Entries Tagged as 'oil'

Escaping the Oil Market is a Pipe Dream

December 1st, 2011 at 5:54 pm 29 Comments

We’re not back to the energy glory days, when oceans of east Texas crude fueled the ships, aircraft, and tanks on which the Allies rode to victory in World War II.

U.S. imports of crude oil and petroleum products, however, have dropped a hair below 50 percent. And on Tuesday, the Wall Street Journal reported that the U.S. is exporting more refined petroleum products than it imports, the first time we’ve been in the black with refined fuels since the Truman administration.

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Killing Keystone Won’t Reduce Oil Use

David Frum November 12th, 2011 at 8:38 am 208 Comments

In my column for the National Post I explain why ending the Keystone XL pipeline won’t reduce the amount of oil people consume:

The true locus of opposition to the pipeline is not Nebraska, but California, where big liberal environmentalist donors have seized on the pipeline as a talismanic cause. These California environmentalists do not want to redirect the pipeline. They want to stop it altogether, so as to leverage an end to further Canadian oilsands development.

What will curtailing oilsands accomplish for the environment? Nothing. This is a big planet full of oil, and if the United States does not buy its oil from Canada, it will buy its oil from somebody else.

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Energy Victory

David Frum September 1st, 2011 at 12:21 am 42 Comments

In my column for The Week, I discuss how America will truly achieve energy independence:

Jon Huntsman unveiled his economic program Wednesday. At the center is a commitment to U.S. energy independence.

Yeah, I know, you’ve heard it before. Perhaps you saw the Jon Stewart bit where he edits together every U.S. president since Richard Nixon saying the same thing.

But the real news about energy independence is that the U.S. has in fact made great progress since the 1970s. Through the 1980s and until 1995, the United States actually burned less oil per year than it burned in the 1970s. Not until 1996 did the U.S. again consume as much oil as in 1978.

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Canada’s Oil Sands: Secret Weapon Against Terrorism

July 30th, 2011 at 6:50 am 79 Comments

Despite the debt-ceiling stalemate, some bills are being passed. On Tuesday, July 26, the House approved a measure to speed up the approval process for a Canada-U.S. oil pipeline. FrumForum recently discussed the vote with two Canadian sources who have both been active in promoting the Canadian oil industry in the U.S, and their responses highlight the variety of approaches being used to do so.
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Choosing Our Energy Priorities

David Frum June 27th, 2011 at 9:28 am 20 Comments

Human Events offers a “Top 10″ list of reasons to think that President Obama favors expensive energy.

Here’s number eight:
8.  Stifles U.S. oil drilling, while subsidizing Brazil’s: The BP oil spill prompted the President to impose a drilling moratorium in the Gulf making deepwater drilling permits impossible to obtain.  So when oil companies moved their rigs to areas off the coast of Brazil where they were welcomed, Obama offered billions in US taxpayer money to aid the venture, creating new jobs in South America.  By refusing to allow U.S. energy sources to be developed, the President is ensuring increased reliance on expensive and volatile foreign oil.

I know this point about US oil vs. Brazilian oil has become a major right-of-center talking point.

But here’s the strange thing: if what you want is cheap oil, you want oil neither from Brazil nor from the Gulf of Mexico. The cheapest oil in the world comes from the Middle East: Saudi Arabia, Kuwait, and so on.

And as between Gulf of Mexico oil and Brazilian oil, Brazilian oil is the cheaper (but not cheap) alternative.

Human Events lambastes the Obama administration for delaying approval of a second pipeline to Canada’s oil sands. (That’s proof number nine.) But Canadian oil sands oil costs even more to produce than Brazil’s offshore oil.

The Human Events list nicely illustrates why US energy policy is such a mess. There are three different things we can want from energy policy, but we can achieve (at most) two at the same time.

We can have energy that is cheap: electricity from coal, oil from the Middle East. But cheap oil is not secure, and cheap electricity is not clean.

We can have energy that is secure: oil from North America and other politically reliable producers. But secure oil costs more than Middle Eastern oil.

Or we can energy that is clean: electricity from nuclear power or renewable sources; alternative sources of motor fuel. But those sources are not cheap. Electricity from solar sources costs between five and 10 times as much as coal-fired electricity.

So we have to make choices.

