Drill baby drill! The last presidential election this was one of the mantras of the imbecilic Sarah Palin who somehow managed to get on the ballet as the Republican Vice Presidential candidate. While hardly anyone mistakes Palin for an intelligent politician with actual ideas for how to solve some of our problems as a nation she is from Alaska where some of the biggest oil reserves that the US owns exist. Unfortunately, this reserve is now past its peak production and the supply curve on the way down is pretty steep. However, Alaska as a state has done very well with oil as a source of income with Alaskan citizens receiving a rebate check from the state every year from the profits that the State sees from oil drilling. Unfortunately, the rest of the nation doesn’t get one of those checks so the idea that more oil drilling in Alaska will somehow help the rest of us requires a suspension of the fact that oil reserves there are dwindling as well.
Behind Palin’s rhetoric is a growing number of conservative talk show hosts and politicians who seem to think that we can remove our dependence on foreign oil by simply drilling enough of it here to make up for it. Similar to most cures for our ills that the far right comes up with, it makes some sense in a very simple minded way. After all, if we own oil reserves why should we be buying oil from overseas? Let’s take a look at this in a little more detail and see if it actually makes any sense.
Oil, like any other commodity, is bought and sold in the market place according to the laws of supply and demand with few exceptions. In other words, the cost of finding, harvesting, and transporting the oil to the market all combine to make up the expense required in selling it. As long as all of these costs can be met and the product is sold a little higher than these costs a profit is made. These are the basic rules of any such market and since oil is bought and sold all over the world any oil that is harvested here is in direct competition with oil that is harvested anywhere else. The US is a large producer of oil but the fact of the matter is that we passed our peak production levels in the late 1960’s for the simple reason that oil reserves are not unlimited and we had by that time depleted the amount of oil in the existing wells. It isn’t a matter of simply drilling more wells as the oil reserves themselves are depleted. In other words, the oil we have remaining is harder to find, in smaller fields, and much more expensive to get out of the ground.
In the oil industry there is a term for the costs associated with oil production. “Lifting costs” include all of the costs associated with harvesting oil. These include buying the property the oil reserve is situated underneath, the exploration costs expended locating the oil in the first place, and the actual production costs of removing the oil from its reserve. As our supplies grow smaller and smaller the exploration costs grow in the opposite direction at roughly the same rate and oil in smaller fields is less economical to harvest. Since we have depleted all the reserves that are easily removed from the ground first, we are left with oil reserves that are technically more expensive to harvest. This has been the reality for many years in this country and it is not a picture that is getting rosier as time passes. The largest reserves the US has left are in offshore deposits. Over the last 20 years the US has been forced to turn to more expensive drilling projects on the ocean floor because it is where the vast majority of our remaining oil reserves are.
The world average for lifting costs is around 25 dollars a barrel. In the largest and most available oil reserves in the world in the middle east this number drops even more; to around 14 dollars a barrel. In the US in shallow water oil drilling the price is somewhere in the neighborhood of 40 dollars a barrel depending on the field, where it is and what kind of weather and climate conditions prevail. It isn’t hard to figure out that when we are spending 40 dollars a barrel it precludes the possibility of competing with someone who is spending 14 dollars a barrel unless they are taking a very large markup due to market conditions such as a shortage. This is the position that US oil companies have been in for quite a few years now which is exactly why they are not drilling enough wells to meet our demand; they can simply buy the oil cheaper than they can harvest it. This sounds bad but the situation is actually worse than what I have covered so far. Most of the shallow water offshore reservoirs have already peaked in production; they are now on the steep downside of the supply curve. This means that we are now looking at even steeper lifting costs to tap into the remaining reserves in deeper waters. Most estimates put these numbers in the 65-75 dollar a barrel range. This is the little secret that never enters into the political discussions wherein conservatives respond to alternate energy requests by insisting that we just need to release the oil companies to tap into our reserves. It is economically unfeasible and the oil companies know it.
