The American Legion Magazine | 3.1.13
By Alan W. Dowd
There are many causes for the painful rise in oil and gasoline prices in recent years.
Oil is a global commodity serving a global market, and global demand is rising – especially in China and India.
Markets are jittery about what’s happening across the oil-rich Middle East. The Arab Spring revolutions took Libyan oil off the market in 2011 and triggered deep concerns about the ability of Kuwait, Saudi Arabia and other Gulf oil producers to weather the storm.
Indeed, a number of questions surround petro-superpower Saudi Arabia. A series of deaths in the Saudi royal family raised concerns about a succession crisis in the world’s oil safety net; equally troubling are leaked diplomatic cables suggesting Saudi officials’ worry that the kingdom’s reserves may be overstated by 40 percent.
Elsewhere, international sanctions have taken a healthy portion of Iran’s oil off the market. A jihadist insurgency is buffeting Nigeria, which accounts for 8 percent of U.S. oil imports. And in places like California, refinery capacity issues sent prices into the stratosphere. Add it all up, and the result is pain at the pump.
But the United States need not be held hostage by the vagaries of this global market, or the whims of petrocrats, speculators and jihadists. It’s time to tap into this country’s vast – yes, vast – petroleum reserves.
Centuries of Supply. Just how vast are these reserves? For that matter, are they even real? After all, politicians talk about America’s untapped energy wealth in such vague terms that the notion of U.S. energy independence – or, at the least, decreased dependence on the unstable sources of oil mentioned above – seems more like a desert mirage than an attainable goal.
The numbers suggest a very real, very attainable future of energy security for the United States.
The U.S. Geological Survey (USGS) estimates that the Arctic holds some 90 billion barrels of oil – more than Nigeria, Kazakhstan and Mexico combined. About one-third of the oil is in Alaskan territory. Another USGS study concludes that North Dakota and Montana have an estimated 3 billion to 4.3 billion barrels of recoverable oil. In the U.S. swath of the Gulf of Mexico, BP estimates that a new reserve could yield 6 billion barrels of oil, and Chevron has found an oil field with some 15 billion barrels. The American Petroleum Institute (API) reports that opening up new offshore areas in the outer continental shelf “could lift domestic crude production by nearly 1 million barrels per day,” and if the United States fully developed all its onshore fields, “output could rise by as much as 2 million barrels a day by 2030.”
All told, the National Petroleum Council pegs U.S. conventional oil reserves at 274 billion barrels. That’s a lot of oil, even for a country that consumes 20 million barrels a day. These reserves alone translate into nearly 38 years’ worth of oil.
But owing to the fact that our awareness of oil reserves and our capacity to extract them is always advancing, conventional and “proven reserves” are just a tiny part of the picture. As a report by the National Center for Policy Analysis (NCPA) details, estimates based on “proven reserves” are almost always understated. In 1920, USGS estimated total world oil supplies at 60 billion barrels. In 1950, that number was pushed to 600 billion. By the mid-1990s, the estimate was 2.4 trillion.
Today the estimate is 3 trillion barrels. The reason for this constant upward readjustment is technology: “Before the first U.S. well was drilled in 1859, petroleum supplies were limited to oil that oozed to the surface,” according to NCPA.
Likewise, until recently, oil supplies were limited to sources derived from traditional drilling. But that’s changing. As the price of oil rises, the cost of extracting and converting less-conventional sources of hydrocarbon energy into petroleum is starting to make economic sense for developers. That brings us to the veritable ocean of oil shale and oil sands deposits in North America.
Oil shale is a rock that can be converted into oil when heated. Oil sands are a mixture of oil, sand and clay that when injected with hot water yield bitumen, and ultimately synthetic oil.
A 2012 study conducted by the Government Accountability Office (GAO) reports that oil shale deposits in Colorado, Utah and Wyoming “contain up to 3 trillion barrels of oil, half of which may be recoverable.” Once thought to be too expensive to extract or too technologically difficult to convert, this vast oil-shale field right in the middle of the country “presents significant opportunities for the United States,” in the GAO’s understated words.
As RAND’s James Bartis has observed, “We’ve got more oil in this very compact area than the entire Middle East.”
As for the oil sands deposits, Utah alone holds between 12 billion and 19 billion barrels. Further north, the Canadian province of Alberta sits atop at least 169 billion barrels. “The oil sands are the third-largest source of proven crude oil reserves in the world, next to Saudi Arabia and Venezuela,” according to the Albertan government.
