Beat the Press

Dean Baker's commentary on economic reporting

4/25/2006

Arctic Oil Nonsense

Proponents of drilling in the Arctic National Wildlife Refuge are happy to make whatever outlandish claims are convenient to advance their cause. A few years ago, they were pushing the line that drilling in the Refuge would generate 500,000-750,000 jobs, citing a study by WEFA, one of the country’s leading economic forecasting firms. We did a short analysis showing the faults of this study. When WEFA refused to stand behind its study, this outlandish job claim quickly disappeared from the debate.

But the nonsense continues. President Bush claimed today that the country would be producing another million barrels of oil a day if President Clinton had allowed drilling in the refuge. He presumably meant this claim to impress his audience, implying President Clinton’s opposition to drilling in the refuge is a major factor behind today’s high oil prices.

A few simple facts indicate otherwise. First, there is a world market for oil. What matters in determining the price of oil is how much oil is supplied in the world, not how much is supplied in the United States. If we were getting an additional 1 million barrels of oil a day, then its impact would be the same on prices in the United States whether the oil comes from Alaska or anywhere else. One million barrels is less than 1.2 percent of world oil supply. That is not trivial, but it will not hugely affect the world price of oil.

The second point follows directly from the first. Iraq’s average oil output is approximately 1 million barrels a day less than it was before the war. In other words, the Iraq war has reduced world oil supplies by approximately the same amount that drilling in the refuge might have increased it.

The third point is that the oil in the Refuge is a temporary fix. According to the Energy Information Agency, it would take approximately 10 years to reach the peak production of 1 million barrels a day. This peak production would continue for approximately 10 years, and then it would trail back down to zero over roughly 10 years. This means that if we had begun drilling in the Refuge the day Clinton took office in 1993, then we would have hit peak production just over three years ago, and we would begin to see a decline in output beginning in 2013. This is not exactly long-term energy security.

Of course, there is plenty that Clinton can be blamed for regarding energy policy. For example, if he had introduced mileage standards that increased average mileage by just 10 percent, this would save the country 1 million barrels a day of oil consumption, which would have the same effect on oil prices as increasing production by the same amount.

But, we can’t talk about these issues seriously unless reporters do more than just mindlessly report what politicians say.

34 Comments:

  • At 1:11 AM, Blogger Dr. Tax in Sacramento said…

    Hyperbole in discussions about oil prices is a constant - 30 years ago when I was working with Bill Simon the first energy czar he taught me that oil is a pretty elastic commodity. And he was right. But we have consistently created policies to reduce supply and increase taxation of this commodity. Those are dumb decisions.

    Indeed, ANWR would only produce a small percentage of world supply but that small percentage would help in some way in producing closer supplies. Than in itself would be a benefit.

     
  • At 8:49 AM, Anonymous Erik L said…

    I have a related question. People are always talking these days about how we need to reduce our dependence on foreign oil. I take this to mean a decrease in the percentage of the oil we use coming from foreign producers. If the oil is cheaper to take out of the ground in Saudi Arabia doesn't that imply that to decrease our dependence on foreign oil we want the price of oil to increase?

     
  • At 8:57 AM, Blogger PGL said…

    Ron Brownstein went off on the Profiles in Cowardice of part parties on this issue. He whined that the Democrats blocked ANWR. Ron should have read your post first.

     
  • At 12:46 PM, Anonymous Anonymous said…

    Dr. Tax in Sacramento wrote, But we have consistently created policies to reduce supply and increase taxation of this commodity. Those are dumb decisions.

    What?

    The supply of oil, a natural resource, is fixed.

    Oil should be therefore be fully taxed. Meaning the value of the oil should be nearly completely recovered by the government on behalf of the people. Oil companies would of course see a return on their capital and labor.

    Not doing so is just a big fat guvmint handout of scarcity rent to oil companies.

    Of course, there's not much we can do in that regard for oil not found in the US.

     
  • At 2:32 PM, Anonymous Anonymous said…

    There is I think a reasonable justification for further drilling in the Arctic that you have not addressed. Because of the growing wealth of Asia, there is a growing worldwide demand for oil. Unfortunately, there do not seem to be any more super-giant oil fields, and most of the easy and pleasant places have been or are being pumped out. Because the remaining oil fields will be smaller in size, we will need to drill in lots of undesirable places, such as Alaska, our continental shelves, and in countries with unstable or dictatorial governments. We should of course reduce demand for liquid fuels, through higher prices and various regulations. But it seems unlikely that the problem can be solved solely by reducing demand. So although Alaska alone will not solve our needs for oil, and we don’t have to drill specifically there, we do need to face up to the need for drilling in lots of places that in the past would not have been acceptable. If not Alaska, then where?

