Is White House Energy Policy A Dry Hole? Part One
By Bill Moore
The United States Energy Information Agency projects that between now and the year 2020, US oil production will decline by 0.7 percent annually while demand, lead by the transportation sector, is expected to increase by 1.8 percent annually. As Jim Lovell said on the ill-fated Apollo 13 mission, "Houston, we have a problem."
But as EV World learned during our interview with Professor Culter Cleveland of Boston University's Center for Energy and Environmental Studies, Houston isn't going to be of much help despite President Bush's best intentions.
Not that there isn't plenty of oil and natural gas still buried deep within the earth's crust of the territorial United States. "The issue is," Professor Cleveland told EV World, "what does it cost to get it out of the ground and delivered to consumers?" This is the real heart of the problem, as we soon learned. Setting environmental questions aside for the moment, Cleveland contends that from a purely economic point of view, it simply doesn't make good financial sense to bring that oil or natural gas up to the surface, even with oil prices in the $25 a barrel and up range.
"The reason the US imports half of its oil is because our oil is very expensive to produce relative to many foreign sources," he explained. "And so Economics 101 teaches us that there is advantage to trade when there are differences in the cost of production of goods, whether its oil or widgets or Toyotas or whatever good you¹re talking about. If there was money to be made (and) profits to be made producing oil here in the US, given current levels of world oil prices, people would be doing it. So, there is no great conspiracy here of people capping wells...It is simply because our oil is very costly compared to foreign oil."
Cleveland firmly believes the United States is better off importing oil than trying to produce all of its own. The reason is simple.
"If we were to -- at the extreme say we were not import any oil, we would be forced to extract a lot of very expensive oil and that extra money we send to the oil industry is lost in terms of other possible investments in the economy."
Cleveland continued by saying, "We are better off as a nation when we produce things were we have an advantage in terms of cost and importing things for which we don't have an advantage. That way, jobs and revenue are maximized." He pointed out that the cost to produce oil in the United States is at least three to four times higher than what it is in the Middle East and in some cases much more than that.
"What we have to keep in mind here is we can't control the price of oil. The price of oil is determined in the international global energy market." He explained that when American oil company executives wake up each morning, they read the paper and see what the price of oil is on the international market. He contends there is little they can do to influence the price of oil. "If it costs more money to extract the oil than they can sell it for, they ain't going to do it."
This is especially true in the case of the thousands of "stripper" wells found across the United States, wells that produce only about 10 barrels of oil a day. According to Cleveland these wells operate on the margin of profitability even at current oil prices. They become unprofitable when the price drops to $15-18/barrel range and frequently their owners permanently cap them and walk away.
"Given their low rate of output of oil, it would be prohibitively expensive then to go back in when oil hit $25/barrel and start production again."
The Luck of Hubbert
On their OilAnalytics web site, Cleveland and his colleague, Robert Kaufmannn, pay tribute to oil industry prophet, M. King Hubbert. It was Hubbert, a geologist and geophysicist who taught at Columbia University before going to work for Shell Oil, that predicted in the late 1950's that US oil production would peak and begin to fall about 1970. Fortunately for Hubbert, if not for US oil producers, his prediction was right on the money.
"History has proven this to be one of the most accurate economic predictions in our history because oil production did, in fact, peak in 1970 and has dropped by about 40% since that peak," Cleveland said. Hubbert accomplished this remarkable feat using relatively simply mathematical formulas that projected future production based on historic past production numbers. Prior to Hubbert, most projections were based on the subjective analysis of estimates by petroleum geologists from various oil producing regions of the US.
As it turns out, Hubbert's success may have been based more on wildcatter luck than mathematical logic. Since Hubbert's time, new technology in the last decade has given petroleum geologists a new view of what lies in the bedrock below our fields and under our coastal waters. One of the most important new tools is 3-D seismology. Using powerful desktop computers this technology processes returning sound wave echoes bounced through the earth to paint detailed pictures of the crust of the earth miles underground.
Cleveland told EV World it is this technology that is at the heart of a great debate in the oil industry. He explained that there are those who believe that this new technology will resoundingly invalidate Hubbert's curve, itself a mathematical projection which shows world oil production peaking and then declining sometime during this decade or next. They believe 3-D seismic will reveal vast new petroleum deposits, ensuring the world a continuing supply of its black blood.
"It is a very difficult issue to sort out," Cleveland stated, "because it is hard to measure in a quantitative way the effects of 3-D seismic or any other technology on actual production discovery rates." He explained that there are numerous factors in addition to 3-D seismic that impact directly on the rate of exploration and discovery. These include economic factors like the price of oil. Institutional forces like OPEC's recent production cutbacks and political decisions like those facing America over whether or not to drill in the Arctic National Wildlife Refuge "Trying to sort out the effect of technology from other forces is very difficult."
Cleveland admitted that initially he and his associate, Robert Kaufmannn, were enamored by Hubbert's prediction, but have since realized that the oil discovery picture is much more complex than Hubbert's simple production curve would suggest. "In our work, we¹ve modified Hubbert's work to account for these (other) forces. Once you do so, you can explain the past much more accurately than the simple Hubbert model. But it also becomes much more difficult to forecast the future." He added that while Hubbert's model worked remarkably well for the Lower 48 states, "when you start applying this to the world, it becomes more problematic."
It is so problematic, in fact, that it cannot account for the vagaries of global oil production. Practitioners of the Hubbert model have, in Cleveland's words, had to do "back handsprings" to try to make it fit on the global level.
"Our conclusion on Hubbert was that, "Was he lucky or was he a genius? Unfortunately because his models did not account for many of these other forces we know affect production, particularly at the world-level, he was in fact 'lucky' that his models did forecast production as accurately as they did."
Unavoidable Slide To Oblivion?
Regardless, there are many who still believe based on Hubbert's model that world oil production will peak in the next five to seven years and begin its inevitable slide, just at the time world demand continues to increase, with potentially world-shaking consequences.
For Cleveland, however, this is too pessimistic a view. "I don't think we'regoing to see a peak in oil production within five years. My own subjective estimate is (that) sometime, however in the next ten to fifteen years we are liable to see a downturn in production. But when you step back, I think this debate over whether it's going to peak in 2005 or 2015 is a mute point, because in the long run, what difference does it make? We have to start thinking about the transition from oil. We have to start thinking about the transition away from carbon-based fuels given the growing evidence for climate change. And whether oil production peaks in 2005 or 2015, in the long run, it's not going to matter that much.
Are there any vast new oil deposits waiting to be discovered and exploited, we asked Cleveland? His response reflected the dilemma facing the oil industry.
"The oil business, despite all the great technology, is still a crap shoot in many ways because you never really know until you actually drill a well. Certainly many regions of the world have been thoroughly explored like the United States, to a lesser extent the North Sea, some parts of Russia. So we can say with a pretty good level of certainty that in these regions there aren't going to be any big surprises. And that's why, for example, the Bush Administration and the oil companies want to drill up in the Arctic National Wildlife Refuge because as they have quite accurately noted it is one of the few places in the country where we have a chance of finding a reasonably sized field."
If the US holds no big surprises, what about the rest of the wide world?
"Now when you turn to the Middle East and to some of the offshore regions of the world then it becomes a little more difficult to say exactly what the chances are of a big discovery because they haven't been quite as thoroughly explored. And also because we don't have access to the data on drilling and discovery to the extent we do here in the U.S."
Continued next week...Cleveland contends that President Bush's fossil fuel-heavy energy plan is a prescription for economic failure, irrespective of its ecological consequences.
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