In short, the United States and its closest neighbor possess enough oil to meet our energy needs for a few centuries. These dependable, accessible oil reserves are not limitless, but they are enough to carry us comfortably to the post-petro economy.
NOPEC? Given these largely untouched reserves, one oil economist recently quipped that the United States may need to join OPEC. What’s much more likely is that the United States and its neighbors may soon break OPEC’s back.
Ed Morse, head of the global commodities division at Citi, reports that total production from the United States, Canada and Mexico “could rise by 11.2 million barrels per day by 2020 ... North America is becoming the new Middle East.”
In fact, according to Financial Times, the main topic of conversation at a recent OPEC conference was the re-emergence of the United States as a global oil power. Oil and liquid hydrocarbon output increased by 1.1 million barrels per day between 2008 and 2011. If the United States expands oil-shale development, output will grow exponentially. “Thanks to both shale and the Canadian oil sands, North America could become self-sufficient in oil ... and even a net exporter,” said Ryan Lance, CEO of ConocoPhillips.
The ramifications are breathtaking:
-More wealth and job creation in the United States. What Morse calls a “supply-and-demand revolution” in oil could add 3.6 million new U.S. jobs and increase GDP by as much as 3.3 percent by 2020.
-More revenue for states. Consider Alberta, which expects to generate $350 billion in royalties and $122 billion in provincial and local tax revenues from its oil sands over the next quarter-century.
-Less dependence on unsavory regimes. The goal of building a thriving oil sector in this hemisphere would not be autarky, but rather security from over-reliance on undependable suppliers. As we learned during the 1973-1974 embargo, oil can be a weapon. When Venezuela’s Hugo Chávez wants to hurt the United States, he raises the prospect of selling his oil to China, uses his oil wealth to prop up other troublemakers or buys Russian weapons. When Iran wants to do likewise, it threatens to close the Strait of Hormuz, funds insurgents in Iraq and Afghanistan, bankrolls Syria and diverts its petrodollars to nuclear-weapons development. An extra 11 million barrels per day produced in the Americas would send a signal to the global oil market, enable the law of supply and demand to bring prices down, and deprive those regimes of revenue and power.
-Less need for military intervention in the Middle East. The security costs associated with maintaining the energy status quo have been enormous. Dependence on Middle Eastern oil has forced the United States to prop up regimes that flout American values (Saudi Arabia), avoid directly challenging them (Iran), and go to war for them (Kuwait) or against them (Iraq). Building an energy supply base in this hemisphere would recalibrate the U.S. relationship with the Middle East from that of user and pusher to a more normalized state.
Comparisons. API concludes that taking full advantage of domestic oil reserves could decrease foreign oil imports by 79.7 percent. But Washington has to have the will to tap those reserves – or at least the good sense to get out of the way so that industry can meet market demands.
Although the Obama administration deserves credit for challenging industry to think about the post-petro economy, it opposed the Keystone XL pipeline extension – which would have carried oil derived from Canada’s oil sands – and reduced the acreage set aside for oil shale development. Drilling permits have decreased by 36 percent under the Obama administration, which also imposed a moratorium on new offshore drilling.
The reality is that oil is the fuel of both the present and the foreseeable future, and the energy alternatives of tomorrow are not yet ready to shoulder the burden at a competitive cost. Well-intentioned but costly examples of government-funded alternatives – from Solyndra’s solar-powered bankruptcy, to ethanol’s endless subsidies, to wind power’s bird-killing side effects, to government-guaranteed Chevy Volts – only serve to underscore how efficient and cost-effective fossil fuels are by comparison.
Hybrid cars, for instance, save gas but cost considerably more than non-hybrids, making them too expensive for many consumers. Take the 2012 Honda Civic Hybrid, which starts at $24,200; the normal Civic costs $15,955 – a 51 percent difference. The Volt’s sticker price is $40,000 but costs $89,000 to build. The market’s response speaks volumes: GM’s goal was to sell 40,000 Volts in 2012, but it actually sold about 20,800.
To see a genuine commitment to oil exploration and production, look no further than this hemisphere. Quite unlike Washington’s recent approach to oil shale development, Canadian government agencies are encouraging oil sands development.
The Albertan government estimates a capital investment of $218 billion over 25 years to fully develop the region’s oil sands.
Likewise, after discovering huge caverns of offshore oil buried under miles of ocean and rock, Brazil began lining up investment pledges of some $224 billion to fund five years of development and extraction. Eyeing an estimated 70 billion barrels, Brazil is prepared to raise $1 trillion over 10 years to support the project. The payoff: It is positioned to become a top-5 oil producer by 2020.