Stratfor assessment of president Bush’s Oil Supply Plan

Here we are. The first day of summer and a record breaking heat wave with 111degree temperature reported in San Luis Obispo. Just what we need as we turn on our air conditioners in our cars to further reduce our gas mileage.

While there are many who might question the White House delay in a full court press to open up drilling off our shores, or in ANWR, Stratfor has just released its assessment of the four latest proposals to lower the cost of fuel that I believe will break the $5.00 per gallon barrier sometime this summer. ”

“Stratfor is the world’s leading online publisher of geopolitical intelligence.”
Some quick facts from the US DOE: In March we produced 160 million barrels of domestic crude including 22 million from Alaska. In that same month we imported 298 million barrels of crude oil with Canada, Saudi Arabia and Mexico being the largest suppliers followed by Nigeria and Venezuela.
Collectively these five nations represent around two thirds of our imports.

Global Market Brief: Bush’s Oil Supply Plan

Stratfor Today » June 19, 2008 | 1526 GMT

With global crude oil prices at historic highs, U.S. President George W. Bush gave a speech in the Rose Garden on June 18 in which he outlined four proposals for lowering U.S. gasoline prices — which are also at historic highs.

There are no easy solutions to the higher prices, which are driven by global trends over which Washington has little control. All of Bush’s proposals — which include opening the continental shelf to drilling for oil, opening the Arctic National Wildlife Refuge (ANWR), pursuing oil shale deposits and increasing U.S. refining capacity — attack the problem from the standpoint of increasing the long-term supply of oil and petroleum products. While they might have some effect (and some would be more effective than others), ultimately they would only slow the eventual decline in U.S. oil production.

Let us address the proposals from the least to the most effective at achieving the stated goal of lowering gasoline prices.

The first of Bush’s proposals would open up more offshore drilling in the United States. There certainly is oil in the continental shelf — approximately 1.9 billion barrels of it — mainly near Alaska, California, Texas, Louisiana, Alabama and Florida. But retrieving this oil would not be easy. It is not concentrated in large, accessible fields, but scattered across millions of square miles of ocean in thousands of small deposits. Even in the most optimistic scenario, a massive series of interconnecting pipe networks would have to be built, costing somewhere in the hundreds of billions of dollars and taking several years. Given the necessary time and investment, the cost-effectiveness of such a strategy is questionable at best, and any impact it might have on prices would be marginal.

The second proposal, drilling in ANWR, is considerably more reasonable — and certainly more feasible — than drilling in the continental shelf, as production could feed into existing infrastructure. An estimated 6 to 16 billion barrels of recoverable oil lies inside ANWR’s 19 million acres, and production sites could be linked to existing pipeline infrastructure that flows from Prudhoe Bay. But developing ANWR would only be a small step toward U.S. energy self-sufficiency; the region’s reserves are not nearly enough to bring back the heady days of $30-per-barrel oil. Even the most wildly optimistic estimates project ANWR’s output at about 1 million barrels per day (bpd) for a maximum of 25 years. By comparison, U.S. demand is currently about 22 million bpd and has been rising for decades. ANWR would help the bottom line somewhat, but in the long run there is no getting around the mathematical fact that its deposits would provide less than 5 percent of U.S. annual consumption, and only for a limited amount of time.

There is greater potential with Bush’s third proposal, oil shale. The Green River Basin in Colorado, Utah and Wyoming contains an estimated 1.8 trillion recoverable barrels of shale oil. Canada has proven that extracting oil from oil sands — which requires somewhat similar technology — is economically viable at current prices. More important, oil shale formations also contain large amounts of natural gas (as do coal seams), and technology is now mature enough to extract and capture this natural gas along with the oil.

But while the technology of oil shale is similar to oil sands, it is not identical, and at present, it is still largely theoretical. Another downside is that oil sands and oil shale require a large amount of processing after extraction, and that requires a large amount of energy. Compared to developing conventional oil deposits, these recovery methods are inefficient and emit high levels of carbon to boot. If carbon taxes and trade regulations are legislated in the future, they will heap on even more complications and costs to oil shale production. So while shale may be very promising, for now it is like cellulosic ethanol — the fuel of the (somewhat distant) future.

The most realistic and applicable of Bush’s proposals is the suggestion to increase domestic petroleum refining capacity. Since 2004, the United States has produced an average of about 108 million barrels of motor gasoline a year — up from about 72 million in 1982. The country has the technology and capital to build new refineries and increase domestic gasoline supply, but none have been built for 30 years. The main reason is that the permitting process at the local, state and federal levels is so complex and contradictory that it is impossible, in practice if not in principle, to get a new refinery built. The proposal to reform the system to allow new refineries might actually lower gasoline prices — but not in the short term, and not by much.

At $130 per barrel, a gallon of unrefined petroleum costs $3.09; turning that into gasoline adds less than $1 of cost. Additional refinery capacity will make a difference, but only a small one, taking only pennies off the price. Even if Congress took Bush’s suggestion to heart and produced a reformed permitting process within a week — and we do not need to speculate on the likelihood of that happening — it would still take two to five years before the first new refineries could come on line. And a lot can happen in the oil markets in two to five years.

It is not that the Bush plan is a step in the wrong direction (although environmentalists will undoubtedly argue that point), but that it offers only very small steps.

The price of oil is set by global supply and global demand, and the answer to cheaper prices lies both in decreasing global demand (or demand growth) and increasing global supply. Bush only addresses the supply side of the equation, and even that only at the national level.

Major supply increases cannot come from places like the United States where, to put it bluntly, there are no large new sources that can be brought on line easily and cheaply. Any “new” oil will instead come from reviving Venezuela’s oil industry post-Chavez, an Iraqi oil renaissance after the war ends, bringing Iran’s technology up to at least the 1980s, and accelerating Brazil’s whopping oil discoveries to market ten years from now.

This leaves only reducing demand as a quick and “easy” option. Reducing demand means, most likely, increasing the efficiency with which the country uses oil. While not an overnight process, this is something that becomes more likely the longer fuel prices remain high. Given a few years, Bush’s proposals might reduce gasoline prices somewhat — but not as much as replacing half of the sport utility vehicles on U.S. roads with hybrids would.


Gilbert comment. Obviously we are over a barrel. Juice readers. What’s your reaction to the president’s speech and the above Stratfor report?

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