To Drill or Not to Drill, That is the Question

The debate is raging. Should the United States drill or not drill within our borders for more oil? With prices at an all time high, the answer would appear to be simple. At the energy summit, ongoing in Jiddah, Saudi Arabia, Gordon Brown, the Prime Minister of the United Kingdom asserted that the issue is about too much demand and too little supply. The U.S. Energy Secretary, Samuel Bodman, said that insufficient oil production, not financial speculation, was driving soaring crude oil prices. However, this issue is as much about ideology as it is about technology and economics. In other words, one needs to look beyond the politicians and rhetoric to understand what is going on.

Production and Consumption. Fortunately, someone has provided us with a scientific (versus political) analysis of oil production over time. In 1998, Richard C. Duncan and Walter Youngquist forecast the world peak in oil production, “which will be a turning point in human history.” Their results are presented a series of three papers (referred to by them as Issues #1, #2, #3) entitled the World Petroleum Life Cycle , which was presented to the Petroleum Technology Transfer Council. Their methodology uses historic oil production data from the top 42 oil producing countries and statistical and heuristic modeling techniques. The 1998 paper (Issue #3), predicted that the peak in world energy production would occur in 2006. Prior analyses in 1996 (Issue #1) and 1997 (Issue #3) predicted a peak in world production in 2005 and 2007, respectively. The conclusions from this study are:

- Prediction 1: “Compounding world energy demands will be increasingly industrialized nations (particularly SE Asia, China, and India) wanting more energy per capita. China, Southeast Asia, and India now with some 60% of the world’s population are getting motorized wheels. If China used oil on a per capita basis as does the United States, China alone would be responsible for approximately 14 million barrels a day more than the present world’s entire world oil production.” [emphasis mine]
- Prediction 2: “A recent analysis by the Centre for Global Energy Studies (CGES), London, using a technique called logistic curve analysis, created one scenario in which even if non-OPEC countries discovered a further 500 billion barrels of oil, non-OPEC production would peak in about 2002 at 50 million barrels per day and decline more rapidly under conventional analysis. We are in full agreement with the CGES about the nearing of the non-OPEC peak.”
- Prediction 3: “Issues #1 through #3 of the Program predicted the world peak in the tight range of 2005 to 2007. However, Issue #3, Section 5, entitled ‘Can We Delay the World Oil Peak?” … concluded, ‘Yes, new production brought on stream well before the 2006 base-line peak can delay it, but only by few billion barrels of new production. However, even large increments of new production brought on after the peak is not likely to have any effect whatsoever on delaying the base-line world oil peak.” CGES’s review noted that oil production was once expected to peak in the 1980s, but has been successively pushed back into the first decade of the next century. However, CGES concludes that the peak may not be pushed back much further. “We are in full agreement with the CGES about the inertia of the world oil peak.”
- Prediction 4: Any oil strike in the former soviet socialist republics surrounding the Caspian Sea would be modest, contributing about 3% of the world’s oil supply. By contrast the Middle East holds about 60% of the world’s oil supply.


Remember these predictions were made in 1998. Based on the US government’s Energy Information Administration forecast (2007), historical consumption is shown in the graph to the left. In 2007, world consumption was 31Gb per year, which was what was projected.

So, what does this analysis tell us:

· Based on 1998 estimates of technology capability, historical production rates, and forecasting techniques, we have reached peak world production, and the production market is now driven by OPEC countries.
· Production is in decline. It could have been mitigated but not reversed, by additional drilling as soon as possible.
· As production declines and demand from China and India increase, the law of supply and demand will drive oil commodity prices up. Prices will be driven higher by uncertainty of supply due to perceived and real threats to supply. Clearly, energy “speculation” (viz., trading) is driving up prices in the short-term; however, trading tends to discount future volatility in a market and therefore is a pre-cursor of a larger, looming problem.

Beyond the oil forecast, other historical facts are relevant to a decision to drill or not drill.

