Obama’s New Position: Sure, Let’s Drill. Why Not?
By Jimmie on Aug 1, 2008 in The Obamessiah, Thinking About Energy
If offshore drilling would provide short-term relief at the pump or a long-term strategy for energy independence, it would be worthy of our consideration, regardless of the risks. But most experts, even within the Bush Administration, concede it would do neither. It would merely prolong the failed energy policies we have seen from Washington for thirty years.
You know what’s coming, don’t you?
Barack Obama, today:
ORLANDO, Florida (Reuters) – Democratic presidential candidate Barack Obama said on Friday he would back limited offshore drilling as part of a broader energy package that attempted to bring down gas prices and reduce U.S. dependence on foreign oil.
Obama dropped his blanket opposition to any expansion of offshore drilling and signaled support for a bipartisan compromise in Congress aimed at breaking a deadlock on energy that includes limited drilling.
“My interest is in making sure we’ve got the kind of comprehensive energy policy that can bring down gas prices,” Obama said in an interview with The Palm Beach Post during a tour of Florida.
“If, in order to get that passed, we have to compromise in terms of a careful, well thought-out drilling strategy that was carefully circumscribed to avoid significant environmental damage — I don’t want to be so rigid that we can’t get something done,” Obama told the newspaper.
Let’s call that one Flip Flop Number 12. Two weeks ago, he was adamantly opposed to any sort of drilling anywhere. The word “failed” is about as firm a word of opposition as you can use.
This has The Anchoress wondering what happened: “I’m all for politicians changing their opinions when facts change. But what is the fact that has changed, exactly, between yesterday and today?” She says that it’s brand new, compromise-minded “Gang of 10″. It could also be, as she notes, he saw that the Republicans were headed to the mattresses on drilling and decided to toss Nancy Pelosi into the crowded undercarriage of his bus. .
We could bet the long shot and say that saw how utterly wrong he was. Ha, ha. Okay…that was just silly.
If I had to lay money on a reason, I’d say he reversed his field because he saw the poll numbers out of California. For the first time ever, most Californians favor offshore drillinga change of ten percent (!) over a year ago. When the assorted enviro-nuts in California, who can’t manage to build a new power plant even though they are heading toward being 2000 megawatts short of demand, are finding themselves in a shrinking minority, you know you’ve camped out on bad ground.
It’s nice to see the Obamessiah come over to the sensible side of the energy debate. It’s interesting that in just a couple sentences, he summed up almost exactly what the Republicans in Congress have been trying to do for two months. Ah, well. No matter how he got there, it’s nice to see him join up.
Stumble it!
As an Exxon-Mobil shareholder, I applaud Obama’s move. As someone who uses no oil, I’m not at all concerned that the move will not increase the world’s oil supply. And as an environmentalist, I’m not concerned at t possible pollution because there will be no new oil exploration for at least a decade. Note that I’m not talking no new production, I’m saying there won’t even be any exploratory drilling. The oil companies aren’t doing exploration on the offshore leases they have, and they won’t explore the new leases either.
The problem is simple: there aren’t enough drilling ships in the world to explore the existing leases, much less any new ones. And it’s not like the shipbuilders are slacking. Production of drilling ships has increased by more than a factor of ten in the last three years. And there still aren’t enough drilling ships. And there won’t be for at least another five years. And if we try to further increase exploration, that drilling ship backlog will only get longer. The only way we could possibly do exploratory drilling on the soon-to-opened reserves is if we halt drilling somewhere else, pull up all the drill pipe, move the ships to the new locations, and then start drilling again. Ironically, this will significantly reduce the supply of oil because we will have to take the drilling infrastructure off-line for a few months to move the rigs. But oil companies aren’t that stupid, so they’ll continue to drill where they are already drilling and let the new leases go unused until the necessary infrastructure is freed up by wells going off line. Bottom line: no new oil exploration for another decade.
