Drilling holes in drilling
The summer round in the energy policy war is over, and the oil industry seems to have won. Public opinion and both presidential candidates have now fallen in line behind the industry’s “drill everywhere” agenda. Congress has stalemated over every attempt to roll back the industry’s rich tax subsidies ($23 billion over the five years ending 2010, according to a recent Taxpayers for Common Sense analysis).
The six major international oil companies just chalked up $51.5 billion in quarterly profits — a record of immense proportions in business history. The majors already have so much available capital that they have been able to fund all economically justifiable expansions in exploration and production and still give back 55 percent of their 2007 profits to stockholders in the form of dividends and stock buybacks.
Taxpayer-funded oil industry subsidies are delivering no benefits to consumers. They are increasing stockholder returns and not increasing production. Oil prices will need to rise still higher before the majors will commit more capital to the increasingly risky and costly projects large enough to alter the world supply-demand balance.
To measure the potential efficacy of the “drill everywhere” fix, we can look at the oil industry’s own business decisions over the past few years. Since 1999, the Bureau of Land Management has more than doubled the number of drilling permits issued annually. While drilling has increased, oil producers have not kept pace with the new opportunities, stockpiling more than 10,000 unused drilling permits over the past four years alone. Offshore, only a quarter of leased acres are in current production.
Meanwhile, domestic oil production has declined every single year since 1991.
If we were to open drilling everywhere — in the Arctic National Wildlife Refuge, off the Atlantic and Pacific coasts, and in all the Rocky Mountain states — consumers would see no meaningful impact on prices or production for 10 years, according the U.S. Department of Energy. At peak production in 2025, the price of a gallon of gasoline would decline by only 4 to 5 cents.
Drilling everywhere would still leave the United States with only 3 percent of the world’s oil reserves, domestic production in continuing decline, importing at least 60 percent of the oil we use, still hostage to world supply/demand factors, and still paying world market prices for American oil.
Nor will non-conventional petroleum resources bail us out. DOE projects that coal-to-liquids and Canadian oil sands will have no more than a marginal impact on world petroleum supplies.
The underlying problem is that the oil majors no longer dominate world oil resources. According to industry consultant PFC Energy, in the 1960s the majors owned or had access to 85 percent of world reserves. Today that number is under 16 percent. Where the oil majors’ motivation is to maximize cost-efficient production, most world oil resources are now in the hands of players whose strategies are often political.
Even flush with profits, capital and domestic drilling opportunities, the majors are shut off from most of the world’s oil resources and can no longer replace their own reserves.
Worldwide production of oil liquids — for the first time in modern history — has been flat at 85 million barrels per day for the past three years. World oil discoveries (as measured in barrels of reserves) peaked in the 1960s, and have been on a consistent downhill slide every decade since, with this decade on track for total discoveries at one-fifth 1960s levels.
Instead of flogging a dying energy horse with more taxpayer subsidies, we need a new energy future, one in which energy use does not cause dangerous climate change, where we can grow energy jobs in America and in New Hampshire, where supplies are inexhaustible, and where energy prices are on a declining cost curve. Wind, solar, wood, geothermal and waste reduction all fit the bill for New Hampshire.
Almost 10 percent of New Hampshire’s economy is now consumed on fossil fuels imported from other states and nations. We are bleeding jobs and income on oil dependency. The U.S. Senate should promptly terminate wasteful corporate welfare for the oil industry, and reallocate energy tax breaks to accelerate development of clean alternatives and more energy efficient cars and buildings.
Jim Rubens is a venture investor from Hanover.