Drain America first

OK, offshore drilling may be a deft piece of political dealing for a climate bill.  Even though my post after the SOU was obviously the cause of Obama’s rebirth as a real leader in the last couple of months, I’ll hold off ranting about this one for the nonce.

What I don’t understand is the larger logic of the push to use up US oil reserves as soon as possible, and put our beaches and coastal wetlands at risk to do so.  We’re dependent on suppliers like Ugo Chavez who, um, don’t exactly have our best interests at heart now, but they are selling us what we need. Aren’t we better off letting foreigners pump themselves out of business, and still having those reserves to go into when they are really valuable?  I know there are large companies who make money now from extracting and selling oil, and are too dumb to figure out how to make a living any other way, but why is anyone in his right mind listening to them? And what is “conservative” about not conserving stuff that isn’t being made any more?

Author: Michael O'Hare

Professor of Public Policy at the Goldman School of Public Policy, University of California, Berkeley, Michael O'Hare was raised in New York City and trained at Harvard as an architect and structural engineer. Diverted from an honest career designing buildings by the offer of a job in which he could think about anything he wanted to and spend his time with very smart and curious young people, he fell among economists and such like, and continues to benefit from their generosity with on-the-job social science training. He has followed the process and principles of design into "nonphysical environments" such as production processes in organizations, regulation, and information management and published a variety of research in environmental policy, government policy towards the arts, and management, with special interests in energy, facility siting, information and perceptions in public choice and work environments, and policy design. His current research is focused on transportation biofuels and their effects on global land use, food security, and international trade; regulatory policy in the face of scientific uncertainty; and, after a three-decade hiatus, on NIMBY conflicts afflicting high speed rail right-of-way and nuclear waste disposal sites. He is also a regular writer on pedagogy, especially teaching in professional education, and co-edited the "Curriculum and Case Notes" section of the Journal of Policy Analysis and Management. Between faculty appointments at the MIT Department of Urban Studies and Planning and the John F. Kennedy School of Government at Harvard, he was director of policy analysis at the Massachusetts Executive Office of Environmental Affairs. He has had visiting appointments at Università Bocconi in Milan and the National University of Singapore and teaches regularly in the Goldman School's executive (mid-career) programs. At GSPP, O'Hare has taught a studio course in Program and Policy Design, Arts and Cultural Policy, Public Management, the pedagogy course for graduate student instructors, Quantitative Methods, Environmental Policy, and the introduction to public policy for its undergraduate minor, which he supervises. Generally, he considers himself the school's resident expert in any subject in which there is no such thing as real expertise (a recent project concerned the governance and design of California county fairs), but is secure in the distinction of being the only faculty member with a metal lathe in his basement and a 4×5 Ebony view camera. At the moment, he would rather be making something with his hands than writing this blurb.

9 thoughts on “Drain America first”

  1. Let me preface this by saying that oil is a commodity, and an unusual one at that. There are so many intangibles that go into oil production – and ultimately gas prices – that I would never speculate in that market. Having said that, there are several factors at play here. One is that oil prices have been rising lately. Really since their crash in mid to late 2008 oil has been slowly rising. Another is that Iraq has yet to reach pre-invasion production levels. Considering that they have the world's second largest proven crude reserves, and they are largely pumping next to nothing, that tells you something. I think BP or Shell just signed a huge deal with Iraq. These Iraqi oil deals are probably the locus of the Iraqi civil war, and unsurprisingly so. Still, another factor is oil demand from developing economies and the unreliable nature of oil reserves. No one really knows, outside of the Saudi royal family, how much oil is in Saudi Arabia. And just this year Venezuela seems to have discovered it sits atop more oil than it thought it had.

    My point is that finding and producing oil is more than a bit of luck. There is a fairly good chance that oil production in some key states like Saudi Arabia and Iran will crash very soon. However there is a fairly good chance that oil production in Iraq could skyrocket much more than any other producer will crash. So there is no way of knowing, even in the medium term, what oil production will do. And oil production seems to be a medium term game. These offshore oil rigs will take a decade to develop if they are even developed, which at this time isn't certain.

    So should we drill? I think that is really a crass political decision. The real question is "what will Obama get out of these deals?". He surely will get something. And surely he must know that oil prices are completely out of our hands, no matter where we drill. So what is he getting for these oil leases?

  2. Nothing. It's empty rhetoric, there's no intention to actually permit drilling to take place. In fact, in the same action, Obama canceled offshore leases which were already pending. So, action and public rhetoric went in opposite directions. No surprise there.

    That said, suppose it wasn't empty rhetoric. Takes time to get new production flowing. We wouldn't drain ourselves first, we'd be lucky to bring the production up fast enough to compensate for dropping availability of oil from elsewhere.

    And what would we gain? Increased resistance to energy blackmail from states you admit don't have our best interests at heart. That would remarkably alter the calculations we currently make about keeping a big military presence around the middle east. A good deal of our military budget is devoted to keeping that oil flowing.

