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Page added on September 30, 2014

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Sustaining oil boom a logical step

Production

One of the economy’s good-news stories is the oil boom, a derivative of the natural gas boom. When the drilling techniques used to tap vast new reservoirs of natural gas were applied to oil, they yielded similarly astounding results. Since 2008, U.S. oil production has increased from 5 million barrels a day (mbd) to 8.3 mbd in 2014. The U.S. Energy Information Administration says it could go to 9.6 mbd by 2019.

By all logic, we should be working to sustain the boom. We aren’t, and therein lies a classic example of how good policy is held hostage to bad politics and public relations. What would promote continued exploration is a lifting of the current U.S. ban on exporting crude oil. Let producers sell into the world market. But that seems (wrongly) an unjustified giveaway to industry. The public perceptions are atrocious.

Hardly anyone expected the oil boom, with some notable exceptions – prominently Harold Hamm, who pioneered North Dakota’s Bakken field. “Fracking” (the injection of pressurized water into fields to make oil and natural gas flow) and “horizontal drilling” (the use of one pipe along a single oil reservoir) changed everything. Formations of “tight oil” embedded in shale or dense sandstone became economical to produce.

Benefits are huge. Surging U.S. production has created thousands of jobs, helped stabilize global oil markets and curbed our import dependence. From 2008 to 2014, net imports dropped about 50 percent.

Sure, there are concerns: Rail transport of crude oil involves safety issues; there are continuing environmental worries about fracking. Still, public gains outweigh the costs. Indeed, producers’ very success at raising oil output increasingly poses problems.

If you want companies to search for oil, you have to provide them with a viable market where they might profitably sell it. As output has increased, this has become a bigger issue. Here’s why:

The new oil consists mostly of “sweet, light” crudes, meaning they have a low sulfur content and are less dense than “sour, heavy” crudes. The trouble is that many U.S. refineries have been designed to process heavy, sour crudes and, therefore, aren’t suitable for the new oil. At the end of 2013, the United States had 115 oil refineries capable of processing about 18 mbd, according to a report from the Congressional Research Service. About half were fitted for sour and heavy crudes. That’s especially true along the Gulf of Mexico coast where more than half of U.S. refining capacity is located.

The result is that more and more new oil is chasing less and less usable refining capacity. Refineries’ bargaining power rises. Producers have to accept price discounts to sell their oil. A second problem is that much of the new production is located in North Dakota with an inadequate pipeline network to transport the crude to refineries. To offset more costly barge and rail transportation, producers (again) have to discount prices.

Some strains will be eased by refinery expansions and new pipelines. How much is unclear. But as a report from The Brookings Institution argues, producers will be discouraged by an oil market that seems rigged against them. They will react by slowing – or possibly stopping – new exploration. The oil boom will ebb or end. Global oil supplies will then be lower than they would otherwise be; prices will be higher. It’s a bad outcome for the United States but a good one for Russia, Iran and other producers hostile to us.

It’s also the logic of U.S. policy preventing producers from selling into the international market. The prohibition was included in the Energy Policy and Conservation Act of 1975 and reflected Americans’ anger over the quadrupling of oil prices in the early 1970s. If U.S. producers could instead sell abroad, they would have a vast market for their oil. Not all oil would go overseas. But the world market’s availability would, assuming no major price collapse, justify continued exploration for new supplies.

Explaining this persuasively in public is difficult, maybe impossible. It’s complicated. It requires showing why the long-run consequences of an export ban (less oil and higher prices) might be different from the short-run consequences (an artificial glut in the United States and lower American prices), which would be temporary. It’s far easier to denounce oil producers as greedy and to argue that selling American oil to foreigners is an unpatriotic act that will hurt the poor and middle class. These sound bites resonate as opposed to sleep-inducing analyses that don’t.

One task of political leadership is to bridge this divide – to find ways and words that build public understanding and support for policies requiring patience. Events are forcing the ban on crude exports onto the political agenda. The economic and strategic implications are huge. How we address them will measure our seriousness.

Robert J. Samuelson is a columnist for the Washington Post.

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6 Comments on "Sustaining oil boom a logical step"

  1. Davy on Tue, 30th Sep 2014 7:06 am 

    I am wondering where else in the great body of knowledge is the quality of journalism content so low. Is the same true of the medical field for example? I am not a medical field news reader. Is this guy a corny and want his problem and solution to be real for a topic he has little understanding of. So this is a failure of knowledge. Is the journalism establishment running low on stories so they throw a journalism nu-bee at this topic telling him to read up and give us a short article by Wednesday? Is he bought off by the establishment that is promoting oil? This guy is too knowledge shallow to be a good market distorting propaganda shrill. This guy should stick to sports. I am on the fence on these issues. I hate the public being misinformed but I feel like it is buying me time to prep also.

  2. rockman on Tue, 30th Sep 2014 7:19 am 

    “It’s far easier to denounce oil producers as greedy and to argue that selling American oil to foreigners is an unpatriotic act that will hurt the poor and middle class.” IMHO one more attempt to confuse the public about the oil export issue. The US consumer is already competing with all the other consumers on the planet for US production. But not oil production: US consumers don’t buy oil…they buy refined products. And the US exports a very significant amount of refined products. The latest estimate is the equivalent of 3 million bopd. So the question is: are the US refiners being patriotic? A trick question, of course. US refiners aren’t in the patriotism business…they are in the refining business. And since nearly all of them are public companies the SEC regulations require them to take whatever LEGAL efforts available to them to max profits for their shareholders.

    Export oil vs. export refined products? Makes little practical difference to the American consumer

  3. Davy on Tue, 30th Sep 2014 8:09 am 

    Tell me about it Rock. I purchased a Jetta TDI diesel car in 2010 to get the high mileage commute. I have a farm truck for local. I have watched the marketing of the distillates to the world market drive my diesel cost up on average $.50/gal. over gas.

  4. Apneaman on Tue, 30th Sep 2014 9:25 am 

    Sustainable boom is an oxymoron. They become more absurd as the desperation level climbs.

  5. Bob Owens on Tue, 30th Sep 2014 4:01 pm 

    Oh NO! The oil companies just aren’t getting the help they need! LOL

  6. Beery on Wed, 1st Oct 2014 5:51 am 

    “I am wondering where else in the great body of knowledge is the quality of journalism content so low. Is the same true of the medical field for example?”

    Yes, it is. This is a systemic problem with journalism today. And it’s not just journalism – the medical establishment also has a problem with using reason: that’s why we have both journalists and the WHO advocating circumcision in Africa to prevent HIV infection when the best evidence points to circumcision potentially increasing HIV transmission rates.

    The problem is that the one thing we DON’T educate kids to learn in school is critical thinking. So when they enter the adult world they are completely unprepared to separate facts from falsehoods.

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