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Oil prices soar in spite of sharp increase in U.S. production under Obama

Joseph Romm's picture
Joseph Romm 13451
American Progress
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  • Mar 9, 2011
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USFieldCrudeProd2000-2010 New

US oil production last year rose to its highest level in almost a decade….

As a result, analysts believe the US was the largest contributor to the increase in global oil supplies last year over 2009, and is on track to increase domestic production by 25 per cent by the second half of the decade.

Domestic oil production is soaring, but so are global prices.  It should be obvious that yet more drilling can’t have any significant impact on oil prices — particularly since the U.S. Energy Information Administration has been making that precise point for years now (see EIA: Full offshore drilling will not lower gasoline prices at all in 2020 and only 3 cents in 2030!).

The only thing that can protect Americans from the inevitably increasing oil shocks of Peak Oil is an aggressive strategy to reduce the country’s oil intensity (oil/GDP), including a steady increase the fuel efficiency of our vehicles — policies that conservatives have fought for decades.

But that doesn’t stop the same conservatives — including former Big Oil lobbyist Haley Barbour — from blaming Obama for high oil prices. As the Financial Times reported:

The revival of US production has been made possible by a rush of small and mid-sized companies into onshore regions such as the Bakken shale in North Dakota, the Permian Basin in west Texas and the Eagle Ford shale in south Texas.

North Dakota’s production has doubled since 2008, reaching 355,000 b/d in November. Extraction of oil reserves in these regions was thought to be uneconomic, but has been made commercially viable by the transfer of techniques successfully used to extract shale gas; in particular, long horizontal wells and “fracking”, pumping water under high pressure to crack the rock and enable the oil to flow.

Dave Hager, vice-president for exploration and production at Devon Energy, one of the companies pioneering the development of the new onshore fields, said new technology had transformed production economics at its mixed gas and oilfields in north Texas.

Like it or not, Obama actually campaigned on opening up oil production in the Bakken shale, so he is delivering on a campaign promise there.

Of course, more domestic production simply can’t have any significant impact on global prices, as the US Energy Information Administration has made clear many times (see here).

EIA Offshore 2009 small

The EIA’s 2009 report, “Impact of Limitations on Access to Oil and Natural Gas Resources in the Federal Outer Continental Shelf” analyzed the difference between full offshore drilling (Reference Case) and restriction to offshore drilling (OCS limited case).  In 2020, there is no impact on gasoline prices (right hand column).  In 2030, US gasoline prices would be three cents a gallon lower.  Woohoo!

I have previously written about the trivial impact of opening the OCS further to drilling — The oil companies already have access to some 30 billion barrels of offshore oil they have barely begun to develop (see “The cruel offshore-drilling hoax“).

If you are concerned about the impact of high oil prices from Middle East instability, the only viable long-term strategy is one aimed at ending our addiction to this climate-destroying fossil fuel.  Even the once-staid and conservative International Energy Agency understands that (see World’s top energy economist warns peak oil threatens recovery, urges immediate action: “We have to leave oil before oil leaves us”).  And Obama has taken aggressive action in this area, raising new car fuel efficiency standard to 35.5 mpg by 2016, the biggest step the U.S. government has ever proposed to cut oil use.

So why are Barbour and the conservatives shilling for Big Oil?  TP explains:

There is a notable theme here — aside from crass political point scoring, these attacks are calibrated to protect oil as a primary energy source at the expense of cheaper green alternatives, while pushing for even more oil drilling here in the United States. These opportunistic attacks come as the oil industry prepares to pump unprecedented sums of money into the political process. Since the midterm elections, the oil industry has “been very aggressive right out of the gate because of the huge opportunity with the election of their allies,” as Daniel J. Weiss, the director of climate strategy at the Center for American Progress Action Fund, told the Houston Chronicle yesterday. Oil and gas companies spent $146.3 million on lobbying last year, and that number is poised to rise as the presidential election approaches. For example, the American Petroleum Institute will start donating money to political campaigns this year.

… the big five oil companies — BP, Chevron, ConocoPhillips, ExxonMobil, and Shell — made $893 billion in profits from 2001 to 2010.

It’s a ‘virtuous’ cycle.  Big Oil gets politicians elected who push for more drilling and try to block strategies that could actually reduce our oil addiction.  Oil profits keep going up — and that means more money for Big Oil to invest in those politicians.

Note:  For the EIA data in the top figure, go here.