Choice-making begins with realistic understanding of the trade-offs. Green energy advocates want to conceal how very expensive their preferred policy will be. They talk about creating “green jobs” to distract attention from the impact of expensive energy on everybody else’s jobs.

But advocates of drilling in US coastal waters can be equally misleading, when they suggest we can lower prices by drilling more at home. The marginal cost of US oil greatly exceeds the marginal cost of Middle Eastern oil. We can enhance security by diversifying sources of supply, agreed. But there is only one world price, and that price is set in global markets in which the US will never again be the marginal supplier. Which means that the familiar formula “drill here, drill now” is not a formula to “pay less.”

It’s a good discipline for all of us to be explicit about rank-ordering our energy preferences. I’d say: security first, cleanliness second, cheapness third.

Which is why I favor intensifying US-Canada energy cooperation and shifting from coal-fired to nuclear-generated electricity. Carbon taxes would be a good mechanism to facilitate this shift.

Maybe you have a different rank ordering? Perhaps (as is implicitly the case for Human Events), cheapness first, security second, cleanliness third?

OK then. You’ll want to maximize imports of Middle Eastern oil, ignore nuclear power, and forget about the Gulf of Mexico.

Whatever your rank ordering, unless you think clearly about what you wish to achieve, you are very unlikely to achieve it.

Don’t Blame the Fed for Oil Price Spikes

June 8th, 2011 at 10:26 pm 24 Comments

Congressional Republicans are having difficulty keeping their stories straight when inventing politicized explanations for high oil prices.

When they are not complaining that insufficient domestic production is the cause of high prices, they’re busy blaming the Federal Reserve for pain at the pump.

Ben Bernanke is too free and easy with the money supply, they argue, driving down the value of the dollar and consequently putting upward pressure on the price of oil.

At a Tuesday speech to the International Monetary Conference in Atlanta, Bernanke – in his measured, academic, and carefully non-partisan way – essentially told congressional Republicans that their dollar-price hypothesis is little more than the product of vivid imaginations. As if he were back at Princeton instructing a group of Econ 101 neophytes, Bernanke delivered a lecture that was as subtle as fingernails on the chalkboard.

“Some have argued that accommodative U.S. monetary policy has driven down the foreign exchange value of the dollar, thereby boosting the dollar price of commodities. Indeed, since February 2009, the trade-weighted dollar has fallen by about 15 percent. However, since February 2009, oil prices have risen 160 percent and nonfuel commodity prices are up by about 80 percent, implying that the dollar’s decline can explain, at most, only a small part of the rise in oil and other commodity prices; indeed, commodity prices have risen dramatically when measured in terms of any of the world’s major currencies, not just the dollar. But even this calculation overstates the role of monetary policy, as many factors other than monetary policy affect the value of the dollar.”

Both Bernanke and the International Energy Agency have attributed the run-up in oil prices to market fundamentals – worldwide supply and demand. Bernanke further said that his critics have their cause-and-effect argument backwards.

“As the United States is a major oil importer, any geopolitical or other shock that increases the global price of oil will worsen our trade balance and economic outlook, which tends to depress the dollar. The direction of causality runs from commodity prices to the dollar rather than the other way around.”

Which underscores the fundamental problem – heavy dependence on a commodity traded in a global market that is significantly influenced by dodgy petro-regimes. Lawmakers should adopt an energy policy that begins lowering our addiction to the sauce, not waste time on distractions that won’t.

Can the GOP Break Its Oil Addiction?

April 29th, 2011 at 11:44 pm 50 Comments

The problem with intellectual inconsistency is that it usually comes back to bite you. The House Republican leadership is getting a painful lesson in this regard because of their longstanding support for subsidizing the oil industry.

This largess—billions of dollars in special tax breaks and subsidies—has suddenly become a liability for a party that has made fiscal responsibility the centerpiece of its policy agenda.

The first sign of trouble came courtesy of a recent ABC news interview with House Speaker John Boehner (R-OH). Put on the spot, Boehner had trouble defending the oil subsidies saying “I don’t think the big oil companies need to have the oil depletion allowances…We need to control spending…And they ought to be paying their fair share.”

It was a good response for someone properly focused on getting spending under control. Unfortunately, the Speaker started backtracking from the statement as soon as he remembered that the President and other Democrats support ending these subsidies.

