Offshore Drilling and Peak Oil
By: Michelle Jelnicky
Too often, discussion of serious issues such as energy are defined by divisive partisan rhetoric that often misses the point, such as this humorous Daily Show segment:
While politicians in both major parties are focused on gas prices, the arguments they use are often little more than a red herring. Consider the current controversy about offshore drilling, for example.
The Republican party line is “Drill here, drill now, pay less”. That’s deceptive. The Democratic party line is “Use what you got, already!” — we shouldn’t risk environmental damage to areas off-limits until existing leases are exploited. That’s also deceptive.
Here’s one problem with these arguments: both parties make the assumption that lifting drilling restrictions for the Outer Continental Shelf (OCS) would result in an immediate rush of oil exploration, with lower prices (Republicans) and environmental devastation (Democrats).
Rational people, however, might question that fundamental assumption. The fact is that oil rigs aren’t just sitting around idle waiting for new places to drill. They’re already close to fully utilized in the places of greatest economic benefit, as shown by utilization data at RigZone.
Furthermore, new rigs aren’t rolling off the assembly line on a daily basis. They’re extremely expensive and take a long time to build. So one reason existing leases aren’t being exploited is that there are easier pickings elsewhere. Opening up additional OCS territory doesn’t mean that new rigs would appear overnight.
But why not? Doesn’t it seem that if global demand and oil prices are strong, then industry investment in exploration and rig production would be also accelerating? Given what we know about growing global demand, why aren’t oil companies investing every spare dollar in exploration, instead of dividends and share buybacks?
Could it be that large oil companies are aggressively buying back stock and not plowing money into locating new reserves because the largest and most accessible reserves have already been found?
Oil is a finite resource, so it is safe to say that once all the oil is extracted, it is gone for good and cannot be replaced. The term “Peak Oil” refers to the time in which the world’s oil production will reach its maximum rate and then begin to decline. Peak Oil is not about the time when we run out of oil; it is about the rate at which oil is being produced. Simply put, it is the point where the amount of oil the world uses everyday exceeds the rate at which oil can be produced.
For an excellent introduction and discussion about Peak Oil, please visit The Oil Drum.
In 1956, scientist M. King Hubbert used a logistic model, now called the Hubbert peak theory, to accurately predict the time which the United States’ lower 48 states would reach peak oil. It is agreed upon that the lower 48 states reached their production peak in 1970 and have been producing less oil, at a slower rate each year, than it had the year before — despite rising prices and continued efforts to increase supply.
The Hubbert Theory has been used successfully to project timetables for the peak of oil and other finite resources in many countries throughout the world. Since the US imports over 60% of its oil, we have not been worrying about the unseen consequences. But what happens when the entire world’s oil supply reaches its peak? Once there is a peak in world oil production, the world will need to learn to decrease the amount of oil consumed and learn how to stop relying so heavily on oil.
From the week of July 4- July 11 2008, the U.S crude oil imports averaged 10.8 million barrels per day. This is a 1.2 million barrel increase from the previous week. In 2007 the U.S consumed over 142 billion gallons of gasoline and in total, consumed over 7.5 billion barrels of crude oil: almost 25% of the total amount of oil consumed in the entire world. Even in the energy sector, dating back to 2005, the U.S accounted for 21.8% of the total energy used in the world. Yet we are only 5% of the world’s population.
Ultimately, high energy prices will help us focus on local, community-based sustainability. However, we will likely need to use nearly every drop and BTU of available energy to make an orderly transition to renewables in the face of global population growth and our current level of fossil fuel dependence.
From that perspective, lifting the federal ban on offshore drilling is necessary, as we must be able to use the most accessible of our few remaining reserves:
But merely lifting the ban won’t accomplish much in itself. It doesn’t mean drilling will begin immediately. It will take some time, during which we will continue to be 300 million Americans increasingly competing with 1.1 billion Indians and 1.3 billion Chinese who love their new cars. So prices are unlikely to collapse, and the impetus to look locally for sustainable solutions will only grow.
