Sunday, June 29, 2008
The chief practical argument coming from those who oppose opening our continental shelf and the Arctic National Wildlife Refuge for drilling is that it will take ten years to get the oil so it will not have any impact on current oil prices. The response is that is factual and analytical hogwash, insofar as the whole point of futures markets is to discount the impact of changes in future supply.
It is also, by the way, reasoning that many on the left would not want applied to their own pet project:
My response to those who say that increased drilling is pointless because it won't yield immediate results -- like Arnold Schwarzenegger --is why worry about the greenhouse effect, then? Nothing we do will cool the planet immediately. Yet we're told immediate action there is vital. In fact, we're told that by none other than Arnold Schwarzenegger, in the very same speech.
One would have thought that this point was so obvious it would not have to be made at all. But then, one would also think it obvious that a "windfall profits tax" on oil companies would reduce the supply of oil in the future, since we have empirical evidence from the Carter fiasco that it will, yet Barack Obama continues to push the idea. That the mainstream media refuses to call Obama to account for the obvious impact of "don't drill, do tax!" on gasoline prices reveals them as utterly unthinking or completely in the tank for the guy. It is hard to know which it might be. Maybe it's both!
Lessee...LBJ's trillion+ dollar war on poverty? Forget about 10, we're 40 years on now, still stroking hard, and still waiting for some quantifiable evidence that money isn't just swirling down a toilet.
The vexing problem is that so many of the MSM commentators are just plain stupid. Well educated and articulate, yes, but they have no practical understanding of economic reality.
The idea that simply declaring far-in-the-future off-shore drilling legal (even if it never actually occurs) could reduce the price of gasoline at the pump come next week seems too bizarre to them for belief.
I am quite often amazed at the lack of common sense that is evident in so many public policies. Just a generation ago we were being hit over the head by the concept that we needed to be more like Japan because their plans went out 50 years. Now five years isn't fast enough. The price of oil is being driven up by speculators profiting on short supply, but opening up millions of square miles to drilling will not lower the price. Coal is bad due to carbon, nuclear is bad due to radiation, so lets allow millions of additional people to illegally immigrate into our country. Most of the problems that I have seen my government try to address by passing bad laws were caused by bad laws in the first place.
Tigerhawk said, "One would have thought that this point was so obvious it would not have to be made at all."
Agreed, my oldest grandson is only 5, don't they care about the children?
The other argument they offer is that there isn't enough oil there to make more than a few years difference. The answer to that is:
A) we really don't know how much oil is there until we drill; Prudhoe Bay is estimated to have twice as much available than was estimated at the outset, and we really don't know how accurate that estimate is either B) A billion barrels here, a billion there - pretty soon it aids up to a lot of oil.
The beautiful thing about the PRICE mechanism is that it takes into account credible threats of future supply IMMEDIATELY! Even though the oil won't be available for 5, 10, 15 years, the fact that we're credibly planning to produce will lower the price immediately!
Having trouble understanding that?
Assume you were told by a credible source that in one year we would run out of all oil, wouldn't the price shoot up? What if they said 5 years? It would still go up IMMEDIATELY!
The inverse is true as well - if we were to credibly demonstrate that we would double supply in 10 years, the price would start going down NOW.
Drilling isn't the only solution - drilling, conservation, drilling, nuclear, drilling, oil shales, drilling, alternative fuels, drilling...
The American people deserve a FULL COURT PRESS on this issue and the libs want us to fight with two arms and a leg tied behind our back. Ridiculous.
When the government opens ANWR and the shelves to drilling, the people lose a wildlife refuge and some businessmen make money. What do the people get in return for this business handout?
Price Impacts? Given that the daily consumption of oil between the US and the EU alone is about 34 billion-with-a-B barrels per DAY, or 12.4 TRILLION barrels per year, you would have to produce a preposterous amount of oil to have any impact that was more than a nickel, even if all impacts were adjusted via the futures market to now. Billions of barrels are chump change in face of even this subest of demand. I've run the numbers before assuming 0 costs in the production of oil, and the outcome isn't strong. If you can include the costs of production and show that there would actually be a meaningful impact on price, please do; but don't forget that this oil drops onto the world market with the US, the EU, China, India, Russia, etc. Also, any stopgap consumer conservationalist habits may cease when oil becomes "cheaper," driving the price back up again.
In short, if you think there is a meaningful price impact, I am calling shenanigans. Prove it.
