Drill, Baby, Drill (Again)

The answer to our economic problems lies beneath our feet.

Jim Lacey
Wednesday, March 16, 2011

If a foreign power tried to dictate our energy policies to us, we would declare war. But no foreign power is to blame for our energy troubles. Rather, we’ve pointed a gun at our own head. In a case without historic parallel, the United States has opted for national suicide when the answer to many of our energy problems lies literally under our feet.

As I write this, oil prices are hovering around $100 a barrel and seem set to rise further, despite a reduction in global demand caused by the earthquake in Japan. But make no mistake about it, oil prices were going up under any circumstances. Collapsing Arab governments had brought us to the $100 threshold a few months earlier. Regardless of what happens in the Middle East, the price of oil is set to go much higher, not because we are running out of the stuff, but because we are not looking hard enough for new sources or exploiting the sources we have. By 2015, or quite possibly earlier, the world will hit a crunch where new supplies will not be coming online fast enough to meet soaring demand.

The last time demand got ahead of capacity was in 2008, when the price of a barrel of crude hit $147 and helped spark the global economic collapse that is still haunting our economy. When, as a result, the price of gasoline pushed through $4 a gallon, a single battle cry threatened to sweep all resistance before it: “Drill, Baby, Drill.”

The resistance revolved around two points. The first was that the U.S. had only 2 percent of the world’s oil reserves, so no matter how much we drilled, there was not enough oil in the country to make a difference. Second, even if we started drilling immediately, it would be years before the oil started arriving on the market. The first was and remains a lie. The second may be the dumbest argument for sitting on our hands ever created. Did anyone think that there would never again be a shortage of oil? Here we are a few years later and its déjà vu all over again.

Unless we start drilling immediately, in a few years we will look back at $100-a-barrel oil as a fond memory. Surging demand in emerging nations, a ravenous China, and the needs of hopefully growing U.S. and European economies will soon outstrip supplies. Once that happens for a prolonged period, the price of oil will not stop south of $200. Present estimates place spare oil-production capacity at approximately 4 million barrels a day (MBD), most of which is in Saudi Arabia. As demand grew at an annualized rate of 3.3 MBD last quarter, it is clear that we are almost at the end of our tether.

Even as gasoline once again pushes towards $4, the United States remains at the mercy of foreign suppliers to meet its needs. Each year we use almost 7 billion barrels of oil, of which more than half are imported. About a quarter of our imports come from the Persian Gulf. Every year we drain our economy of $350 billion to pay other nations for their oil, many of whom would welcome the demise of American power. Despite the promises of eight consecutive presidents to reduce our demand for foreign oil, we are worse off than ever.

The old rule of thumb was that for every $10 increase in the price of oil, the nation’s GDP was reduced by .02 percent. But that approximation was based on a healthy economy at or near full employment. In an economy that is still struggling to recover, an oil-price shock is likely to have more dire consequences. As unbalanced capital flows return and oil-based inflation takes hold, there is a real chance that the U.S. could slip back into recession. The resulting demand destruction will lower the price of oil for a time, but at a terrible cost. Moreover, the same roller-coaster ride will happen again and again, whenever we begin to recover economically. The only long-term solution is to find and consume our own energy reserves.

It is remarkable therefore, that we have placed our economy on a starvation diet when we live in a land of plenty. It may come as a shock to many that rather than having a mere 2 percent of global reserves, this country is energy-rich, with known reserves far exceeding those of any other nation. Many Americans already know that our proven coal reserves will hold out for another 400 years — and probably much longer. Less well known is that in recent years there has been a quiet natural-gas revolution in this country. In 2008, estimated natural-gas reserves in the U.S. were 177 trillion cubic feet (Tcf). Since then, we have produced 165 Tcf and have 245 Tcf left. This bounty is the result of new drilling techniques that have massively added to our reserves. Currently, we have approximately a century of proven gas reserves, a number sure to grow over time.

Even less well known is that the U.S. sits on at least three times as much recoverable oil as the entire Middle East. The techniques used to uncover vast new sources of natural gas, are now being transferred to the shale-oil deposits in the Midwest, where they are unlocking trillions of barrels of oil. In one 35-by-35-mile area of the Green River Basin alone, there are at least 800 billion barrels of oil that could be profitably recovered once prices reach $25 a barrel.

In a few years, improved drilling techniques may raise the estimated reserves in this single area to 1.4 trillion barrels. That is enough oil to meet all of our demands for 200 years, replace our imports for 400 years, or replace our imports from OPEC for a millennium. Even if we cut these estimates in half, this remains a pretty impressive find. Cutting the estimates in half, however, might be the wrong direction, for there is a lot more oil shale in the United States than what has been audited in the Green River Basin.

And that may be only the tip of the oil iceberg. A couple of years ago, Brazil discovered massive amounts of oil directly off its coast. The U.S. may be similarly blessed off its own coast. It is impossible to know for sure as no one is looking.

What does it take to get at this oil? Only that the government get out of the way. As the prices of oil surges, the Obama administration is doing everything possible to block further exploration of our own supplies. Overwhelmed by the environmental lobby, fearful of the great man-caused-global-warming fraud, and dedicated to the fantasy that renewables will create jobs and replace the need for carbon sources of energy, the government is preventing oil companies from doing what they do best: finding oil and sending it to consumers. Then, after making their job nearly impossible, Congress and the administration have the chutzpah to accuse these same companies of hoarding supplies to drive up the price of gasoline.

Instead of real solutions, the administration is tinkering with releasing oil from the Strategic Petroleum Reserve. Such proposals are nothing but political cover. There are about 730 million barrels in the strategic reserve, about enough to replace Saudi output for two years. After that our oil predicament returns with a vengeance. Worse, the strategic reserve will then be gone, making it impossible to respond to a true crisis, such as a Shia revolt in Saudi Arabia. Releasing oil from the strategic reserve is nothing but an excuse to continue doing nothing to solve our energy problem.

It is possible that oil prices will drop below $100 a barrel in the near future, but they will not remain there. A devastating energy crunch is on the horizon. Our global competitors are doing all they can to prepare for it. Only the U.S. is choosing to sit idle despite trillions of gallons of oil within easy reach. Maybe it takes $5 gasoline and a staggering economy to wake Congress and the administration up. It is unfortunate that a catastrophe may be required for the government to pursue the best interest of the people.