August 3rd, 2008 at 6:11 pm
As a “student” of Peak Oil and oil production for the past two years after reading “Twilight in the Desert”, I’m pleasantly surprised to find the mention of this issue in a political campaign. Too often, the theory is dismissed as loony or conspiracy talk when it is backed up by hard evidence and actual petroleum geologists like Hubbert and Campbell.
“It is agreed upon that the lower 48 states reached their production peak in 1970 and have been producing less oil, at a slower rate each year, than it had the year before — despite rising prices and continued efforts to increase supply.”
It’s also important to show not just that Peak Oil exists, but that it likely occurred recently or will occur soon (oil data is so horrible due to the secret nature of many nations’ national oil companies). For instance, at least 33 of the top 48 oil producers are past their peak. This is not limited to the US, where the oft-mentioned and quickly dismissed environmental movement has certainly sped up the process in the States. But many other nations without this movement have experienced peak like Norway, UK, Mexico, Yemen, Oman, Syria, Iran, etc.
Good article
August 3rd, 2008 at 8:43 pm
Michelle
All the oil that is currently pumped and that that will be pumped in the future belongs to the oil companies that pump the oil. This oil does not belong to America or Americans! Oil companies will always sell the oil they pump (offshore and ANWAR) to the highest bidder on the world market. The highest bidder may well be China. If it is China, the oil companies will load the oil into a tanker and send it to China. If you were an Exxon stock holder would you expect them to behave any other way? They will certainly not sell it to an American refiner at a discount. If they did sell the oil at a discount the refiner would just sell the gasoline at whatever price the market would bear which would negate the discount. This whole offshore drilling thing has been started and magnified by the oil companies and their comrades in the Republican party.
A better idea is to hoard the oil on American shores so that it will be available for possible future catastrophies.
August 3rd, 2008 at 11:51 pm
Nick — I do think Peak Oil is decidedly out of the “fringe” category, especially now that we have a Congressional caucus led by Rep. Roscoe Bartlett, and the GAO report published last year:
http://www.theoildrum.com/node/2414
http://www.theoildrum.com/node/2418
BJ
August 4th, 2008 at 12:15 am
Gail — While the price of oil is set in a global market, the fact remains that our economy is absolutely dependent on oil and its derivative products.
Current data suggest that the era of cheap oil is coming to an end - we’ve seen rising global GDP with stagnant oil production (see below), and energy prices have risen as a result. As energy gets more expensive, we will need to continue bringing our own energy resources to the global market.
Regardless of where the energy ends up, oil and gas that we recover here does benefit us economically. Every barrel of oil that we recover domestically will reduce our trade deficit — either it is consumed here and reduces a barrel of imported oil, or it is exported and contributes positively to our trade balance. Profitable companies generate tax revenue on these transactions, as well.
The Republicans can’t guarantee that lifting a drilling ban will lower gas prices. With 1.1 billion Indians and 1.3 billion Chinese buying new cars, growing global demand makes lower prices pretty unlikely. But if there is any truth to Peak Oil, we must aggressively locate all available domestic sources — not for “energy independence”, but simply for survival during the transition.
Saying we need to “hoard it” implies that we need to know where it is. Saying we need it available for “possible future catastrophes” implies that we need a company with the technology and equipment to get it out of the ground.
The concern with Peak Oil is that our “possible future catastrophe” is slowly creeping up on us right now — it’s the existing global plateau in oil production, accompanied by rising global demand:
(From here)
In this scenario, we will need to extract our domestic reserves, and use them judiciously in transition to a sustainable future.
Since it will take time for new supplies to come online, it seems prudent to allow companies to begin the assessment and exploration process as soon as possible.
BJ
August 4th, 2008 at 8:31 am
Additional oil provided to the market will have 1 of 2 effects. Either the price of oil will fall, or the increase in the price will be mitigated. There is no other option, according to the law of supply and demand. Either the increased supply will be enough to push price down (or down faster) or it will offset some of the effects of increased global demand.