  3. Brett, you can do better than this. At least try to understand Mike's point before pretending to disagree with it.

    Whatever we pump now won't be available to pump later. Less dependency on Libya now means more dependency on Libya in the future. There! That wasn't really so hard to grasp, was it?

    Of course the real problem is that the amount of oil producible in any year from new offshore drilling is the rounding error in total consumption. We use about 21 million barrels per day (MBD) of oil. A billion-barrel field (which is a substantial find; the total recoverable reserves from the entire Atlantic Coast are estimated at less than 4B barrels) would supply 3 MBD for a year if it were all pumped at once; pumped over a more typical 20 years, it represents less than 1% of annual consumption.

    The best measure of the value of the oil is the difference between production cost and price; if we never drill for that oil, we would be leaving tens of billions of dollars – maybe hundreds of billions – worth of surplus on the table, and I can think of better uses for that money than satisfying the prejudices of Greenpeace members. (Yes, offshore drilling has environmental risks; so does ocean transport of oil produced on land. Not clear which way the balance tilts.) But the pretense that we can improve energy security either by drilling or by waiting really doesn't pass the giggle test.

  4. "Whatever we pump now won’t be available to pump later."

    True, no matter WHEN we drill for it. That's an argument for never drilling. The problem is, it takes substantial time to go from changing policy, to oil actually showing up in pipelines. By the time that offshore oil runs out. we probably won't be dependent on oil from Libya because Libya won't HAVE oil anymore to be dependent on.

  5. Drill baby drill isn't about national security, or, outside of Alaska, even money. It's about sticking it to the hippies.

    I don't know what the President is planning, but when I saw the map, I didn't think "concession," I thought "wedge."

  6. Mark

    The original purpose of places like Teapot Dome (the famous Warren Harding scandal, of which science fiction writer Larry Niven was the inadvertent beneficiary as a grandchild of one of the oil men) was to serve as the US emergency oil supplies in time of war.

    Perhaps that logic still holds. Yes, it would take 8 years, from a standing start, to get that oil out. Yes it would be far off shore (shades of the Frank Herbert novel Under Pressure/ Dragon in the Sea, still one of his most chilling in my mind).

    But 1m b/d would keep the USN afloat and a significant chunk of the USAF plus emergency vehicles etc.

    Worth having on that basis?

  7. Brett

    Update yourself. Libya is on our side now. The place is crawling with American (and British, and Italian) oil men. However the Europeans will pay more for gas than the Americans will.

    Hence Berlusconi's apology (justified: Italian policy towards the Libyans was genocidal) and plan to transfer hundreds of millions in recompense. The stakes, in terms of secure gas supplies for Italy, are far bigger.

    Actually they are going to run out of water faster than they run out of oil. Quaddafy is pumping fossilised water to a very fast growing population (4 and some millions, growing 4% pa, and a large legal and illegal immigrant population from Algeria, Egypt and sub Saharan Africa).

  8. Mark

    I should add on extraction rates, oil fields (think North Sea) usually peak about 25 years after first extraction, then halve every 10 years thereafter.

    So this oil will still be being pumped in 50 years: not much of it (and offshore fields are sufficiently expensive that the last 10% extractible may just not get pumped) but it will still be producing.

    If we figure 5 bn barrels (that number will rise pretty consistently as the fields are developed due to better technology, but not fast enough to offset extraction) then peak will be say 2m b/d. That would probably be around 2030, say (assuming very fast development), and it would fall back to less than 100k b/d in the subsequent 20 years. This I think would be reasonable against the North Sea (British side, the Norwegians have managed the resource for a much longer time table– the British side went into Thatcher's tax cuts, just like the Dutch gas went into propping up Volvo-DAF).

    Which doesn't obviate your general point (10% of US oil consumption is really neither here nor there in strategic terms). The market pays a premium for politically secure oil, because private oil companies cannot get access to 70%+ of world reserves.

  9. Michael

    There is a case in economics not to scrap your capital. In the case of the offshore expertise of US oil companies, if they lose that, when they do need it, they cannot get it back.

    It's rather like the shutdown of the Concentrated Solar Power industry (really: 1 company) in the US in the late 1980s due to changes in California Law. It's put the US behind on an important technology.

    Now, to be fair, there is lots of other work US oil companies can do offshore in other places. And Aberdeen (where the domestic oil industry is almost dead, but the offshore industry thrives providing expertise all over the world) is a case in point.

    But (I think this is tied into Krugman's Trade Theory) there is path dependence on these things: if you lose the domestic expertise, you may never get it back.

    There might be a cheaper way to warehouse it, though.

    I think Obama is going for the vote: he was always a politician. I don't think this is a bargaining play with 'reasonable' Republicans. After the healthcare thing, and given the primary battles Lindsay Graham and John McCain are facing, there are none such.

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