Tuesday, June 24, 2008

What to do about oil production?

The argument is being made by oil and gas industry representatives that it is time to open up the outer continental shelf (OCS) to drilling for oil and gas; the OCS has been placed off limits by the US federal government. When asked (during a US Congressional hearing) why there’s been no activity on the 68 million federally controlled acres that are available for drilling oil, those same industry representatives stated there was no drilling equipment capacity available. The turn around time for drilling platforms and supplies is approximately 5 years from order to delivery; we’ve got time to consider the ramifications.

The US uses 20.5 million barrels per day (b/d) of oil. The total estimated SWAG (Scientific Wild A** Guess) for the OCS is 27 billion barrels of recoverable oil. Add to that the ANWR oil reserves most optimistic SWAG of 11.8 billion barrels of recoverable oil and you get 39 billion barrels; 5.2 years of oil reserves untapped. The most optimistic projections of daily production from these reserves total about 3 million barrels of oil per day (b/d); about 15% of the daily US consumption. That brings us down to only 8 million b/d of imported oil; assuming none of the other US fields slow down at all. All this new capacity can be online in 7-10 years. What would you have the Sheik do with the money he’ll make from you in the meantime?

Year after year gas prices have spiked higher each summer driving season, and this year is no exception. The oil and gas industry says it doesn’t have the refinery capacity to change from producing winter to summer oil based products quickly enough. In the 1990s they sold a large chunk of the refinery capacity to independent operators; reduced their own capacity. Meantime, they optimized production at their remaining refineries to more than 90% utilization; great for profits, bad for flexibility or damaged (tornado, hurricane, industrial accident, etc…) capacity offsets (e.g., the BP refinery accidental explosion and fire here in TX).

So, can we get some help from auto manufacturers in conservation (autos consume the majority of oil based products in the US)? Nope. The association of manufacturers is suing to stop the California Air Resources Board (CARB) from imposing restrictions on automotive green house gas emissions (only way to do that is to use less fuel). In the 1990s CARB had imposed a requirement for cars that were zero emission vehicles (ZEV). GM leased multiple ZEV vehicles to California citizens while it lobbied the CA legislature to repeal the aforementioned requirement. When the lobbying effort proved successful the ZEV lease vehicles were repossessed at the end of the lease agreement (even though quite a few leaseholders wanted to purchase their cars) and GM scrapped them.

GM also displayed the Volt, a plug-in, full series hybrid car (moved by electric motor only, using an internal combustion engine to crank the generator exclusively), but said batteries to make the car feasible weren’t commercially available. However, the folks at General Dynamics Land Systems had already field demonstrated a four ton Humvee replacement that was a full series hybrid truck (getting 250% better mileage than the Hummer).

I hear the cry to, “let the markets work,” but the markets have discovered that profitable is more fun than responsible activity. We were on this road in the 1970s and are here again (see other posts), because we’ve demonstrated an ability to forget the past. To quote Bill Engvall, “Here’s your sign!”

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