As an alternative, we could spend our time not getting a quick fix and delaying the problem, but instead heavily investing in long-term solutions. This is different from the drilling example because these benefits persist long after the oil would be burned and gone, allowing you to sum benefits across damn long time periods rather than few-year consumption horizons; even a "small" long term benefit can produce more good (however you're choosing to evaluate) than a short term "big" benefit if the time frames are sufficiently different. Fix the problem now rather than delaying the inevitable.
By way of comprimise, we could do this and start drilling in any international waters where others plan to drill, as in the Cuba coast example. Additionally, as posted elsewhere, for a sufficient investment in research, conservation and alternative energy, at least all the people I know opposed to this drilling would be willing to bargain.
You'll pay less when we start getting energy from places other than oil (like solar, which peaks in production in exactly the part of the day when you need it most) for reasons I listed after you stopped reading. The change in price and the savings you accrue from it could be covered by change found on the street, and you don't pick those up, do you.
Right now, there is a short fall between supply and demand. Demand is climbing faster than supply, hence those evil "speculators" are supplying information to the market place, buying futures that are betting that the supply of oil will continue to fall short of demand. So telling the market place that the future supply will be growing will put a dampler on certain types of futures.
By putting ~ 5M bbl/day of oil on the world market, the price will drop significantly. 5M bbl/day are not going to magically appear tomorrow, but if we drill in coastal waters which are now closed, ANWR, and other large fields (such as the new discoveries off the coast of Brazil), plus perhaps begin to build coal-liquefaction plants, develop shale oil,more effective alcohol production than making it from food, etc., the world supply situation could be much better and more stable in five years.
Lacking that, you can expect gas to be $5/gallon next summer, and probably $6/gallon in 2009. I was told by a neighbor in retail sales, that when gas hits $6/gallon, retail sales will collapse in this country.
Meanwhile, as Bob Zubrin reminds us, we are financing the people that are financing our enemies. At this rate, the Saudis and their friends will have enough money to buy all the Fortune 500 companies in the US in about 15 years.
Meanwhile, the sophists among us keep urging us to "trust in solar, blah, blah, blah, blah..."
50% of the electricity in this country is generated by coal, ~20% by natural gas, ~ 20% by nuclear, with about 10% by "renewable sources", with the vast amount of that hydroelectric.
When solar actually reaches 5% of the total electrical needs of this country, then we may have something to talk about.
We need a realistic plan, or at least for the government to get the Hell out of the way.
Y'all were right, I was wrong, read "bbl" as "billion barrels" rather than the singular-b'd "barrel."
Using WH numbers,
there are ~18 billion barrels in the OCS and ~10 billion in ANWR. Let's double these numbers to 56 billion total.
CIA numbers put world annual oil consumption at ~34 billion barrels per year. Assume all 56 billion barrels come up at once with no cost, and are divided evenly along the time span in question. This cuts our ~$5/gal to ~$2.5/gal gas for 1.67 years, or puts our gas at $4.40 for 6.68 years (Think of the implementation of this free gas as part of a large buy-X-get-Y-free sale, and these are the numbers you have to pay to get the same amount of gas as usual). Dilute this impact further via longer a time frame with the futures market and we're down to even less change, probably below 50 cents a gallon. Now throw in costs; leasing, production, payroll, speculation, etc an then charge what the market will bear. This would seem to get teh price change pretty damn small for less than 7 years, and then we're back where we started. Also, we doubled the mount of oil we thought we could get from the start. Fix the problem by investing in technology, where the seemingly smaller changes will have greater impact by amortizing over a longer timespan than 7 years.
Also, as noted elsewhere, even the most radical liberals I know (self included) would willingly open up ANWR, OCS, and select other places for more money in research, conservation, and such. To put it in context, every $1B demanded for such things would be $10 for every man, woman and child in the US, AKA two Starbucks drinks, likely a small fraction of the cost of our democracy deployment efforts.
Our economy, as it currently functions, is oil dependent. If we do nothing to ensure a domestic, predictable oil supply, we will not have the resources to develop alternatives that will not be realistic for 50-60 years.
I personally think that the United States Congress' intervention to prohibit domestic drilling and development of safe nuclear power is tantamount to criminal negligence.
Why are we arguing about "drilling versus alternatives". At the risk of sounding insultigly condescending...DRILL NOW, STABILIZE THE ENERGY SUPPLY, STABILIZE THE ECONOMY AND ENCOURAGE DEVELOPMENT OF FUEL EFFICIENT TRANSPORTATION!!! DUUUHH!!!