As Boehner was backtracking and Republicans were circling the wagons in defense of oil subsidies, Exxon and Shell reported huge quarterly profits that were up over 60 percent from the same period last year. Exxon reported $10.6 billion in profits for the quarter and Shell reported $8.78 billion.

In light of those profits, the GOP mantra that removing the subsidies and special breaks would result in a higher price at the pump sounds more like the utterings of a blackmail victim than it does lawmakers focused on sound public policy.

As Boehner and company were probably hoping the issue would go away, news surfaced that House Budget Committee Chairman Paul Ryan (R-WI) had expressed support for ending oil subsidies at a recent town hall meeting. When asked about oil industry tax breaks Ryan said:

We’re talking about reforming the safety net, the welfare system. We also want to get rid of corporate welfare. And corporate welfare goes to agribusiness companies, to energy companies, financial services companies. So we propose to repeal all of that.

It will be interesting to see if Republicans can be persuaded to go along with such a proposal—particularly in light of the campaign cash oil interests ply them with and the insistence by libertarian radicals like Grover Norquist that ending any tax break, regardless if it has outlived its original purpose, amounts to a tax increase.

For anyone who is truly in favor of the free market and fiscal responsibility, special corporate tax breaks and subsidies should not be the norm, nor should they be championed as the functional equivalent of lower across the board tax rates.

Special corporate subsidies and tax breaks, to the extent that they are used at all, should be temporary and targeted towards a very specific policy goal that is in the nation’s long-term interest—such as giving breaks to jumpstart renewable energy and new technologies, or encourage energy conservation.

If Republicans can garner the courage to make a clean break from their habit of subsidizing oil companies, they will not only strike a blow for intellectual consistency, but they will be helping our nation to break its oil addiction and give cleaner, more domestically available, alternative fuels a fair chance to compete in the market place.

If not, its special interest driven contortions will repel voters—just as they did in 2006.


Fed Turns a Blind Eye to Energy Inflation

April 29th, 2011 at 12:23 pm 24 Comments

When New York Fed chairman and QE2 cheerleader William Dudley recently offered the fact that an iPad 2 is the same price as an iPad but with many more bells and whistles as an illustration that inflation is indeed tame, someone fired back the obvious: “I can’t eat an iPad.”

David Frum asks why, if inflation is such a real looming issue, are investors putting their money in China?  But I think his very definition of “inflation” is off.  Inflation is not caused by rising prices per se, rather rising prices are caused by inflation which is the decreased purchasing power of one’s currency. There is no better way to devalue a dollar than for the Fed to expand its balance sheet, which it has done at heretofore unheard of levels in an effort to: a) prevent deflation (done, but never necessary); b) promote price stability (fail); c) increase employment (fail).

Without recognizing the contradiction of his own previous arguments that commodities price increases are not inflation, Frum poses the following:  “China is in the grip of actual, current, existing inflation. Not inflation fears. Inflation. Prices of basic items like milk rising by 25%, apartments soaring to unprecedented multiples of annual household income, etc. Yet there seems no reluctance to invest in China. Why not?”

One answer can be found in how the Chinese measure inflation in the first place.  The inflation that Frum is talking about in China is based on a measure that includes a healthy weighting of food and energy in their calculations.  The Chinese do not look solely at “core inflation” as the Fed does when deciding monetary policy.    Frum in fact cites food rises such as: “prices of basic items like milk rising by 25%” as evidence of Chinese inflation.  Yet for some reason these same measures are irrelevant when mentioning US inflation… why again?  Because the Fed says so?  (Keep in mind that same Fed also offered in May 2007: “we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.”  But I digress.)    One can have the discussion as to whether or not core inflation is valid as a measure of real costs to consumers, but you cannot compare one economy to another while applying a different general CPI formula to each and then make your case accordingly.

Until the Boskin concept of weighted measures of prices for the CPI surfaced in the early 1990s, the CPI was measured using the costs of a fixed basket of goods, a fairly simple and straightforward concept. The identical basket of goods would be priced at prevailing market costs for each period, and the period-to-period change in the cost of that market basket represented the rate of inflation in terms of maintaining a constant standard of living.  Over a period of several years though, straight arithmetic weighting of the CPI components was shifted to a geometric weighting.  The benefit of a geometric weighting was that it automatically gave a lower weighting to CPI components that were rising in price, and a higher weighting to those items dropping in price.  Obviously then stripping out food and fuel completely to create “core CPI” only adds to the muting effect it will have on measuring real inflation.