    Also, I question whether oil is really a fully tradeable commodity. Lots of oil-producing nations sell gasoline at much-reduced prices to their own populations. Also, in lots of places it is difficult to transport the oil and so where it can be sent is limited. There are also long-term contracts. So perhaps a million barrels per day from Alaska will have a larger impact on the free market than simply comparing it to the total world production.

     
  • At 8:02 PM, Blogger Hans Gruber said…

    "The supply of oil, a natural resource, is fixed."

    Not all natural resources are fixed; many are renewable.

    Secondly, of course the amount of is fixed, but that's not what he meant by supply. Supply is dictated by the amount of oil we can find (known reserves), and the amount of oil we can extract and refine into usable fuels. We haven't done a very good job, at least here at home, of doing these things.

    I do agree with Dean Baker that we need to get serious about increasing fuel efficiency, this seems to be where we can really impact demand and thus lower prices, but of course we should do what we can do increase supply whenever possible, too.

     
  • At 8:38 PM, Anonymous Anonymous said…

    The oil companies have colluded to reduce the refining capacity in America to create a bottleneck in the gasoline supply. This cause shortages in the system (like taking power plants off line during the CA electricity crisis of 2001) artificially to cause prices to raise.

    Senator Wyden did a report PDF on this topic in 2001 which showed the companies that colluded, It also showed that between 1995-2001 there was a reduction in refining capacity of 830,000 barrels per calendar day. Yet Rep Barton (TX-R) showed that in 2004 the US was importing 550,000 barrels per day of gasoline.

    Now think about that, because of efforts of Big Oil to reduce the refining capacity to increase their profit margin (and squeeze the independent operators out of business) we have a reduced ability domestically to refine oil, and have had to increase our imports of the finished product.

    If you don't want to read the whole Wyden report, which recommend, then this web page has links to the memos by oil companies regarding the collusion.

     
  • At 10:08 PM, Blogger Tom Faranda said…

    Well one millions barrels a day, when we are consuming 16 million barrels a day; that is not trivial.

    Only a small piece of the solution, however.

     
  • At 6:45 AM, Anonymous James Schipper said…

    Dear Mr Barker
    I read recently that Americans consume about 2000 liters of gasoline per year and Germans,who are by no means poor, about 600. Americans would do themselves and the world a favor if they reduced their gas-guzzling ways by buying more fuel-efficient cars, drive less and use public transportation more.
    Arctic oil is a makeshift. The important thing is to tax gasoline more, use the revenues to subsidize public transportation and build more nuclear power plants.
    Americans are about 300 million and the world's population will stabilize at around 9 billion in 2050. Americans use about 25% of the world's oil extraction, so that means that, if everybody in the world in 2050 were to consume as much oil per capita as the Americans do today, oil production would have to increase 7.5 times till then. It isn't going to happen.
    We should all get ready for a world with declining oil production and rising demand for oil. What has kept oil cheap up to now is that so much of the world has been too poor to consume a lot of oil. Rapid growth in demographic giants like China and India are going to terminate that for good.
    Regards. James

     
  • At 8:06 AM, Anonymous Erik L said…

    Did you see today that the republicans have a bill in the senate that would give every taxpayer a $100 "rebate" for gas and also permit drilling in ANWAR? I don;t feel strongly one way or the other on ANWAR, but isn't this a bit outrageous? Is this the new thing, congress will send taxpayer money in exchange for supprting a business interest?

     
  • At 6:23 PM, Blogger Mark Thoma said…

    I think someone might have had an impact (good job):

    TPM: TPM Reader: TPM Reader PON finds this exchange from White House National Economic Council Director Al Hubbard's briefing yesterday on the president's 'Four Point Energy Plan' ...

    Q Just to follow up, though, on one element of that point. The President made the point that had ANWR been approved ten years ago, you'd get about a million barrels a day. Had the Iraq production resumed to the level that had been projected before the war, how much would that contribute today?

    DIRECTOR HUBBARD: I actually don't know the precise answer to that. What's really most important, though, is that we've become less reliable on overseas sources of crude oil and other sources of energy, and more reliant on energy from within our 50 states [sic].

    Q You have no estimate, though, about what Iraqi production could be?

    DIRECTOR HUBBARD: I do not have it.

    MR. HENNESSEY: We can get back to you.

    DIRECTOR HUBBARD: Yes, we can get back to you with that, or --

    Q That would be useful. I mean, just -- obviously, since the President has chosen one interesting example in ANWR, the Iraq one would be an interesting one to compare it to, whether that would be more or less than a billion -- a million a day.

    DIRECTOR HUBBARD: Yes, we will have to get back to you on that...

     
  • At 8:49 AM, Blogger Dean Baker said…

    Very nice to see the Hubbard interview. Whoever asked the question gets the first BTP prize for outstanding reporting. There are many reporters out there who want to do a good job. If we can give them a bit of help and encouragement -- glad to be of service.