I also believe that there are elements at play in our governmant who are using ecological garb to hide their real intent....fostering government dependence of those who find themselves in a financial downspin due to energy costs. Gee, who might that be??
Buying carbon credits is going to be tough when the dollar is worth a yen.
A few items -
Anon 2:39 -
When the government opens ANWR and the shelves to drilling, the people lose a wildlife refuge and some businessmen make money.
C'mon. Nobody loses a wildlife refuge. The "big oil" response to this, which I believe is correct, is that ANWAR is roughly the size of South Carolina, and the drilling footprint under discussion would be roughly the size of a big city airport (think O'Hare).
In addition, offshore drilling is the other item on the table. There, the tradeoffs are much simpler. If Norway can drill offshore without hurting the environment, then presumably we can. And, in any case, the alternative is not no environmental damage, but environmental damage in other countries that will do less to protect and clean the environment.
Also, your idea that drilling in these areas will not have a price impact, on the one hand, and be a "quick fix", on the other, is a bit inconsistent. If you are right that there will be no price impact (I suspect you are wrong in that), then it won't be a "quick fix," will it? If it is not a quick fix we will know soon enough in economic terms and be off to the races with the other stuff. No opportunity will have been lost.
Also, I really do not understand this lefty interest in investing billions of dollars in government money to find alternative energy sources. Yes, we may need some standard-setting and some preemption of local laws (it will be impossible to rebuild the national infrustructure without some serious reformation of existing environmental laws), but we did not need government money (by and large) for either the green, infotech or biotech revolutions, and previous government "investments" in energy have been catastrophes (see, e.g., "synfuels" and corn-based ethanol). American venture capital will get the job done when it is truly necessary, and in plenty of time. You already see it happening.
randian -- there will be good applications for solar energy. My guess is that efficiency will improve substantially with new generation technology (there has been a lot of pop-sci discussion of that). One can imagine that, with the help of a much "smarter" electrical grid and much more aggressive preemption of local NIMBY and environmental activists (both things that government could certainly help move along), some combination of wind, solar, and nuclear could be making a huge contribution to the power system in a fairly short time (as these things go).
According to the Energy Information Administration, Canada is by far the largest exporter of petroleum to the United States. A substantial portion of that is from the Oil Sands, which are now under strong environmentalist attack in the US and Canada.
TH - If you think there are going to be price impacts, show me the numbers. When I was rightfully corrected about prefixes, I posted my estimates at 5:11; if you think you can do better, please demonstrate. I used "quick fix" to mean a shoddy patch job, (though I recognize that there are other uses.)
My envirobio friends tell me that the impact of the equivalent of O'Hare in ANWR would be substantial and problematic in the face of disappearing relatively pristine reserves, but I'll just throw up my hands and say "meh" on that point.
As for goverment money in important things, infotech is an example? See DARPA's role in ARPANET, TCP/IP protocol, and other fun things. Jump starting the preceding technology to the Internet moves us forward in impressive ways, and think of the impact this had this way: without the (call it) ten years of advancement given by the DoD taking interest, we'd be back in 1998's state of computing affairs. Ew, and without the giant influence etailing, productivity enhancements and such have had. Also, Turing was a govt employee of Bletchley Park when starting that whole "computer" business. NASA gave us huge leaps in telecomm, engineering and structural anaylsis, and the like. Even if we only got one of these for every ten "synfuel" instances, I would want more money thrown at it. Govt grants are telling us wildly interesting new things in the hormone-related work of Phyllis Wise and others. If the market could have done it cheaper, faster and better, 1) why didn't they, when the demand for these things is hugely obvious based on their impact 2) how do you know, given the holes in assuming perfect, free information, free entry and exit and such in basic market theory and the shortfalls that happen when you take these away, and 3) the same thought exercise as above: three years head start gets you not the first three years, but the last three ahead of the alternative, which is hugely significant in terms of societal benefit. In short, prove it. Additionally, when you have the problems of prohibitive price and first adopting (see the iPhone rebate for a rare instance when this gets rectified) govt support may be the only way to solve market penetration problems expediently.
It may only work half the time, or a quarter of the time, or whatever you choose, but I will take hormone research and modern medicine (ex. aids cocktail) that comes from it, the computer and internet, telecomm, engineering etc that we get that much faster from govt money. Also, if you want govt out of research, we should be able to do what we want with stem cells rather than restricting lines (another policy of which I am in favor.)