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Paul O's picture
Paul O on Mar 9, 2011

Frankly this post up reads more like an attack on conservatives than a serious attempt to debate energy policies.

Quote: :The only thing that can protect Americans from the inevitably increasing oil shocks of Peak Oil is an aggressive strategy to reduce the country’s oil intensity (oil/GDP), including a steady increase the fuel efficiency of our vehicles — policies that conservatives have fought for decades.”

 

Really, assuming that you are serious that we should replace oil, what Green fuel do you propose to replace oil with?

Bill Hannahan's picture
Bill Hannahan on Mar 9, 2011

We should be using our natural gas to power transportation and replace imported oil. We are paying about $28 / MBTU for imported oil; domestic gas costs only about $8-10 / MBTU.

http://engineering.mit.edu/ask/question.php?id=39

It is crazy to be burning up our natural gas to make electricity. We should be making our electricity with nuclear power and using our natural gas for transportation.

That would reduce emissions from both sectors, reduce transportation cost, reduce food cost by eliminating corn ethanol, and eliminate the economic drain of paying for imported oil.

Paul O's picture
Paul O on Mar 10, 2011

Ed, 

Fueling with Natural Gas (assuming we have it in realistic quantities and distribution) could  reduce our Trade Deficit. As for carbon emissions, I can’t imagine how NGV wouldn’t be better than gasoline vehicles.

In reality the massive infrastructural changes and vehicular alterations necessary might prove too difficult to overcome for this idea to be adopted.

Bill Hannahan's picture
Bill Hannahan on Mar 10, 2011

Ed, you and Paul are correct, natural gas has a higher hydrogen to carbon ratio than oil, so it produces less CO2 per BTU than oil. But the really big savings comes from eliminating the combustion of gas and coal in the production of electricity via nuclear power.

Auto makers can transition to natural gas much quicker and cheaper than to electric vehicles because the technology and materials required are readily available at small additional cost.

In the long, run battery or fuel cell vehicles will probably dominate, but for now, natural gas should be a transition transportation fuel, not a transition electric generation fuel.

Bill Hannahan's picture
Bill Hannahan on Mar 10, 2011

Ed, the implication that we have to replace 250 million vehicles overnight or do nothing at all, is a false comparison. People who bought new oil powered vehicles in the last few years will continue to use them.

Manufacturers should provide customers with an option to buy natural gas, electric, hybrid, conventional etc. Let each customer decide what is best for them on a level playing field.

Today natural gas would have a substantial cost advantage. Most homes and businesses have gas service. Small NG compressors that can fill a vehicle overnight are a nitch industry now, but can be ramped up. The existing distribution network could handle a significant transition over 10-15 years. That transition, on a world wide basis, would take pressure off of oil consumption, and bring oil prices back in line with other energy prices.

What is your proposal to replace 250 million vehicles overnight or a longer period?

 

Paul O's picture
Paul O on Mar 11, 2011

Ed,

While I see the near impossibility/near futility of a fleet wide conversion to Natural Gas, espescially as technology advances the electric car forward, I do find myself less worried than you that maximum allowable carbon will in the end have any draconian impact on transportation.

In my view no Congress or Political Party will survive the wrath of the American public, should they pass any laws that in effect take our cars and trucks away from us. Let me quickly add that personal transportation is not a matter of vanity and wastefulness as some enviro-zealots love to assert/imply/infer, it is in many ways fundamental to the lives and livelihoods of the American public. In other words, the carbon regulations that do make it out will be in sync with the reality on the ground. 

As a final thought on this topic, perhaps the future of cars would be a NG-Electric Hybrid, either akin to the Volt, or one that reforms NG to Hydrogen for use in a fuel cell, with or without side-by-side Li ion batteries.

Geoffrey Styles's picture
Geoffrey Styles on Mar 11, 2011

Joe,

The logic in this post is too flimsy to carry the weight of the assertions you’re making.  Although it’s impossible to determine precisely by how much oil prices would now be higher if US production had continued on its previous trend and been a half-million or million barrels per day lower, they would certainly have risen sooner as the economic recovery took hold and spare capacity was used up faster, and then spiked higher when the instability in the Middle East and North Africa kicked in.  Even if the impact on prices of additional US production were nearly zero–and I would argue as a former oil trader that the EIA has grossly underestimated that impact–it’s self-evident that at current prices every million barrels per day of additional US production represents another $36 billion per year that stays here instead of going to some exporting country. 