Of course, there is the “magic pixie dust” theory. This states that new legislation will create a huge cloud of magic pixie dust that will settle onto the oceans. Wherever the pixie dust lands, drilling ships will magically appear and immediately strike oil. While most Americans actually believe this theory, people in the oil industry scoffs at it. They know that the cost of drilling ships has tripled in the past three years because ships must be built in places like China and Korea, they don’t just magically appear.
So why does the oil industry want this legislation if it will produce no new oil? The answer lies in the corporate balance sheet. Oil leases are sold at less than 1% of their value. For every dollar an oil company spends on leases, they add more than a hundred dollars to their assets. These assets can then be used as leverage to buy back their own stock, which is a better investment than oil exploration. It is also the only investment they really can make because there aren’t any drilling ships available no matter what price they’re willing to pay.
The fact is the only value that opening up new leases has is to use it to bribe Republican politicians into lifting their opposition to funding for alternative energy. That’s what the new “Gang of Ten” plan offers, and that’s why Obama is signing on to it. Alternative energy and conservation are the only real paths to energy independence. We will not become independent by increasing the world’s oil supply by 2%. And opening up new offshore leases won’t even do that because the infrastructure just isn’t there.
But I must say, Jimmie, that I’m touched by your desire to make me richer without improving you own situation at all. That’s very altruistic of you and I appreciate it. Now, if we can just get that war with Iran started, I’ll be able to retire on my profits from oil stocks.
fostert | Aug 2, 2008 | Reply
That’s an interesting point, but it doesn’t appear to be true. The Swedes seem to be able to find a drilling rig sufficient to get into the Caspian Sea right now. As I wrote last month, the Swedes found a quite large deposit in June and they expect to be pulling oil from the find in either September or October (I don’t recall exactly which) of this year. I don’t expect that it’s the only drilling rig available in the whole world. They’re not the only ones aggressively looking for oil (take, say, the Chinese off the coast of Florida or the other nations in the same general location) which tells me that they don’t expect to sit on their finds for a decade until the ships come available.
But even if your statement was true, it would be mostly irrelevant in the short-term. Again, as I wrote last month, we’re looking at somewhere around 10 billion barrels of oil in shallow waters off the California coast where we already have rigs in place. So whether or not we can get new ones, we have them there right now and the estimate is that we could be pulling oil from there inside of a year.
I understand that the anti-drilling, “turn back the clock to horse and buggy” crew worked hard on their talking points, but they certainly didn’t work hard enough. I’ve heard the same arguments for two months now, at least. They’re still incorrect and/or not applicable.
Jimmie | Aug 3, 2008 | Reply
Umm, that Caspian Sea oil discovery was made by drilling a test well. Had the drilling ship that discovered the reserves been working off the US coast instead, the discovery would not have been made. This is a situation where it was a good thing we (’we’ being the entire world) didn’t allow exploration in the 50-150 mile range. I we had allowed it, Exxon-Mobil would have outbid Lundin for the drilling services (they have a lot more money than Lundin and will receive subsidies for their exploration efforts) and they would have discovered a much smaller patch of oil. And the Lundin find would have had to wait. The net result: a reduction in the world’s oil supply. The simple fact is that it makes sense to explore for oil where the oil reserves are large and densely packed, like the Caspian Sea. It makes much less sense to explore where the oil is spotty and distributed over a very large area, like the US.
What’s important to understand here is that I’m talking about drilling SHIPS, not drilling PLATFORMS. Before an oil company sets up a permanent drilling platform, they drill test wells to get a good understanding of the geology. Those test wells are done by the cheaper and more flexible drilling ships. And it is the drilling ships that are the bottleneck in the system. The only way around the bottleneck is to guess where the oil is, and there’s no oil company in the world willing to do that.