All taken, well made points on NIMBY, state regulation inconsistencies, etc. I just don't see the corporate world (where most of this stuff might possibly, maybe find a budget) supporting long term, hard to patent (monopoly harms), speculative innovations when there is already a pernicious incentive to boost short term returns over long ones. That last point is one I remember from the Journal, of all places.
If you think there are going to be price impacts, show me the numbers.
That is, of course, a silly thing to say. If I had any special knowledge about the impact of incremental supply of any commodity on that commodity's price, I would be richer than George Soros (without the intellectual pretension, I hope). Anybody, and I mean anybody, who suggests that he knows the extent of the magnitude of the impact of ANWR drilling or any other marginal measure on the price of oil is a fraud. However, it is also true that changes in supply increase price at the margin. A small percentage increase in damand or decrease in supply certainly can influence the price of the commodity far in excess of the percentage change (that is, a 5% supply reduction or demand increase can double the marginal price). We know that. It is that same logic that drives environmentalists to want to put a small tax on a ton of carbon. They cannot know what the impact of that tax will be, but they know the direction of the impact, setting everything else equal.
But that said, I have previously argued that we should drill in these areas even if the impact on the price of oil will be tiny for several reasons, including environmental ones.
Wouldn't this argument cut in another direction if you consider capital to be put in research to be another allocatable resource, indicating that seemingly marginal amounts of extra research dollars could have v. large impact? Basically, why doesn't that argument also say we should open the floodgates (marginally) on govt funded research, particularly with proven notable products like the computer and internet?
Secondarily, I gave you numbers above concerning an outcome so otherworldy in its optimality that any true outcome would have to be worse. When these benefits are spread over long timeframes via the futures market, the impact necessarily dissolves pretty fast given that we are not going to force this oil to be sold strictly in the US. Admittedly, weird things can happen: perhaps the opening of ANWR would persuade Exxon Mobil that there will be enough domestic production to take a hard line with the Venezuelans, who capitulate at the bargaining table in spectacular fashion, therby putting pressure on the Arabs to make oil run fast and free forever. But we don't get to assume or rely on such turns of events, so we can say that all things being equal the impact is X over Y years, taking this number to be heavily volatile as commodity pricing always is.
Tertiarily, you have to have a guess; it's hard to do cost/benefit analysis without some kind of theory. Further, there does exist an epsilon-bound such that current price +- epsilon is deemed to be ineffective-to-not-worth-it, with epsilon being an individual thing but with a certain distribution across society. Unless you want to propose that such drilling is utterly without cost (no impact whatsoever? Really? Not even the really nebulous and weird things like what our legislature could have been doing and perception of govt handout to oil companies?) it's hard to weigh the two at all, let alone get beyond epsilon.
We know the direction of things, (because an increase in supply should decreased price on a mathematically continuous spectrum, absent weird things) but when push comes to shove, much like the carbon tax, we need to pick some numbers. We don't just make into law "a tax," but instead a tax of x on y at z per a for b time. Also, I reiterate: this deadlock could probably be resolved (albeit in referendum) if we were guaranteed to take a multilateral approach with research money, drilling, CAFE standards, etc. This would placate the drillers, the auto industry, the greenies, and whoever else if only because the brunt was being born semi evenly (I find such a prospect almost universally useful; many of my colleagues would sign on to, aid, and abet a bill that lowered barriers to outsourcing, etc, all the typical business conservative things, if there were retraining programs and between-job support with quality controls paired in. Compromise can happen.)
With regard to as-argued-elsewhere: as argued elsewhere, oil reserves can be strategically available for when Saudi Arabia has little or no oil left rather than the 264Billion barrels the CIA puts them at, and by current consumption we won't get there for quite a while. Additionally, the drilling and trade balance harms can be resolved by getting off oil sooner, rather than supplementing a fraction of our yearly consumption over n years. https://www.cia.gov/library/publications/the-world-factbook/geos/sa.html
Why bother with time-consuming and costly litigation? Let's just get Justice Kennedy on the phone and ask his permission straight up.
This point highlights one of the major problems in developing any energy source not blessed by the environmental lobby and liberal establishment.
It is not enough to remove the ban on drilling offshore and in ANWR, it will take positive legislation to protect the companies from endless lawsuits designed to do nothing more than prevent drilling forever. This tactic proved successful in California before there was a federal ban on offshore drilling.