As for attributing the recent increase in production to recent policies, ask yourself how long it takes to develop an oil project from evaluation to leasing, permitting, procurement and construction to first production, and then consider whether enough time has elapsed since Inauguration Day 2009 for a significant number of new projects to have run through that cycle, particularly with the longer delays in the leasing and permitting processes that have ensued. 

Sam Carana's picture
Sam Carana on Mar 11, 2011

As you say, Joe, we should end our addiction to climate-destroying fossil fuels. In my post America can win the Clean Energy Race, I present the chart below, which shows that petroleum is responsible for most of the trade deficit.

America posted a record monthly budget deficit of $22.5 billion in February 2011, as spending growth outstripped revenue gains crimped by tax cuts enacted late last year, reports Reuters, adding that companies claiming tax credits and refunds caused net corporate receipts to turn negative by about $1 billion during February.

For February, the Congressional Budget Office (CBO) projects that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion, or 9.8% of GDP. CBO adds: The deficits that will accumulate under current law will push federal debt held by the public to significantly higher levels. Just two years ago, debt held by the public was less than $6 trillion, or about 40% of GDP; at the end of fiscal year 2010, such debt was roughly $9 trillion, or 62% of GDP, and by the end of 2021, it is projected to climb to $18 trillion, or 77% of GDP.

With such a large increase in debt, CBO further adds, plus an expected increase in interest rates, as the economic recovery strengthens, interest payments over the debt are poised to skyrocket over the next decade. 

Yet, Republicans refuse proposals by House Democrats to end oil company tax breaks, while, as the Guardian reports, the three big US oil companies ExxonMobil, Chevron and ConocoPhillips together made nearly $60bn after costs and taxes — a doubling of profits in 2010 compared with the previous year. The profits of the Anglo-Dutch oil company Royal Dutch Shell also doubled.

Republicans instead seek to cut EPA funding, yet the EPA shows that its programs to reduce air pollution from smokestacks and tailpipes will save America some $2.0 trillion in 2020, preventing over 230,000 early deaths, at a compliance cost of a $65 billion.

What’s needed are policies that discourage people from burning fuel, which is best done through feebates, i.e. fees on fuel, with revenues used to fund local programs on clean energy and transport electrification.

Paul O's picture
Paul O on Mar 12, 2011

Quote ” What’s needed are policies that discourage people from burning fuel, which is best done through feebates, i.e. fees on fuel, with revenues used to fund local programs on clean energy and transport electrification.”

 

SamCarana

I have copied your own image here so that you might use it to remind yourself that we are talking about PETROLEUM.

Now answer me this. If we discourage burning of Petroleum without having a replacement for it in place, what would happen to our society? If you happen to have a ready to go replacement for petroleum, where are you hidding it?

Sam Carana's picture
Sam Carana on Mar 12, 2011

As I said, Paul, clean energy and transport electrification should be supported, rather than to keep subsidizing our addiction to oil. Fees can be imposed on fuel and on the engines, furnaces, ovens and stoves that burn fuel, to fund local support programs for facilities producing solar, wind and geothermal power, for high voltage direct current transmission between grids, smart meters, electric vehicles, high speed rail, electric arc furnaces, etc.

Some areas may introduce standards and regulations, e.g. to ban incandescent lightbulbs, mandate highly efficient appliances and equipment, etc. In many cases, the best policy will be a number of feebates, including fees on oil to fund local rebates on electric vehicles. That will both save the local car industry and facilitate the quickest shift to the clean energy economy of the future.

Geoffrey Styles's picture
Geoffrey Styles on Mar 12, 2011

Sam,

Your calculation of oil’s impact on the trade deficit is inflated by a factor of more than four, because it’s incorrect to apply the value of oil imports only to the difference between imports and exports.  Oil’s contribution to the trade deficit is closer to its proportional share of imports, because imported oil is a major input to the entire economy, including the goods and services that make up US exports.  Last year, total US imports of goods and services amounted to $2,330 billion.  Net petroleum imports (including products) in 2010 averaged 9.439 million bbls/day.  At an average refiner acquisition price for the year of  $76.76, the approximate value of that oil works out to $264 billion.  As a result oil accounted for around 11% of the total value of US imports, and thus roughly 11% of the trade deficit.  That’s still a lot of money, and it’s more than it needs to be, because we still have lots of resources to apply to reducing it, along with the efficiency measures cited in the posting, but it’s simply wrong to blame oil for half the trade deficit.

Geoffrey Styles's picture
Geoffrey Styles on Mar 12, 2011

The discussion would be a lot more useful if Joe bothered to defend his own posts. 

