly to the housing crisis precipitated by a failure to regulate subprime mortgages, allowing loan companies like Bear Stearns and Fannie Mae to get away with virtual robbery. When hard times came rolling in and the failure of these companies was imminent, Bernanke took the easy way out and began printing more money to bail them out, in conjunction with taxpayer dollars. As any economic student knows, increasing the amount of a fiat currency increases inflation and devalues the dollar. Barrels of oil are traded in dollars, and so it takes more dollars to buy them as their value goes down.

The oil crisis we face today is not simply one of supply and demand. While it is true that supply is remaining constant while demand globally is increasing, the United States has consistently used 25% of the oil supply for years. The crisis is one of failed loans and corporate greed, that trickles down to average consumers like you and me. As legendary oil entrepreneur T. Boone Pickens says "We cannot drill our way out of this crisis", no matter what President Bush or 74% of the American public
may say.