· Due to environmental protectionism, the United States currently sits on the world’s second largest coal supply (China is first). The United States coal supply is adjudged by some to contain three times the energy content of proven OPEC oil reserves, which comprise 60% of the world’s known oil reserves.
· United States Oil consumption is approximately 20 million barrels per day (7.3 billion per year) of which 50% is imported.
· The United States has known reserves of 86 billion barrels of oil offshore, of which 85% is off limits to drilling. This is equivalent to 12 years of total energy needs, or 24 years of imported needs, at current consumption rates.
· China is currently drilling off our coast, but we are not allowed to.
· Since 1998, the United States has developed new methods of exploring for oil, deep ocean drilling techniques, technology to recover sand tars, and methods for extracting oil from shale. This has opened up additional potential areas for energy recovery, including areas in the Rockies, Wyoming, Montana, and parts of the Dakotas. Although I have not researched this, my understanding from media reports is that exploration in these areas will require permission from the Federal government, much like the current situation in Anwar.
· During the 1960s and 1970s, nuclear power was commercialized in the United States, with the intention of producing low cost electrical energy, which would make electric residential heating and electric vehicles abundant and cheap. Where utilities have been allowed to commercially operate nuclear plants, in spite of their excessive regulatory cost, they are the lowest priced sources of electrical energy and are operated as base-loaded facilities.
· The United States is ranked 8th in the world in proven uranium reserves; Australia is ranked 1st and Canada is ranked 3rd.
· No new plants have been ordered in the United States since the late 1970s because of environmental activism. At that time, America was the world’s technology leader in the commercialization of nuclear power, which we ceded to the French and Germans. Today, France is 80% nuclear.
· Starting in the 1970s and until this year, the environmentalist have opposed nuclear power through political activism, fear, quack science, and distortion of the the facts. In the meantime, the existing 104 commercial nuclear units are reaching their end of useful life. Now, the high priests of environmentalism have declared nuclear to be green. As of this writing 14 applications have been made within the last year to the Nuclear Regulatory Commission for new plants. Unfortunately, burial of the waste at Yucca Mountain is mired in red tape and will not open until at least 2017, almost 40 years after discussion of this project started.

My conclusions are:

· In the near term we need to drill everywhere it is technically and economically feasible. Our economy and physical security rely on the internal combustion engine, and that technology will not be replaced for many years to come, no matter what alternative energy sources we develop. To address environmental concerns, we can let the Norwegians and the Danes do it. Apparently, like the French who mastered nuclear power and we could not for political reasons, the Scandinavians have safely and economically continued to explore, exploit, and place into production offshore oil drilling.
· Due to the ideology of environmentalism, we have missed the opportunity to bridge our economy from an oil based one to a nuclear one. We should license and build as many plants as we can. Because the average age of the nuclear thought leadership in this country is approximately 53 years and is retiring, we can ask the French and Chinese to head up this project.
· Offshore drilling restrictions should be relaxed. Funds from the lease of these properties should be put into technologies that show near term promise: nuclear, clean coal, fuel cells, and electric vehicles, especially battery technology. The energy density of solar and wind is not sufficient to provide the backbone of our energy infrastructure (see prior blogs). These technologies, with conservation, do have a place in the energy mix, but will never be more than 10 to 20% of our total energy supply.
· Put in place long term (10,20, 30 year) incentives to achieve energy independence goals.
· Learn from our mistakes. Environmental ideology and politics of fear prevented us from developing a critical technology, nuclear power. Since the 1970s, the French and Germans have been the technical leaders in this field and the principal suppliers of technology to others, including Pakistan, Iran, Iraq, and Libya. These nations not only control the oil but also now seek to develop nuclear weapons. They are not only a threat to our energy security, they are now a threat to our physical security.

Just like many other aspects of our society, energy policy in this country has been hijacked by those on the left. In fact, they are as bad if not worse than the energy traders, whose “speculation” simply quantifies in monetary terms what is otherwise bad policy and the inevitable consequences of ignoring the laws of supply and demand. By historically preventing the development of commercial nuclear power in this country, the environmentalist have effectively destroyed our “energy bridge” to the future. Now, we are in a declining oil-based market, where production has peaked, demand is increasing, and prices will certainly rise. Just like a “speculator,” the environmental left has created a perfect “straddle.” By now declaring nuclear environmentally safe, they have now given the “green” light to develop a technology supported by an aging infrastructure, an aging workforce, a mind numbing spider’s web of regulation, and nowhere to bury the waste. When this fails to address our energy needs in a timely manner, they will simply state it wasn’t their fault, and continue to push their agenda to develop passive energy technologies that do not have the energy density to meet the needs of a growing, technologically competitive society. For the environmental left, it is all about ideology and the science of the probable; it is not about common sense and the science of the possible.