In order to get to the 18 billion barrels located in the 50-150 mile zone, test wells will have to be drilled. We know those wells haven’t been drilled already because there is a moratorium on such drilling. And there are no unused drilling ships floating around. They are all being used somewhere. And they are being used in promising locations with high density reserves like the Caspian Sea (60 billion barrels) and Brazil (30 billion barrels), rather than in the US with it’s 85 billion barrels spread across thousands of miles of coastline.
As for California, the entire OCS (not just the areas that are closed off now) of California contains 10 billion barrels (Bush administration estimate), but most of that is already leased and not being drilled. The new leases are in the 50-150 mile range, where drilling has been banned for 40 years. There are no drilling SHIPS there because the oil industry doesn’t just leave ships floating around for no good reason. The only PLATFORMS in this region are more than 40 years old and it is questionable that they could be used as a base for future operations (they were abandoned and are probably really rusty right now). There is also the issue that only a small portion of oil in the 50-150 mile range is already discovered, the rest is just estimates based on seismic studies. Even if the old platforms can be used and there is oil near them, we still have to drill test wells to find the oil. And we aren’t going to use horizontal drilling from antique platforms to drill test wells. We need ships, and we don’t have them.
So what’s the impact of drilling for an extra 2-4 billion barrels of oil off California in a world with a trillion barrels of oil reserves? Not much. How about we instead drill the 10 billion in the Caspian Sea or the 30 billion in Brazil?
For the record, I oppose drilling only for national security reasons. I think we would be more secure by drilling other countries’ oil first while preserving our own reserves. As the oil market tightens up, the oil reserves off our coast will become much more valuable. And given that the best oil reserves are currently in other countries, we should drill there first. The Republican plan is the opposite. The Republicans say we should use up all of our own oil when oil is still cheap, and then we should fight wars to gain access to foreign oil once we’ve used up our oil.
So one final question: You seem to have some unique knowledge of the location of drilling ships that are unknown to the oil industry. Care to enlighten us as to where these drilling ships are?
fostert | Aug 4, 2008 | Reply
Tom, a couple notes.
First, the oil in the shallow water off of California has already been explored. We know where it is and could drill for it right away with the equipment that is already there. Yes, the equipment is old, but it would take very little time to bring it up to speed as soon as the moratorium was lifted. Like I said, within a year. No drilling ships needed there. No drilling ships needed in ANWR either, which is not exactly a tiny deposit. It’s certainly larger than the amount the Democrats want to release from the Strategic Reserve, which they say will reduce gas prices by more than 40 cents a gallon.
Second, let’s assume that we can’t get any new drilling ships until 2012, four years from now. The sheer fact that we are doing that would put a lot of downward pressure on the price of oil in the futures market, which would drive down the price right now. The likelihood of increased supply is a considerable factor on today’s prices. Give people reason to believe there will be more and the prices will drop as they did just a couple days after the President lifted his ban.
The Caspian find wasn’t the result of a test well. They haven’t drilled that well yet. It was just an exploratory well. As for the rest of your strategy, I disagree strongly with your analysis. It’s clear that spending billions of dollars on foreign oil is not a boon to our national security.
Jimmie | Aug 4, 2008 | Reply
“First, the oil in the shallow water off of California has already been explored.”
Only the areas near existing platforms have been explored, which is far less than the 10 billion barrels you falsely claimed. I doubt it’s even 1 billion barrels, but even that would only represent 0.1% of total supply. It doesn’t even come close to the effect of conservation efforts that could be accomplished this week. We could reduce oil consumption in the US by 1% in a week with cooperation from the public. Yet the Republicans ridicule and block any attempts to reduce demand.
“The Caspian find wasn’t the result of a test well. They haven’t drilled that well yet. It was just an exploratory well.”
That’s largely a semantic difference. Regardless, they would not have been able to drill the ‘exploratory’ well if the drilling ship were wasting its time exploring the Atlantic Coast instead of the Caspian Sea. The point here is that we should be going after oil where it’s plentiful rather than where it’s hardly even profitable to recover. And we know that at least 68 billion barrels of OCS oil are not economically recoverable now (compared to Caspian oil) or the oil companies would be trying to recover it. They’re not, which speaks volumes.