Secondly, while it is true that some of the new production might not hit the market for up to 10 years, that does not mean it will all take 10 years. There was a report out a few weeks ago from the Wall Street Journal researcher Sanford C. Bernstein who said that California could restart production within 1 -2 years, and that the existing platforms, in shallow water, sit atop almost 10 billion barrels of oil.
Third, given that we have roughly the equivalent of 4 Saudi Arabia’s worth of oil, in oil shale, (almost 2 TRILLION barrels) I find it hard to take the peak oil fears seriously. In addition, there have been huge oil discoveries recently in the Gulf, off of Brazil, and the Bakken formation in Montana.
And Michelle, I would say that while it is true that with about 5% of the population, we consume about 20% of the words energy…it is also true that the U.S. is responsible for almost 30% of global GDP, with that same 5% of population.
Finally, and I think, most importantly…this issue is not really about lowering the price of gasoline. It is about the long term energy security/needs of our country. It is about stopping the outsourcing of our energy needs and resources to countries such as Saudi Arabia, Iran, and Venezuela.
On a political note, I think a wonderful line of attack against Mr. Price and all other Congressional Democrats, would be to call them on the continued ‘outsourcing’ of our energy needs and security to foreign countries. Specifically using the term ‘outsourcing’, because that is what they are doing.
August 4th, 2008 at 10:30 am
Michael — I think we should start thinking in terms of “Global Supply Days” when we evaluate oil reserves. So if drilling off California’s coast can be restarted to tap those 10 billion barrels, what does that mean? One billion barrels at current global consumption of ~86 million barrels per day is ~11.8 Global Supply Days. So those ten billion barrels of oil are better thought of as 118 Global Supply Days. I’d call that a short-term consulting gig instead of a steady employment.
Also, many are concerned that oil shale is not a panacea. Two concepts are important to consider: Energy Return on Investment (EROI), and the raw materials necessary to make oil from oil shale.
EROI is the “net” energy gain — while shale reserves may have a certain amount of energy, it will cost a significant amount of energy to extract it. Kind of like your paycheck, it’s the net income that matters, not the gross income. It’s a lot more expensive both energetically and financially to create oil from oil shale than it is just to recover oil directly. Finally, creating oil from oil shale requires a lot of water — which is in increasingly short supply in the American west, and faces stiff competition for agriculture.
There’s a good summary of the challenges facing oil shale here, and another interesting article here. A nonpartisan analysis by the RAND institute has a good description of the different methods of extraction. The energy inputs required to get the energy out are significant.
Here are some key quotes from the first source:
Given these realities, some have said being rich in oil shale is kind of like having $100 million in the bank, but if the bank only lets you withdraw $10,000 per year… it’s a little difficult to support a wealthy standard of living.
The point is that we need to be looking at all the options here — we certainly need to access our existing resources, and we need future technological improvements, but we need a healthy dose of ingenuity mixed with realism to get onto a more sustainable path.
August 4th, 2008 at 12:59 pm
I completely agree that we need to look at all solutions.. However, we are going to need oil, and lots of it for the foreseable future. There are no viable alternatives that will dent our oil consumption for decades at least. Ethanol has not been the panecea that is was touted to be, to say the least. Even the best new technologies coming on board, battery technology, still require gasoline.
The oil from California can/must be ‘part’ of the solution. Lets say we get 500k barrels a day from that source, and 1M barrels from ANWR…plus another 1M from the OCS….that total roughly represents a 50% reduction in our oil imports from OPEC countries. To me, that is very significant. Most people are not aware that most of our oil imports come from Canada…not OPEC.
If the biggest argument against shale is the water needed for extraction, it has a large leg up on ethonal, which requires much more water to produce the equivalent of a barrel of oil. And much of the water used for shale extraction can be recycled. From what I understand, Shale is profitable when oil is about $80 per barrel. Finally, I found it interesting that the bold quote from your link was a quote from 1986. Technology has surely progressed since then, and will certainly progress as we move forward.