Let’s look at the economical reality of the situation. The only way US oil companies can invest the large amounts of capital in specialized rigs and new technology drilling equipment needed to do more deep water drilling they have to either know the oil prices are going to stay at ranges around 90-100 dollars a barrel or else they are spending money harvesting a product they can’t make a profit selling. Any time the owners of larger and therefore cheaper oil reserves to harvest decide to flood the market with this oil the US companies heavily invested in expensive technologies to harvest deep water oil will take a huge loss and oil companies are fond of profit. Since the whole thing is an economic pariah it is worth taking notice who is pushing the argument that we should simply drill more and why.
Oil companies are like any other large bureaucratic entity; they are mainly interested in their own survival. Presently, the oil companies own the distribution of the energy source our country depends on. I won’t bother to explain why cornering the market on any commodity is profitable but I will point out that US oil companies have owned the energy market in this country for much of this century and they are not anxious to give it up now. Since they own or are leasing these deep water reservoirs which they bought with the understanding that their monopoly would continue, they are not willing to see it threatened from any quarter; whether it makes economic sense or not. Every time the government starts making noises about alternate energy and subsidizing infrastructure to make such ideas feasible the oil companies see this as a direct threat to these investments. Oil company lobbyist in Washington are pushing very hard for increased government support to subsidize the costs of deep water drilling, shale oil removal projects and other economically unfeasible ideas because any other alternative is a threat to their control of energy policy in this country.
Two things are key part to the oil company’s strategy; maintaining high demand and maintaining high prices. Without the high demand they can’t maintain the high prices and without the high prices they can’t even make the argument that higher lifting costs are in any way economically feasible. It is a little amazing that such supposed supporters of free markets don’t understand the logical fallacy of the position they are in. As prices go up demand decreases; it is one of the basic laws of economics. This has happened several times in the last few years in this country. When supposed shortages raised prices so high in 2008 people cut back on their consumption which is why the prices came back down. The oil companies can’t make the argument that more expensive technologies to harvest oil make any sense whatsoever if the demand for oil starts to dip which is why they are so adamantly opposed to alternative energy of any kind; it will necessarily lessen demand.
In short, energy policy in this country like most everything else is built around money. I won’t bother to go into environmental costs associated with these more expensive harvesting methods but as we saw this last summer in the Gulf they are not minor. The people who have the money set the policy and right now that is oil companies. Never mind that the reality of the situation is that an oil based energy policy is completely unsustainable. Never mind that this is true not only in the US but all over the world as well. Demand for energy is outpacing the world’s supply of oil and all signs are that the emergence of industrialization all over the world promises to increase this demand in the next century.
We are faced with a clear cut choice in this country. We can continue to support an industry that is doomed to inevitable failure because we simply don’t own the oil that we need for energy and it is getting more expensive in every possible way to get it; or we can use our resources to get ahead of the curve and be the leader in finding an alternative.
The US has been the leader in innovation for much of this century. It is amongst our greatest strengths as a nation, both technological and intellectual innovation. We are now faced with a clear cut choice as to whether we will squander everything we have worked for maintaining an industry doomed to inevitable collapse or find a better way. Reality is knocking at the door and no matter how many oil company lobbyists funnel money into congressmen’s pockets in Washington the message it has for us about our dependence on oil will be delivered.
Showing posts with label Oil. Show all posts
Showing posts with label Oil. Show all posts
Friday, November 5, 2010
Wednesday, November 3, 2010
The Energy Policy of Oil
It is always a little amazing to me to realize how little Americans understand about energy policy and how it is orchestrated in this country. The fact of the matter is that our country is in danger of becoming a third world country in terms of economic development and much of the reason for this fall can be traced to our energy policy. The rise of American power during and after WWII is closely related to the fact that we utilized and owned the most efficient energy source in the world at the time; Oil. It is worth remembering that our actual involvement in the war itself came about as a direct result of our energy policy.