A tiny minority of people in the United States will decide the energy future of the country using these guerrilla tactics. They are not open to reason or common sense and they seem to care little for the average person in the country. They have been successful in stopping any reasonable energy programs for years because of the low price for energy. The majority of the country is now focused on the issue of energy and the politicians in Washington have the cover to implement far reaching programs to safeguard the country’s energy future.
The long term future is nuclear. The short term depends on oil, gas and coal. All the others are niche sources that will play a small part in the US energy future.
@ Stan: My favorite advocacy is providing a third option in civilian lawsuit beyond penalty to defendant and no penalty: penalty to those pressing charges for wasting everyone's time, dollars and such with "obviously" inadequate cases. This type of thing seems like the only reform that allows big penalties for egregious conduct while fixing the payout calculus such that pressing charges on poor fact bases doesn't have a positive expected value. There are some implementation problems, but I like the theory and it resolves your issue.
I understand that the USA is one of the few countries in the world were the defendant is not awarded cost from the claimant if he is successful in his defense. However, the American legal system is run by lawyers and they currently have a sweet deal going. If they sue and win, they get the money. If they sue and lose, they just waste some of their time. Your third path makes the claimant responsible for the cost of the defense. The lawyer is still in the clear. If the lawyer is going to get 50% of the award then he needs to be in the bag for 50% of the loss as well.
Of course it has been established that Tyree is way off on U.S. oil consumption...the figure is more like 6 billion barrels a year used in the U.S. (who gives a crap about the EU...think they're sitting up nights worried about you?). Naturally, I believe there should be investigation of all forms of energy we have at our disposal...ANWR, nucular, wind, tides, cow farts, whatever, but I think the answer lies in shale oil.
It's a dry read, but the upshot is that there are 3 trillion barrels of recoverable shale oil in the world, and 2 trillion of it is right here in the good ol' USA! Do the math Tyree, even if consumption rises with population growth, 6 billion divides pretty favorably into 2 trillion (sounds like a couple hundred years worth of Texas tea).
One problem, 70% of it is located on public lands...and the Guv of Colorado just vetoed a bill to start recovering it. The technology exists and is pretty inoculous, (drill an 1800 foot deep hole, heat to 650 degrees, pump out, garnish, serve) Exxon is ready to go today.
Treehuggers will be the death of us yet...although I suspect that would be alright with them!
Oil does not have a future. The higher the price per barrel goes and the longer it stays high, the sooner alternatives will be released on the market, refined and, in the end, take over. It could be anything: corn ethanol, other biofuels, hydrogen, the GM Volt or whatever. Everyone may be freaking out over the "spike", but in reality it's the beginning of the end for oil.
This post http://peakoildebunked.blogspot.com/2008/06/364-other-peak-oil.html on POD claims that demand - which is apparently outstripping supply - is actually falling in major countries. Most of the commenters seem to disbelieve it. I'm not sure what to think. I would like it to be true.
The problem with current high prices is that they are not guaranteed to stay high. Oil companies don't want to invest in refinery capability because they don't expect the prices to stay high. Investments in alternative energy sources are not yet viewed as profitable because investors don't expect the prices to stay high -- and if the efforts were to actually pan out, the price of oil would drop. It's self-defeating. Investors have been burned often enough that they are staying conservative.
The biggest untapped source of oil is under the hood. If 69% of US oil consumption is for transportation, then the biggest way to impact the futures market is by implementing more stringent CAFE standards. Logically, expected future reductions would cause the price to drop immediately. Of course, that assumes that you really want the price of gasoline to drop. Not me. I'm in favor of CAFE standards, but I really want the price to go up because I want us to stop using oil on a more permanent basis. If prices drop, we'll just go back to wasting it.
I exaggerate. I don't want us to stop completely or immediately, but I do think we should wean ourselves with at least all due deliberate speed. The problem is that we are today a petroleum monoculture. Since such a large share of our energy business is done in petroleum, we are economically, politically and even culturally vulnerable to all kinds of supply shocks. Even the futures market of those potential shocks can afflict us. An aggressive rubber dinghy in the Straits of Hormuz can effect the price and the disposition of drivers in NJ.
IMO, conservation is the first recourse. Plug-in hybrids using flex-fuel engines are the way to go for now. The next question is where does the electricity come from for the plug-ins. Frankly, I don't care. It could be coal, natural gas or peat moss -- as long as it takes us away from oil, especially OPEC oil. The best solution, of course, is nuclear, because it is the least environmentally damaging. If the French can make it work, then so can we.