Once the system had been shifted to geometric weighting, the net effect was to reduce reported CPI on an annual, or year-over-year basis, by 2.7% from what it would have been based on the traditional weighting methodology.

The point being, if we are going to talk about Chinese inflation being high while US inflation remains low (and yet paradoxically the Renminbi’s value against the dollar has risen) I think it behooves us to first use the same measures of CPI for each economy and then go from there.  When you do that, suddenly the Red Dragon—with its economy poised to be the world’s largest by decade’s end and a discipline that comes from being unbeholden to a failing/collapsing welfare ponzi state,  allowing it effectively tackle its
M2 surge—looks much more appealing than does the sick, heavily debt-laden, service-based, entitled and politically feckless eagle.

In fact, some argue that if the United States measured its inflation using pre-1980s methodologies it would be closer to 10%.  This figure anecdotally equates with what the average American is feeling when they go about their daily lives as well.  As anyone familiar with William of Occam will attest, sometimes the simplest answers are the correct ones.

I remind Frum that food and energy were at the forefront of Reagan’s inflation fears when he took office in 1980.  I also remind him that Social Security and other retirement benefits’ cost of living increases are pegged to the CPI as currently measured and as such there is a very powerful incentive, one could even argue sinister motivation given the social compact of the program, for the Federal government to understate inflation.  I ask any Social Security recipients reading this: have your increases kept up with your cost of living?  I didn’t think so.  In my humble opinion, you are being skinned.  Some call this conspiracy theory.  I just call it a logical conclusion.  This is a discussion for another day however.

Inflation across the globe is now on the rise, from Germany to Brazil to Vietnam and is spilling into US markets beyond food and energy.  We just renewed our healthcare plan here to the tune of a 16% annual increase in premiums.  Wal-Mart CEO Bill Simon warned last month: “We’re seeing cost increases starting to come through at a pretty rapid rate.” As of two days ago, consumer products giant Kimberly Clark announced that it is increasing the cost of its Huggies and Kleenex brand and other products 5%, citing lower earnings due to higher costs of raw materials.  I suppose these will be the next products stripped out of any inflation discussions we have going forward, just to keep things clean… and that includes the Fed’s hands and those of administration academics who have supported its policies.


Don’t Bank Our Future on Oil We May Not Have

April 5th, 2011 at 8:02 am 13 Comments

Over the weekend, salve I noticed that an op-ed in Investor’s Business Daily took me to task for citing “proven” oil reserves in my FrumForum post, The GOP’s Oil Drilling Pipe Dream.

The author, an economics professor at George Mason University (GMU) named Donald Boudreaux, makes the case that government estimates of “proven” or “proved” reserves are irrelevant because the estimates of “unproven” reserves are so much higher.

Different agencies and groups have slightly varying definitions of “proved” reserves, but the Central Intelligence Agency (CIA) sums it up nicely:

Proved reserves are those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with a high degree of confidence to be commercially recoverable from a given date forward, from known reservoirs and under current economic conditions.

Estimates of “unproven” reserves mostly refer to “undiscovered, technically recoverable oil.” In other words, oil that geologists estimate might be in the ground and recoverable using existing or reasonably foreseeable technology. Such estimates are intriguing, but too speculative to take to the bank. They do not take into account the quality of the oil that might be there or the economic profitability of production.

Such numbers can change as we learn more. For example, while the United States Geological Survey (USGS) has dramatically increased its mean estimate of undiscovered, technically recoverable oil in North Dakota and Montana’s Bakken Formation from 151 million barrels to 3.65 billion barrels, the same agency recently revised comparable estimates for the National Petroleum Reserve-Alaska (NPRA) downward from 10.6 billion barrels to 896 million barrels—roughly 10 percent of its 2002 estimate.

Considering that the U.S. currently consumes roughly 7 billion barrels of oil per year, the notion that we can bank our energy future on unproven reserve estimates represents little more than an imprudent roll of the dice.

Then, of course, there is economics. A significant fraction of undiscovered oil reserves, assuming that they really exist, are in remote locations and consist of heavy oil, both of which are not profitable to produce if prices are low. How high does the price of a barrel of oil need to be before this oil could be economically produced? Is it $100 per barrel? $150 per barrel? We are not talking about cheap or easy oil.

Cheap and easy oil, to the extent that it remains, is mostly located outside of the United States.