I do not believe there is any 1 solution to our energy security/needs going forward. However, drilling off the coasts, ANWR, oil shale, and new production off of the OCS can go a long way to reducing our need for foreign oil, while at the same time, new technologies are developed which do not require an oil based product, and are equally inexpensive. I am not saying that any 1 of those choices is THE answer…but to be serious about the solution, those choices must be PART of the equation.
August 4th, 2008 at 6:10 pm
Michael - Here’s a handy place for top-line oil stats:
http://www.eia.doe.gov/basics/quickoil.html
Canada is our largest single source at 1,888,000 bbl/day, but OPEC imports dwarf that at 5,980,000 bbl/day.
Based upon the timeframes of new resources coming online, we’re going to be in a tough spot unless a global recession gives a temporary reprieve in demand. Matt Simmons had a good interview on CNBC here, and he makes a good point: “The best new oil basin we will find is conservation.” High prices will continue pushing us in that direction, unless the government gets in the way.
August 4th, 2008 at 8:26 pm
I think it’s worth pointing out that where we get the oil is really a non-issue. Many countries (Japan, for example) import *all* of their oil, and they get along just fine.
Just repeal all oil subsidies and price controls, and the market will figure it out.
-jcr
September 1st, 2008 at 3:02 am
BJ, I’m with Michael on this one… in today’s world of oil power and politics, it seems just a bit unreasonable to repeat the “peak oil” mantra after so many “resettings” of estimates for “recoverable oil”…
As i understand it, several times the total amount of “available oil” have already been pumped and delivered! And the new finds off South America and in the Gulf of Mexico must be considered, too.
In addition, if alternate energy were REALLY THE BEST solution, the Russians must be complete morons for exerting so much effort to tie up the drilling areas under the Arctic Ocean as their own turf. The real market is telling you that getting more oil out from under the earth’s surface is still a VERY desirable goal.
The “outsourcing of energy supplies” is also a wonderful way to put it. If the US were to have more of its own energy needs supplied by its own suppliers, the benefits are practically too numerous to list.
I created a metaphor a few weeks ago for what this situation/discussion looked like to me.
Picture one lonesome guy on a desert island. He sits under the last remaining tree on the island. There’s an axe nearby. He wonders what to do. If he cuts down the tree, he’s destroyed his environment and rendered extinct the sole surviving tree on his island.
On the other hand, with the tree and the axe, he could fashion a canoe and a paddle and make his way to a future, safer location.
The analogy is: if we work to bring more petroleum-based energy OF our OWN TO OURSELVES, it can be used as a SOURCE of energy to BUILD the next generations of renewable resources and their infrastructure for ourselves. [not to mention jobs and profits along the way.]
But to sit under the tree, getting hungrier and older just doesn’t seem to be the way I believe human beings tend to manage their futures.
Or has that era passed, too?
September 1st, 2008 at 3:10 am
the forecast of oil reserves as graphed above is interesting…
http://www.eia.doe.gov/emeu/international/reserves.html
shows an increase in reported reserves from 2006 to 2007 to 2008.
somebody’s numbers stink.
September 1st, 2008 at 4:39 am
alan — your analogy is spot on. As the blog post above notes, we need to lift federal bans on OCS drilling, and unlock our domestic energy reserves, for exactly the reason you note. But not necessarily so we can “pay less”.
Regarding peak oil, it’s important to note that peak oil isn’t related to the *amount* of recoverable reserves. It’s related to the rate at which we can pull it out of the ground. There’s a reason why “nontraditional” oil reserves have been “nontraditional” — it’s a lot more expensive both energetically and financially (and usually environmentally) to pull them out of the ground.
Based upon my study, I believe we will need every barrel and BTU we can get to transition to a sustainable future.
September 12th, 2008 at 12:23 pm
John McCain to support drilling in ANWR, biggest news from Palin/Gipson interview.
http://strategicthought-charles77.blogspot.com/2008/09/john-mccain-to-support-drilling-in-anwr.html