Sympathy for the Oil Industry?

The poor oil industry. After years of record profits, things have soured with the collapse of oil and gas prices. And now I read of an Obama “bias” against the industry. Heavens!

Robert Samuelson is an editor at Newsweek and the Washington Post, and, according to his Wikipedia page, he is so dedicated to objectivity that he never votes in an election. On Monday, Samuelson used his bully pulpit at the Washington Post to rail against Obama’s “undermining” of domestic oil and gas exploration. ("The Bias Against Oil and Gas," Washington Post, May 4, 2009.) Pretty serious stuff; let’s look into this "bias."

Our “Huge Oil and Natural Gas Resources"

Samuelson quotes some impressive numbers. We’ve apparently got enough stuff in the ground to dwarf Saudi Arabia’s reserves and keep our cars fueled up for many decades. Can this be true? Well, yes and no.

You’ve got to be careful around oil industry terms such as "resources" and “reserves” because they're not always interchangeable.

There are reserves we know about (e.g., proved reserves, which are estimated, with reasonable certainty, to be there and commercially recoverable with existing technology and unproved reserves, which are slightly more iffy) and resources we think are there but not for sure and even if they are there, we don’t know if they’re recoverable. (For more details, see our glossary of oil exploration terms.)

The numbers Samuelson cites fall into the category of undiscovered technically recoverable resources (UTRR) and thus we don’t know if those potential resources will ever be economically recoverable.

Why Aren’t We Exploiting the UTRR

Samuelson says Obama’s administration is “undermining” the exploration and exploitation of our domestic resources. Really?

The UTRR Samuelson is talking about come in three flavors: natural gas, petroleum, and oil shale. Let’s take a look at how Obama is “undermining” each.

Natural Gas

Estimates of the proved reserves of natural gas in the United States have increased by leaps and bounds in the past couple of years. The bigger estimates are due to the extraction of unconventional resources such as coalbed methane and the development of techniques such as horizontal drilling and hydrofracing that allow easier access to the gas in shales and other low-permeable rocks. 

Folks like T. Boone Pickens have been pointing out how these deposits could be used to power automobiles and end our dependence on foreign oil. (See U.S. map [pdf] of shale gas deposits.) Great idea and it might actually work, so why is the Obama administration standing in the way of exploiting these reserves? The simple answer: it's NOT.

The leases for drilling for natural gas are in place and ready to go. The problem is that natural gas prices have collapsed, there is an oversupply of natural gas, and companies prefer leaving the gas in the ground until more favorable conditions arise.

Bottom line: Economics -— not the administration — are preventing exploitation.

Oil Supply

Despite all of Samuelson’s arm waving and statistics, America’s oil reserves are relatively small. We have less than three percent of the global reserves, but use more than 20 percent of the global supply (source: EIA spreadsheet [xls]). We can drill and drill and drill, but we will be hard pressed to significantly increase our domestic oil supply. Drilling more and now is more about racing to maintain reserves rather than grow them.

And because oil is a global commodity, our small contribution to the global supply will only have a minor impact on oil prices and the long-term flow of cash to countries like Saudi Arabia with the really large reserves.

The only lever we have in that regard is on the demand side — lowering demand by increasing fuel efficiency of our cars.

Oil Exploitation

According to Samuelson, the Obama administration is also standing in the way of oil exploration. For example, he points to an estimated 3.65 billion barrels of potential oil in the Bakken formation in North Dakota and Montana. 3.65 billion barrels. That’s a lot. Why is Obama preventing us from getting at those gallons? Well, actually he is not. The Bakken formation is already open for exploration. So if the stuff is there and the economics are good, it can and probably will be produced.

The same holds true for the oil on the outer continental shelf (OCS). The vast majority of those resources were never covered by the bans that expired last fall — some 68 billion barrels of the total 86 billion barrels of UTRR in the OCS — and so are already open for exploration.

Bottom line: Why is that potential oil not being exploited? As with natural gas, the economics are not favorable.

Oil Shale

The United States has a staggering supply of oil shale, mostly in Colorado. If we fully exploited that resource for oil, we would probably have no gasoline worries for the remainder of this century and beyond.

But here too the economics are unfavorable — the estimated costs to produce a barrel of oil from shale falls in the range of $75 to 90. So oil prices would need to remain high to make this resource worth developing. Nevertheless, it is true that the Obama administration is scaling back Bush administration plans to expand research, development and demonstration leases for oil shale.

Why might Obama do a thing like that? Samuelson is correct in this instance: environmental protection. Converting oil shale into oil is an energy-intensive process that:

• requires large quantities of water — a commodity already in short supply in dry Colorado, and
• results in significant pollution — water pollution and global warming pollution.

The latter is especially troubling — a gallon of gasoline from oil shale leads to about 20 to 60 percent more greenhouse gas emissions than a gallon of conventional gasoline.

Bottom line: The Obama administration is blocking exploitation of oil shale for sound environmental reasons. Does that make sense? I think so.

Federal policies curbing carbon dioxide emissions will eventually take effect. It may not be this year, or the next, but it will happen. And if you care about the economy — as Samuelson does — it makes no sense to invest in exploiting a resource whose use will have to be curtailed.

I guess Samuelson thinks it makes sense to go ahead with an investment that has no future. Hey, I’m just a scientist, but that seems like poor economic policy to me.