In the early months of 1941 the United States was trying to steer clear of conflicts in Europe while at the same time keeping a wary eye on developments. At the same time Japan, still incensed over what it considered to be slights at the end of WWI, was steadily striving to increase its security in the Far East and the Pacific Rim. Japan had been one of the Allies during WWI but at the end of the war had initially been denied the gains that it had made in China and other areas of the Pacific Rim. When Japan threatened to walk out of talks with the Allies as they were dividing up the spoils of the war, Britain had intervened on her behalf. Still, the American contingent under Wilson was not happy with the whole scenario and steadily pressured Britain after the war to drop support for Japan as a partner. Japan saw American opposition as very threatening, more especially since Japan had earned the enmity of some powerful enemies in supporting the Allies in WWI. China and the Soviet Union were very close and very powerful in Japan’s eyes and without allied support as trading partners and suppliers of raw materials needed to keep building up their defensive powers Japan felt ever more exposed with each effort by Americans to isolate them.
Unlike the United States, Japan was wholly without the raw materials of steel and iron needed to build a navy or an army. It was also completely without the oil that it needed to keep its basic economy going without importing it from outside sources. American efforts to isolate Japan were seen by the Japanese as threats to its very existence and it reacted accordingly. As the rest of the world became enthralled with watching the exploits of Nazi Germany in Europe, Japan began expanding her borders and subsidizing her military buildup by colonizing the far east just as Western powers had done for much of the preceding century. Japan saw it not in the light of economic development but in the light of survival of their nation. As Japan began to invade Manchuria and then later China itself, the western powers became more concerned with Japanese ambitions. These concerns were sharpened further by the abject brutality of Japanese invasions which often included the wholesale slaughter of civilians.
By early 1941 relations with Japan had reached a crucial stage with Roosevelt and the American government determined to discourage further Japanese military expansion and Japan just as determined to continue what it considered to be tactics necessary for its survival as a nation. The American government decided to set up an embargo on industrial products that Japanese needed to continue their expansion. These included steel and other raw materials but even more critically, they included oil. The Japanese were dependent on foreign sources for fully 80% of their oil supply. This oil supply not only powered the Japanese military but also the whole Japanese economy. Without this critical oil supply the whole economy would collapse internally and Japan would no longer be able to feed or clothe its people.
Naturally, the Japanese reacted to this oil embargo with great alarm. They first tried to cut a deal with the American government. Japan offered to give up part of its expansion plans in return for American support of many of it conquests already achieved. With publicity of Japanese atrocities in the Pacific Rim and China getting more exposure daily these requests for compromise fell on deaf ears with the United State government insisting that all expansion activities cease as well as the return of lands the Japanese had already conquered. Facing the prospect of a total collapse and realizing that there was no compromise position that the US would agree to that would be palatable to the Japanese public the war hawks in Japan took over the government and began making plans of how to neutralize American power in the Pacific Rim until Japan could seize control of the supplies that it needed from the region.
Pearl Harbor was the almost inevitable result of this oil embargo. Japan had no delusion of being able to conquer the United States but it did believe it could cripple American power in the Pacific Rim long enough to seize control of the area and assure Japan’s access to oil and other raw materials it needed to survive. With the choice between collapse and war, Japan chose war and the United States was involuntarily dragged into the middle of WWII. With hindsight it is easy to see the chain of events that led to Japan attacking Pearl Harbor. In 1941 of course, this chain of events was much harder to see and very few people believed that events would lead to such an attack. However, it is without question that it was the Japanese need for oil that was at the core of the reasons for the attack. Japanese sources within the government at the time point this out repeatedly in their explanations for the attack. A country dependent upon foreign oil for its very survival will often be forced to make decisions that are antithetical to its basic moral views and the United States is no exception.
In 1940 the US was one of the main producers of oil in the industrial world. US oil companies operated in the world market with great freedom and the US still owned a large portion of the world’s known supply of oil. However, since that time with the exponential growth of the usage of oil for agricultural production and an industrial sector that was the envy of the rest of the world the US gradually used up its own supply of oil and began being more dependent on other sources of oil. Along with this change, smaller third world countries that had up to this point welcomed US expertise and US oil companies into partnerships to produce oil in their countries began taking over ownership of their own oil reserves. This is a pattern that repeated itself in South America, Indochina, and the Middle East with unerring accuracy.