Anyone who claims that unproven reserves are the answer to high gas prices is either uninformed or trying to hoodwink the public.

Mr. Bourdreaux, echoing a common refrain of petro-peddlers like Sarah Palin and Congressman Joe Barton (R-TX), contends that government restrictions are the only thing preventing our nation from producing all of the oil we could ever need.

It is a claim driven far more by special interests and political agendas than by anything approximating reality.

Unproven reserves are just that, unproven.

While the amount of proven reserves will fluctuate based on the price of oil, new discoveries, and technological advancements, the current proven reserves estimates remain the most prudent guide for making decisions about our energy future—along with the knowledge that oil is a finite resource.

In addition to being more certain, proven reserve numbers exist for all of the major oil producing countries.  We can see how we compare with other nations and better assess our economic and strategic vulnerabilities. That is not the case for unproven reserves.

In making policy decisions, we must evaluate  the risks of perpetuating dependence on oil and exposing our economy and security to price spikes and supply uncertainties caused by events over which we have little control.

Mr. Bourdreaux teaches at GMU, whose team nickname is the Patriots. I think that true patriotism requires us to pin our country’s energy future on something more reliable than unproven reserves.


Obama Energy Plan Won’t End Our Oil Addiction

March 31st, 2011 at 11:55 pm 55 Comments

Cutting oil imports by one-third, as President Obama proposed, is a fine goal. The biggest energy security problem we face, however, is not dependence on imported oil. It’s dependence on oil, period.

Oil dependence is a strategic liability because oil is traded in a globally integrated market, where events over which the U.S. has little or no control – rising demand in Asia, civil commotion in dysfunctional petro-states – can roil the market and drive up prices.

Sure, we could import more oil from those nice Canadians and hand over our public lands and territorial seas to oil producers. For anyone who believes Doc Hastings’ rhetoric that doing so would translate automatically into lower gasoline prices and less vulnerability to OPEC machinations, we’d be happy to mail you a prospectus about buying Brooklyn Bridge time shares.

The problem is that the U.S. is not an island unto itself. Oil produced here would enter a global pool for purposes of price setting. Further, we consume 25 percent of global production – which is three times what we produce – and hold only a 2 percent share of global reserves. U.S. dependence on the world market wouldn’t go away even if Congress acceded to every item on the American Petroleum Institute’s wish list.

In the years ahead, as a 2010 research brief from Resources for the Future pointed out, the oil market will be influenced by trends with worrisome implications for energy security – rising energy demand in Asia, more production from OPEC, more control over oil by national oil companies serving political as well as economic agendas, and longer, more vulnerable supply lines bringing in oil from costly, difficult production areas in the remote Arctic and in deepwater.

In March 17 testimony before the House Natural Resources Committee, Energy Information Administration chief Richard Newell tried to insert a few facts through the ideological filters that most members of that committee have stuffed into their ears.

“Long term, we do not project additional volumes of oil that could flow from greater access to oil resources on federal lands to have a large impact on prices given the globally integrated nature of the world oil market and the more significant long-term compared to short-term responsiveness of oil demand and supply to price movements.”

There is another thing to consider, Newell told the committee. Given the outsize importance of OPEC oil in the supply-demand equation, “another key issue is how OPEC production would respond to any increase in non-OPEC supply, potentially offsetting any direct price effect.”

In other words, if the U.S. insists on speeding up depletion of its 2 percent share of global oil reserves in a vain attempt to drive down prices, the House of Saud could dial back the valves to ensure that prices stay within the Goldilocks range that serves the kingdom’s interests – not too low, so the regime has enough money to smother domestic discontent with fiscal largesse, and not too high, so that the U.S. and other addicts in the shooting gallery don’t get uppity ideas about aggressively expanding use of oil alternatives.

Getting out of the oil dependence pickle will not happen overnight, on Obama’s watch, or on that of his successor. We would start moving in the right direction, however, if Congress were less interested in partisan games and more interested in seeking out energy policy agreements that both sides could live with.

Yes, more domestic oil production without giving the store away to oil producers would help a bit, but we’ll need tighter fuel efficiency standards and adequate funding for R&D into fuel and motive technologies that could compete with oil.

Someday, Congress might be willing to have a rational discussion about a revenue-neutral carbon tax. If and when that day comes, we’ll be closer to solving the energy security riddle.