Obama Misses the Big Oil

By Michael Lynch, the former director of the Asian energy and security working group at the Center for International Studies at the Massachusetts Institute of Technology, an energy consultant (THE NEW YORK TIMES, 05/04/10):

The Obama administration’s decision to allow oil drilling off northern Alaska and the East Coast and in the eastern Gulf of Mexico is a bold political move that demonstrates a rational approach to energy policy. Yet, given the peculiarities of petroleum extraction, the public shouldn’t buy any arguments that it’s going to accomplish a lot in terms of energy independence or payback for taxpayers.

The administration is trying to deflect criticism from environmentalists by pointing out that the decision should help reduce our dependence on foreign oil, create thousands of high-paying jobs and generate much-needed tax revenue. But Mr. Obama is being careful not to offer any specifics, and for good reason: estimating undiscovered resources in areas with little previous drilling is as much art as science; even the most optimistic projections concede that the amount of petroleum we’re talking about here is relatively minor; and while some jobs may be created fairly quickly, profits (and tax revenues) are going to come slowly.

The best estimates of the federal Mineral Management Service suggest that the three new drilling areas combined have 4.5 billion to 22 billion barrels of potential oil, and 13 trillion to 95 trillion cubic feet of natural gas. Considering that our current total estimated domestic reserves are 20 billion barrels of oil and 250 trillion cubic feet of gas, this sounds significant.

But this estimate of potential resources is misleading in a number of ways. Most important, the term “potential resources” refers to the amount likely to be discovered over a very long time, while our current reserves are those that have already been found but not yet tapped. Think of potential resources as the estimated harvest from an unplanted orchard, and reserves as what’s on the trees right now.

A more meaningful yardstick of potential in the new areas is the estimated undiscovered petroleum in all our domestic offshore areas, which amount to 40 billion barrels of oil and 200 trillion cubic feet of gas. And, unfortunately, there is always a possibility that little or no oil or gas will be found in the new sites, especially off the East Coast, where past exploration has been confined to a few unsuccessful wells decades ago. My personal take is more optimistic over the very long run — we’re talking decades — as throughout the history of oil exploration technological and scientific advances have tended to increase estimates of recoverable resources.

But, as Keynes said, in the long run we are all dead. Production half a century from now is not very relevant to either politicians or policy makers. To think of near-term production levels and timing, we might want to consider the North Slope of Alaska, where drilling began in the 1960s; it contains the Prudhoe Bay field, which was found to have oil in 1968.

With estimated resources of about 25 billion barrels, this area looked like an answer to our prayers. Yet, between the inherent difficulty in extracting petroleum and opposition from environmentalists, serious production did not begin until the completion of the trans-Alaska pipeline in 1977, ramping up over a couple of years before falling to the current modest production of a bit less than 700,000 barrels a day.

If this history is any guide, we might get production of as much as one million barrels a day of oil from these newly released areas, but only after 10 to 15 years of effort. Natural gas production might be greater, and come sooner: because it is off the contiguous states and not Alaska, there is likely to be less objection from environmentalists. However, the price of natural gas tends to be significantly lower than that of oil, so it will mean much less tax revenue.

How much money are we talking about? Those amounts are certainly difficult to predict, but assuming prices stay at current high levels — $80 per barrel for oil, $4 per million cubic feet of natural gas — the oil revenue over the long term would be $30 billion a year, of which as much as half would be paid as taxes. Gas revenue would be closer to $12 billion, and the tax take would probably be a smaller fraction (this is because gas prices are set in relation to the costs of extraction, while oil prices are set in a global market). The best guess is that the government could, eventually, make at least $10 billion a year in taxes, and no more than $25 billion.

There is, of course, a way to bring in more tax money, and provide more oil: opening the California coast. We know from earlier operations that it has significantly more resources than the all the newly opened areas combined. Yet most extraction there came to an abrupt halt in January 1969, after a Union Oil platform off Santa Barbara spilled more than 80,000 barrels into the ocean. There are still 40 or so active leases there that now produce some 40 million barrels a year safely. They have given us a good understanding of the geology, thus exploration would be quicker and less costly than in unknown areas, and the return more certain.

This area, especially off Southern California, has an estimated 7.5 billion to 14 billion barrels of oil and 13 trillion to 24 trillion cubic feet of natural gas. It could probably generate as much revenue as the other newly released areas combined; the oil, not having to be piped from northern Alaska, would be cheaper to harvest. While California drilling is one of the third rails of American politics, the federal government forgoing at least $20 billion a year in taxes seems unwise.

Clearly, the petroleum from the new areas isn’t going to offset our 12 million barrels a day of imports, and the tax revenues aren’t going to put a huge dent in a budget deficit in the hundreds of billions of dollars. Still, the plan makes a contribution on both fronts, and one that is almost pain-free. This is certainly better than spending billions on money-wasting alternatives like ethanol, or taking more tax money directly out of consumers’ pockets by raising taxes at the pump.

Fuente: Bitácora Almendrón. Tribuna Libre © Miguel Moliné Escalona