By the late 1960’s the US found itself in the unenviable position of being the biggest consumer of oil while its own reserves were steadily being used up. By 1970 most US sources of oil were peaking in production with a sharp downside to the supply curve that spelled major economic problems for an economy completely dependent on oil for survival. While this was not unpredictable and the US had foreseen the necessity of maintaining a presence in the largest oil reserve area of the world after WWII, it soon became obvious that even minor disruptions in this supply would cause major upheavals in the US economy. The Oil Embargo of OPEC nations of the Middle East in the early seventies were a precursor to what the US government understood to be a deadly source of destruction for US economic concerns.
After WWII the Allied powers basically split up and reordered the landscape in the Middle East based upon their own individual needs for oil and the fact that this area of the world happened to be the largest known supply of the commodity. Almost all political decisions in the Middle East since that time have been based upon the underlying fact that western economies are dependent on a steady supply of these reserves of oil. The US found itself forced to deal with governments in the region that were both antithetical to our moral values and some of the worst violators of their own people that the world has ever seen. How else can one justify America’s undeniable support of regimes in Saudi Arabia, Iran, Iraq, Afghanistan, Jordan, Syria, and Egypt that were both brutal violators of basic human rights and at different times dangerous and tribal based aggressors in both internal and external wars that have consumed the area for much of the last seventy years. We have installed dictators, fomented wars, and supported brutality in the area since WWII that is as bad as has ever been seen on the planet. Even today, we lament the brutality of Saddam Hussein while forgetting that we helped put him in power to act as a buffer against radical Islamic groups in Iran. We support brutal dictatorships in Kuwait and Saudi Arabia who regularly fund terrorist organizations that mindlessly attack innocents all over the world. We rage against Iran for her own abuses while at the same time that we support governments in Jordan, Pakistan, and Egypt with equally appalling records of human right violations against their own people.
Any real accounting of the cost of this oil dependency has to include the military costs that we have expended in the region in 3 separate wars in the last 20 years. If we add the cost of these wars to the cost in dollars per gallon in oil that we import; is oil still the most efficient energy? I don’t understand why Americans would continue to insist that we have no energy alternative when faced with the real costs in military incursions and increased national security measures that became necessary after 9-11. We must remember that it was our need for oil that got us involved in the area to begin with. It is our need for oil that keeps us embroiled in political issues in the area that should be reprehensible to every American. Without oil we have no need to have a presence in Saudi Arabia, Iraq, Iran, or Afghanistan. Since we are the biggest consumer of oil in the world we have the ability to bring about the collapse of these regimes. We can easily remove their ability to afford war by simply removing ourselves from the equation. We cannot do away with demand for oil in the rest of the world but we can devastate the demand markets by simply finding other sources of energy; sources that don’t force us to support brutal dictatorships or tribal based hatreds.
All of this leads us to the place where I started this post. We are now in the same position that Japan found itself in previous to WWII. We are completely dependent on oil from foreign sources. The only difference is that we are dependent not upon the United States or Great Britain, we are dependent upon brutal regimes that we would not otherwise do business with for any amount of money. While we don’t import 80% of the oil that we use, we do import 55% of the oil that we use from outside sources. What that means of course is that we are extremely dependent on outside sources for the well being of our economy and that in itself should be enough to convince Americans that we need to find a better solution without even bringing up the fact that many of these outside sources are diametrically opposed to our moral viewpoints. There was a commercial on TV when the government was trying to drum up support for the war against terrorism that suggested that Americans buying drugs were inadvertently and indirectly supporting terrorism. A more accurate statement would be that Americans support terrorism by directly funding its sponsors every time we fill up our SUV at the gas pump.
