To Drill or Not to Drill... That is not the question

It is a good political ploy, since all us citizens are suffering from the high gas prices. But the real issue is whether lifting the ban on drilling will send the price down.

There is really no good justification for banning offshore drilling. The main reason for the ban was the potential for environmental damage, and this no longer holds. The oil industry's environmental offshore record is stellar, with only a few minor spills despite the recent spate of hurricanes and the resulting (often severe) damage to platforms and pipelines. Their record on land might be somewhat worse, but these issues are negotiable.

Producing more oil will certainly improve our trade balance, which is woefully in the red, and thereby weakens the dollar. But it is  doubtful that, all other factors being the same, the price will be reduced by much.

This price has been rising steadily for a decade, driven mainly by the supply-demand equation. On the supply side, oil is getting gradually harder and more expensive to get out of the ground. There is plenty of oil still to be found, but the cost of extraction projects, as well as their time-to-production, is increasing. Older fields are declining, so supply cannot grow very quickly.

On the other side of the equation, demand is rising much faster, due to accelerated industrialization in developed countries, mainly India and China. As long as China maintains its policy of 10% plus yearly GDP growth (and it shows no sign of giving it up) it will buy every barrel of oil to be found on the market. With a $1.8 trillion foreign currency reserve it will outbid and outlast all other potential buyers - including the US.

The oil market is global. Any new oil - no matter where it comes from - is simply added to the pool and is directed where the price and delivery terms are the most favorable. As long as global demand outpaces supply, the price will rise, for Americans as for everyone else (except for the consumers of the producing countries where the price of fuel is subsidized). Bringing more oil to the market - unless the quantity is truly huge - will merely slow down the rate of price increases, and that only if other producing countries do not curtail their own production to keep the price up. Since the vast majority of oil reserves are now under the direct control of national governments, such curtailment is entirely possible, if not probable.

Producing more oil within the US will thus not lower the price of gasoline, which is proportional to the price of crude. To achieve this goal a more comprehensive policy is needed.

Roughly two thirds of the US oil consumption goes to produce transportation fuel - gasoline, diesel and jet fuel (kerosene). It is the fuel, not the oil, that the consumer pays for. The key to lowering the price of fuel ("the price of gas") is to separate the domestic price of fuel from the price of oil (and do this without subsidies, which we pay for through taxes). This essentially means increasing the supply of fuel which is not made from oil. There are two ways to do this.

One involves so-called "renewable fuels", which are currently made from agricultural products. The main ones are bio-diesel and ethanol. Neither of those is currently viable without subsidies and /or mandates, which skew the law of supply and demand. But even leaving that aside, we have already seen the effects of a rising ethanol production on the price of food, which we need even more than we need transportation. Pressure is therefore already building to repeal the ethanol mandates, and it will soon become irresistible. Once the mandates and subsidies are abandoned bio-fuels (in their present form) will be reduced to niche applications.

The other alternative is synthetic fuel made from coal, of which the US has the world's largest and most accessible reserves. The production technology is well-developed and has been tested on an industrial scale. It is competitive with oil beyond $60/barrel, and is currently being embraced by a number of countries (including, you guessed it, China). It should be seriously considered by anyone who is truly seeking the US national interest in the energy area.

 http://voyons-potsdemiel.blogspot.com 

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