Friday, December 18, 2009

The Big Energy Lie

RedState kicks off this post by blowing apart some of the most common energy lies:

The Big Energy Lie goes something like this:

The United States has only 2-3% of the world’s oil reserves, but consumes 25% of global production.

Those words have been uttered by our Dear Leader as well as his Secretaries of Energy and Interior. The idea justifies “progressive” Administration policies ranging from “green jobs” to Cap and Trade to foreign affairs.

And they are deliberately designed to mislead.

Let’s study the fraction that results in that paltry 2-3% number.

The Numerator - U.S. Reserves

Geologists and engineers make estimates of petroleum resources, the total potential future recoverable quantity of oil and/or gas. Right now, the U.S. has considerable potential resources in places like the Outer Continental Shelf, ANWR and the Colorado Oil Shale. Reserves, on the other hand, is the term applied to that subset of resources that have been proven to exist by drilling and can be recovered with existing technology. Since we’ve made a policy decision to keep ANWR and 85% of the OCS pristine, those resources will never be “promoted” to reserve status. Until and unless someone figures out a way to exploit the oil shale profitably (and secures the blessings of the sate and the Feds), those resources will not be counted as reserves, either.

(I don’t know the numbers off the top of my head for oil, but for gas, the U.S. has reserves on the order of 200 trillion cubic feet, and annual production of roughly 20 trillion cubic feet. Natural gas resources are about 2,000 trillion cubic feet. Every year, if things go right, we should drill enough new wells to turn resources into reserves to replace production. And at the current rate of gas production, we’ll be able to do this for another 100 years or so.)

As an analogy, imagine a multi-millionaire who owns lots of illiquid assets — houses, cars and boats — but only has $250 in his checking account. Do we consider him poor? Reserves are analogous to ready cash; resources are akin to total assets. Our example millionaire is cash poor by his choice; the U.S is relatively reserve-poor because we, as a nation, have decided not to fully exploit our resources.

Another factor — U.S. public companies must report their estimates of reserves to shareholders and to the Securities Exchange Commission. Almost all companies undergo a thorough audit of their estimates by third party engineers at least once a year. These reserve estimates tend to be conservative in nature as the companies prefer to avoid the bad press associated with reserve writedowns.

So we have a fraction with a numerator that is skewed to the small side — for several reasons.

The Denominator - Global Reserves

Here, the concept is the same, but the effect is different.

Some 70% to 80% of Global Reserves are owned by NOCs — state owned National Oil Companies. The regimes that control these reserves have zero transparency in reporting. They have an incentive to lie aggressively represent the reserves they own. Most of them use the cash from oil to support their populations with generous welfare, subsidies and social programs. Bigger reserves mean that they’re more stable internally and more powerful geopolitically.

So we have a fraction with a denominator that is probably an artificially large number — for several reasons.

And, dividing a small numerator by a large denominator gives a tiny fraction. So tiny that it implies that the country’s domestic energy situation is hopeless; furthermore, we cannot reasonably expect it to be otherwise.

It’s a giant lie.
And it really comes home at times like this:

Despite Kyoto, despite Copenhagen, despite the New Green Economy and despite the Democratic Party, world oil demand is expected to increase by 0.8 to 1.5 million barrels a day in 2010, depending on the source of your forecast. That kind of increased demand could lead to a substantial increase in oil prices; when demand exceeds production capability by just a little bit, the price reaction is usually pretty strong.

What has the Obama Administration done to prepare for such an eventuality?

Nothing. Well, nothing positive.

  • In February, Interior Secretary Salazar extended the comment period on the 2010-2015 five-year offshore leasing plan by six months and has not taken any additional action.
  • Likewise, the Administration has failed to make progress on Lease Sale 220 offshore Virginia that was planned for 2011. It’s estimated that the Sale 220 area could contain 1.14 trillion cubic feet of natural gas and 130 million barrels of oil.
  • Sec. Salazar cancelled oil and natural gas leases on 77 parcels of federal lands in Utah, then announced that 60 of them would be removed from development–eight permanently and 52 indefinitely.
  • The administration’s fiscal 2010 budget contains at least $80 billion in tax increases on the U.S. oil and natural gas industry. These increases will depress investment in new domestic oil and natural gas projects, weakening the nation’s energy security and doing nothing to defray the impact of higher world oil energy prices on America.

Even as the climate change community is starting to realize that clean, abundant, domestic natural gas is part of the solution, the Administration promulgates policies that delay and discourage domestic production. It’s time to encourage domestic oil and natural gas production to benefit all Americans by raising supply levels, creating well-paying jobs, and improving the nation’s energy security.

Even worse, the entire Democrat party insists that the U.S. do nothing to develop our own natural resources, nor move closer to independence from foreign oil, nor anything that would lower costs for Americans. And yet, look at what the other major players in the oil game are doing:

Not only is China investing in places like Iran, Iraq, Kazakhstan, Nigeria, Venezuela, and Argentina, but it is in the U.S.’s backyard, looking towards usurping the U.S. supply of Canadian oil sands. China is a good customer for Canada, as Canada fears that the U.S. may introduce a low carbon fuel standard[ii] or other legislation that would restrict our purchases of oil sands from Canada[iii]. China is also looking at a possible purchase of leases in the Gulf of Mexico where Devon Energy is looking to sell its U.S. leases.[iv] The sale of these offshore leases requires the approval of the Mineral Management Service in the U.S. Department of Interior. China is willing and able to be at the forefront of any misstep other countries make to gain a foothold and secure oil and gas supplies, and the U.S. seems to be giving it elbow room.


While the Bush Administration initiated steps to bring on new leases of oil and gas, both offshore in the Gulf of Mexico and on public lands that are endowed with billions of barrels of shale oil, the Obama Administration has slowed the progress by extending the comment periods and providing other obstacles.

These policies are energy and economic suicide, and could also manifest in the form of national security issues down the road. It must be stopped, and some true grown-ups need to be put back in charge of the country.

On a related note, 68% of Americans favor increased offshore drilling.

As usual, the Democrats in Congress are horrendously out of touch with American citizens, and their failure will become our problem.

There's my two cents.

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