In the early months of 1941 the United States was trying to steer clear of conflicts in Europe while at the same time keeping a wary eye on developments. At the same time Japan, still incensed over what it considered to be slights at the end of WWI, was steadily striving to increase its security in the Far East and the Pacific Rim. Japan had been one of the Allies during WWI but at the end of the war had initially been denied the gains that it had made in China and other areas of the Pacific Rim. When Japan threatened to walk out of talks with the Allies as they were dividing up the spoils of the war, Britain had intervened on her behalf. Still, the American contingent under Wilson was not happy with the whole scenario and steadily pressured Britain after the war to drop support for Japan as a partner. Japan saw American opposition as very threatening, more especially since Japan had earned the enmity of some powerful enemies in supporting the Allies in WWI. China and the Soviet Union were very close and very powerful in Japan’s eyes and without allied support as trading partners and suppliers of raw materials needed to keep building up their defensive powers Japan felt ever more exposed with each effort by Americans to isolate them.
Unlike the United States, Japan was wholly without the raw materials of steel and iron needed to build a navy or an army. It was also completely without the oil that it needed to keep its basic economy going without importing it from outside sources. American efforts to isolate Japan were seen by the Japanese as threats to its very existence and it reacted accordingly. As the rest of the world became enthralled with watching the exploits of Nazi Germany in Europe, Japan began expanding her borders and subsidizing her military buildup by colonizing the far east just as Western powers had done for much of the preceding century. Japan saw it not in the light of economic development but in the light of survival of their nation. As Japan began to invade Manchuria and then later China itself, the western powers became more concerned with Japanese ambitions. These concerns were sharpened further by the abject brutality of Japanese invasions which often included the wholesale slaughter of civilians.
By early 1941 relations with Japan had reached a crucial stage with Roosevelt and the American government determined to discourage further Japanese military expansion and Japan just as determined to continue what it considered to be tactics necessary for its survival as a nation. The American government decided to set up an embargo on industrial products that Japanese needed to continue their expansion. These included steel and other raw materials but even more critically, they included oil. The Japanese were dependent on foreign sources for fully 80% of their oil supply. This oil supply not only powered the Japanese military but also the whole Japanese economy. Without this critical oil supply the whole economy would collapse internally and Japan would no longer be able to feed or clothe its people.
Naturally, the Japanese reacted to this oil embargo with great alarm. They first tried to cut a deal with the American government. Japan offered to give up part of its expansion plans in return for American support of many of it conquests already achieved. With publicity of Japanese atrocities in the Pacific Rim and China getting more exposure daily these requests for compromise fell on deaf ears with the United State government insisting that all expansion activities cease as well as the return of lands the Japanese had already conquered. Facing the prospect of a total collapse and realizing that there was no compromise position that the US would agree to that would be palatable to the Japanese public the war hawks in Japan took over the government and began making plans of how to neutralize American power in the Pacific Rim until Japan could seize control of the supplies that it needed from the region.
Pearl Harbor was the almost inevitable result of this oil embargo. Japan had no delusion of being able to conquer the United States but it did believe it could cripple American power in the Pacific Rim long enough to seize control of the area and assure Japan’s access to oil and other raw materials it needed to survive. With the choice between collapse and war, Japan chose war and the United States was involuntarily dragged into the middle of WWII. With hindsight it is easy to see the chain of events that led to Japan attacking Pearl Harbor. In 1941 of course, this chain of events was much harder to see and very few people believed that events would lead to such an attack. However, it is without question that it was the Japanese need for oil that was at the core of the reasons for the attack. Japanese sources within the government at the time point this out repeatedly in their explanations for the attack. A country dependent upon foreign oil for its very survival will often be forced to make decisions that are antithetical to its basic moral views and the United States is no exception.
