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Energy Realism and Hype

By and / 4.9.2010

Thanks to new drilling techniques, U.S. natural gas reserves may have doubled, Energy Secretary Steven Chu announced this week. “That’s a big deal because it will be a transition fuel as we go to renewables,” Chu said at a conference hosted by the U.S. Energy Information Administration.

Chu’s emphasis on natural gas as a bridge fuel, together with President Obama’s decisions to allow offshore drilling and expand loan guarantees for building nuclear power plants, attest to a new realism in U.S. energy policy. The Obama administration is trying to move the deadlocked energy debate beyond a false choice between fossil and renewable fuels. For now, America needs more of both.

This “no fuel left behind” approach also lays the groundwork for bipartisan cooperation on capping carbon emissions. If Republicans say “no” to things they’ve long demanded, namely more nuclear power and offshore drilling, as part of a comprehensive climate bill, it will be another sign that they are unwilling to help solve the country’s biggest problems.

Some environmentalists (including, apparently, Al Gore) are chagrined over Obama’s support for offshore drilling, which they see as a concession to the “drill, baby, drill” right.  So let’s be clear: offshore production in U.S. waters will not lead us to “energy independence,” nor will it lower prices at the pump. Our share of the world’s oil reserves — even if much more is aggressively produced — is still not large enough to move global oil prices. This would be the case even if there was a truly competitive and free global petroleum market. But the global oil market is not free and competitive — it is dominated by low-cost producers in the Persian Gulf, who are aligned in a cartel and could easily counteract any downward price influence from an increase in U.S. supply. The only way that U.S. oil could directly and dramatically lead to low U.S. gas prices would be for us to adopt the Venezuelan model: nationalize the industry, close the borders, and grossly subsidize the industry. Not gonna happen.

Nonetheless, modest expansions of domestically produced oil would yield modest benefits. Estimates range from a low of 39 billion barrels of recoverable oil to a high of 63 billion barrels. “If ramped up quickly enough, that could overcome the underlying decline rate of current U.S. output and add significant net production for a decade or two, at a time when competition for the oil we are currently importing is likely to be fiercest,” writes energy consultant Geoffrey Styles.

In addition to marginally reducing our reliance on foreign imports, offshore drilling would create U.S. jobs and lower our massive energy trade deficit. These benefits shouldn’t be exaggerated, but they certainly aren’t negligible. Further, to the extent that our offshore development leads to large and cost-effective finds of natural gas, that is almost certainly a good thing since unlike oil, gas is not as subject to global price pressures or oligopolistic manipulation as is oil. Moreover, to really reduce our greenhouse gas emissions, the United States will have to substitute baseload gas for baseload coal on a large scale and abundant gas developed in an environmentally acceptable fashion (more likely to apply to offshore development than to much of the contemplated onshore development of “unconventional” sources) is a key to that goal.

What about the environmental risks of drilling? Without question, the history of petroleum development and delivery is rife with calamities. The decades-old Santa Barbara spills are still seared into the minds of many and, of course, the Exxon Valdez has not – and should not – soon leave our collective memories. But the former was decades ago and the latter is a compelling argument for even stronger protections in the transportation of petroleum. The next Exxon Valdez could be carrying oil from onshore or offshore sources. But the technology and regulation of offshore production has greatly improved since Santa Barbara, and while one could compellingly argue for even more protections, the fact is that offshore development is much less risky than ever before.

Finally, Obama has deftly maneuvered his political opponents into a tight corner. The White House understands that the paramount goal of energy policy should be to price carbon. That goal is unlikely to be achieved in Congress as long as conservatives continue to fantasize over a supply-side panacea that will lead American to a golden age of “energy independence” and “lower prices at the pump.” This is an energy policy of abdication and isolationism. By taking a balanced approach, Obama has challenged conservatives to take “yes” for an answer — or show that they really don’t believe in their alleged “alternative” path to energy security.