Sam Carana's picture
Sam Carana on Mar 13, 2011

The chart is correct in comparing oil imports with the trade deficit, Geoffrey. If all imports are to be included in the picture, then it’s not just oil that needs to be looked at, but also other items such as vehicles and their parts, such as batteries, lights, etc. Imported vehicles is a growing part of the vehicles sold in America, as illustrated by the graph below.

The point is that electrification of transport could cut the trade deficit significantly (by more than half, I’d say), while it could also save America’s car industry and open opportunities to export electric vehicles. That would not merely save a lot of job and investment opportunities, it could actually create many additional clean domestic job and investment opportunities in areas such as production of clean energy, smart meters, interconnecting grids, etc.

Without making the shift to clean energy and electric transport, America would have no car industry left, while the growing national debt would make it increasingly difficult for Americans to import cars (and oil) from abroad. At some point in time, internal combustion engines and their parts will become obsolete and it will be prohibitively expensive to import such parts. By contrast, electric vehicles have few parts and require very little maintenance.

The shift to electric vehicles makles sense from numerous other perspectives as well, such as to improve our health, energy independence and security, grid efficiency, and – of course – the environment and global warming.

Geoffrey Styles's picture
Geoffrey Styles on Mar 13, 2011

Sam,

You’ve actually made my argument for me.  Using the methodology in your oil/deficit chart one could make the same claim about imported cars, imported goods from China, or any other segment of imports you’d care to name, and when you added them all up they’d exceed the total trade deficit by a wide margin.  You just can’t blame half of a nearly $500 billion trade deficit on oil imports that are only 11% of our total goods and services imports.

Sam Carana's picture
Sam Carana on Mar 14, 2011

No, Geoffrey, my “calculation” doesn’t compare oil imports with total imports; instead, the graph presents the value of oil imports against the background of the trade deficit, and there’s nothing “incorrect” about that, in fact, it makes a lot of sense given the intricate link between the two.

In January 2011, oil imports amounted to $24.5 billion, reports Bloomberg, quoting an economist who points at oil prices and says: “There’s no doubt the trade deficit will continue to widen through the quarter.” Bloomberg also adds that auto imports were the highest since February 2008. Note that this is a report about the trade deficit; Bloomberg evidently does see the obvious link. 

AP, in its report on the trade deficit, says that a “surge in oil prices helped push imports up at the fastest pace in 18 years in January, giving the country the largest trade deficit in six months.” Remember, this was the January trade deficit, the big rise in oil prices started in February.

Even the Commerce Department, in its announcement of the January 2011 trade deficit ($46.3 billion), points at the link, adding that “the increase in the goods and services trade deficit was due to increased imports of petroleum products, automotive vehicles and parts, consumer goods, and capital goods, which reached a record monthly level.”

The point is that, to improve the balance of payments, the obvious place to look at is to cut imports of oil, oil-consuming vehicles and their parts. Across the political spectrum, there is little or no doubt about that. As to the best ways to achieve this, rapid electrification of transport tops the list.

Geoffrey Styles's picture
Geoffrey Styles on Mar 14, 2011

Presenting “the value of oil imports against the background of the trade deficit” and labeling it “Petroleum vs. Nonpetroleum as % of U.S. Trade Deficit” is misleading, because it looks like an analytical result when it’s actually just two pictures superimposed.  For that matter, your whole thesis is short on analysis when it includes statements like, “rapid electrification of transport tops the list”.    In fact, each million EVs will displace less than 35,000 bbl/day of oil, or just 0.2% of our consumption, and it will be years before the first million of them are on the road. (It took about 10 years to reach the first million hybrids.) There are many other things we could do that would have a bigger impact on imports, sooner.

Sam Carana's picture
Sam Carana on Mar 15, 2011

Mind you, Geoffrey, I’m always keen to correct errors, in fact I spotted a typo in one of my earlier comments; the February budget deficit should read $222.5 billion. The graphic, however, is not incorrect nor misleading; the contrary, it shows that only partial electrification of America’s vehicle fleet could end oil imports, cutting the trade deficit by more than half. That is good reason to speed up transport electrification, while there are many further reasons to do so. As said, I haven’t seen any politician come up with better ways to improve the balance of payments, but if you had something in mind, please let us know.

Geoffrey Styles's picture
Geoffrey Styles on Mar 16, 2011

Sam,

The numbers just don’t support your conclusion, but we’ll have to leave it at that.

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