In 1940 the US was one of the main producers of oil in the industrial world. US oil companies operated in the world market with great freedom and the US still owned a large portion of the world’s known supply of oil. However, since that time with the exponential growth of the usage of oil for agricultural production and an industrial sector that was the envy of the rest of the world the US gradually used up its own supply of oil and began being more dependent on other sources of oil. Along with this change, smaller third world countries that had up to this point welcomed US expertise and US oil companies into partnerships to produce oil in their countries began taking over ownership of their own oil reserves. This is a pattern that repeated itself in South America, Indochina, and the Middle East with unerring accuracy.
By the late 1960’s the US found itself in the unenviable position of being the biggest consumer of oil while its own reserves were steadily being used up. By 1970 most US sources of oil were peaking in production with a sharp downside to the supply curve that spelled major economic problems for an economy completely dependent on oil for survival. While this was not unpredictable and the US had foreseen the necessity of maintaining a presence in the largest oil reserve area of the world after WWII, it soon became obvious that even minor disruptions in this supply would cause major upheavals in the US economy. The Oil Embargo of OPEC nations of the Middle East in the early seventies were a precursor to what the US government understood to be a deadly source of destruction for US economic concerns.
After WWII the Allied powers basically split up and reordered the landscape in the Middle East based upon their own individual needs for oil and the fact that this area of the world happened to be the largest known supply of the commodity. Almost all political decisions in the Middle East since that time have been based upon the underlying fact that western economies are dependent on a steady supply of these reserves of oil. The US found itself forced to deal with governments in the region that were both antithetical to our moral values and some of the worst violators of their own people that the world has ever seen. How else can one justify America’s undeniable support of regimes in Saudi Arabia, Iran, Iraq, Afghanistan, Jordan, Syria, and Egypt that were both brutal violators of basic human rights and at different times dangerous and tribal based aggressors in both internal and external wars that have consumed the area for much of the last seventy years. We have installed dictators, fomented wars, and supported brutality in the area since WWII that is as bad as has ever been seen on the planet. Even today, we lament the brutality of Saddam Hussein while forgetting that we helped put him in power to act as a buffer against radical Islamic groups in Iran. We support brutal dictatorships in Kuwait and Saudi Arabia who regularly fund terrorist organizations that mindlessly attack innocents all over the world. We rage against Iran for her own abuses while at the same time that we support governments in Jordan, Pakistan, and Egypt with equally appalling records of human right violations against their own people.
Any real accounting of the cost of this oil dependency has to include the military costs that we have expended in the region in 3 separate wars in the last 20 years. If we add the cost of these wars to the cost in dollars per gallon in oil that we import; is oil still the most efficient energy? I don’t understand why Americans would continue to insist that we have no energy alternative when faced with the real costs in military incursions and increased national security measures that became necessary after 9-11. We must remember that it was our need for oil that got us involved in the area to begin with. It is our need for oil that keeps us embroiled in political issues in the area that should be reprehensible to every American. Without oil we have no need to have a presence in Saudi Arabia, Iraq, Iran, or Afghanistan. Since we are the biggest consumer of oil in the world we have the ability to bring about the collapse of these regimes. We can easily remove their ability to afford war by simply removing ourselves from the equation. We cannot do away with demand for oil in the rest of the world but we can devastate the demand markets by simply finding other sources of energy; sources that don’t force us to support brutal dictatorships or tribal based hatreds.
All of this leads us to the place where I started this post. We are now in the same position that Japan found itself in previous to WWII. We are completely dependent on oil from foreign sources. The only difference is that we are dependent not upon the United States or Great Britain, we are dependent upon brutal regimes that we would not otherwise do business with for any amount of money. While we don’t import 80% of the oil that we use, we do import 55% of the oil that we use from outside sources. What that means of course is that we are extremely dependent on outside sources for the well being of our economy and that in itself should be enough to convince Americans that we need to find a better solution without even bringing up the fact that many of these outside sources are diametrically opposed to our moral viewpoints. There was a commercial on TV when the government was trying to drum up support for the war against terrorism that suggested that Americans buying drugs were inadvertently and indirectly supporting terrorism. A more accurate statement would be that Americans support terrorism by directly funding its sponsors every time we fill up our SUV at the gas pump.
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