“Give people reason to believe there will be more and the prices will drop as they did just a couple days after the President lifted his ban. ”
How does Bush’s change have any effect? The congressional ban is still in place. The only real change in policy was SEC’s change in rules for oil speculation, which happened around the same time. Another thing that happened around that time was Saudia Arabia’s production increase, which was equal to 75% of theoretical production of the entire OCS at full capacity. And we stopped filling the Strategic Petroleum Reserve about the same time (it had reached full capacity). And, of course, any time the price of anything rises, it always overshoots the natural price and then drops back down. That the normal rules of price fluctuations apply to oil should not surprise us. There is also the issue that demand for oil dropped 3% compared to last year due to voluntary conservation efforts spurred by high prices. Yet you ignore all these factors and give credit only to Bush’s meaningless action.
“It’s clear that spending billions of dollars on foreign oil is not a boon to our national security”
True, which is why demand reduction would be a really good idea. According to the Bush administration’s own predictions, the entire OCS would produce 200,000 barrels per day, while the US consumes 20 million barrels per day. So we could, in theory, reduce our payments to foreign countries by about 1.6%. That assumes that NO foreign oil companies get any of the offshore leases. In reality, BP and Shell will be major bidders and we will send their profits overseas. In the end, this oil really won’t make a big difference in in foreign payments. And it won’t make any difference at all if Saudi Arabia decides to cut production and drive prices up by 2%, which they can easily do and have done in the past. Face it, we’re too small a player on the supply side to have any real effect on the oil market. We are, however, the world’s largest player on the demand side. We can have a huge effect on the markets by reducing demand. So it makes sense to take action where we can have a real effect. This is why the Democrats are pushing demand reduction efforts like fuel efficiency standards, tax breaks for alternative energy development, and expansion of mass transit. And it is precisely why Republicans are so adamantly opposed to any demand reduction. They don’t want oil prices to go down. They want oil profits as high as possible to get the maximum campaign donations from the oil industry.
But the point about energy security was really about current and future markets. The current market is an open and global market, and it is actually unusual in the history of oil. Already, China is sidestepping the open market and locking in access to oil through the more traditional bilateral agreements. This trend will continue as oil becomes more scarce. In an open market, it doesn’t matter where our oil comes from because the price is the same for every buyer and every seller. The open market is the most efficient market system and results in the lowest prices. So we should take advantage of it while it still exists and buy foreign oil. As the markets become more closed, countries like Iran and Venezuela will charge the US more than they charge other countries if they can. And it will be much harder for them to overcharge us if we still have our own oil. Which is why it would be worth making sure we still have our own oil when the open market ceases to exist. The idea that we should use up all of our oil when oil is cheap and easily accessible and then buy foreign oil when it is expensive and rare doesn’t make any sense from a long term strategic standpoint.
As for ANWR, that isn’t really the subject, but I’ll discuss it anyway. It’s still a drop in the bucket in supply terms, so it won’t have much effect on prices. It certainly won’t have nearly the effect of the recent Brazilian discovery. But that oil will be drilled at some point, the question is when. I shifted my position on ANWR drilling last week from “mildly oppose on national security grounds” to “mildly support due to Global Warming.” It’s an ironic switch, I know, but there is a reason and it’s called the Alaska Pipeline. The pipeline is deteriorating rapidly due to melting permafrost and it’s really unclear long long it can survive. So, a good case can be made that we need to get the oil out before the pipeline becomes unusable. The negative environmental effects of drilling are far outweighed by the negative environmental effects of shipping oil instead of piping it.
Regardless, I’m open to all of these drilling options so long as the Republicans are willing to drop their opposition to conservation and alternative energy. If more drilling is the bribe it takes, I’m willing to pay the bribe.
fostert | Aug 5, 2008 | Reply