     
  • At 3:58 AM, Anonymous Anonymous said…

    Anonymous wrote: "There is I think a reasonable justification for further drilling in the Arctic that you have not addressed."

    Ah, but there's an objection that also hasn't been presented.

    Why drill now? Why the urgency when oil is only $3 a gallon and people are still buying gas-guzzling vehicles?

    If SUV's are still selling, then it isn't time to open ANWR yet.

     
  • At 7:57 AM, Anonymous Anonymous said…

    I find it depressing that no one has mentioned the enviromental impact of ANWAR as well as global warming. There is an oil industry site www.rigzone.com that had an article a couple of weeks ago about how thrilled the oil industry was because global warming had made it so much easier to explore for oil in the Artic.

     
  • At 3:52 PM, Anonymous Half Sigma said…

    "oil in the Refuge is a temporary fix. According to the Energy Information Agency, it would take approximately 10 years to reach the peak production of 1 million barrels a day. This peak production would continue for approximately 10 years, and then it would trail back down to zero over roughly 10 years."

    This applies to every oil well drilled anywhere. Based on this logic, there's no point bothering to explore for oil, it will just get used up anyway.

    The Democrats don't really have a good reason to not drill in ANWR. The environmental reason makes no sense. ANWR is a barren frigid wasteland that no one ever visits. I couldn't think of a better place to drill oil wells where there'd be less of an environmental impact.

     
  • At 10:19 AM, Blogger Dean Baker said…

    half sigma,

    The point about every well having a finite supply of oil is of course true. But the issue here is how much impact any specific well or set of wells would have on the supply of oil. The potential impact of drilling in the Arctic has been hugely misrepresented. If we had begun drilling there 15 years ago, the world market would look almost exactly the same as it does today.

    It is possible that most people would agree with you and say that they don't care about preserving the refuge and the wildlife there, but they should make this decision based on real information about the tradeoffs, not the nonsense that has dominated the public debate.

     
  • At 7:15 AM, Blogger c_orrery_blissbombs said…

    I wish someone would do an really thorough analsis on the cost of getting the oil out from under ANWR with the cost of realizing fuel economy improvements.

    The obsession to get every bit of oil pumped before making the necessary investments into renewables and fuel efficincy leaves me cold. It isn't only foreign oil we need to wean ourselves from... and it seems that, because of the costs involved to establish a new technology and a new economy, it'll only cost more if we leave it to the last minute to make the big switch

     
  • At 8:25 PM, Anonymous Anonymous said…

    I have one concern. When you said that it would take about 10 years to reach the peak proudction of 1 million barrels a day, last for about another 10 years, and then gradually reach 0, then why wait to start drilling if our county is at such a high demand for oil? After about another 10 years, there might be more oil available. If we don't act now, our country will be at a higher demand and we'll need more oil than the earth can supply. I've read that if we dig the oil now our demand for crude oil in 2025 will go down 4%.I think it's better to act now than wait and need more than we have.

     
  • At 10:14 PM, Anonymous bikini said…

    Environmentalists are concerned that the drilling would spoil one America’s most pristine natural landscapes.The concerns are well-founded. Earlier this month a pipeline burst near Prudhoe Bay dumping more than 250,000 gallons of oil onto the tundra in what is being called on of the worst recorded spills on Alaska’s northern slope.Eventually we’re going to have to face the reality that oil is a finite resource and that it is running out.Exactly when it will run out no one knows for sure, but the longer we wait to develop alternate forms of energy, such as hydrogen and solar power, the more difficult the transition will be.

     
  • At 7:48 AM, Blogger Dave Lankshear said…

    It's not just that, but the oil pipelines and constant noise will interrupt and diver the Caribou from their annual migration paths. They are already decreasing in number. The fact is that the ANWR site is one tiny pocket left of a VAST area that's already been pillaged for oil.

    Don't we want to save biodiversity for it's own sake, and for the sake of our children's medicine? This mentality to rush in and exploit every last resource to death just completely baffles me. We are reaching peak oil, peak freshwater, peak gas, peak fish, peak arable land, peak food, and even peak metals! (Even iron ore will be exhausted in the lifetime's of babies today if we continue at 2% annual growth, which equals using about 4 times as much metal after 70 years than we do today).

    Isn't it time humanity put a fence around ANY remaining wilderness and said "Enough is enough". Greenies have been going on about this stuff for decades, and now food prices are rising, oil prices are rising, OPEC keeps refusing to open the oil pumps up a heap more — what if they can't? — and some of the scenarios in the old classic "Limits to Growth" look right on track.

    Save the biodiversity. There might be some rare earthworm in ANWR that is the cure for cancer, or a soil microbiology that enables a new algae that can replace oil in the first place, or a new heart disease medicine or new plastic.

    Save the biodiversity, because once it's gone, it's gone forever.

     
  • At 5:13 AM, Anonymous Anonymous said…

    First, it should be noted that Bush Sr. was the president that signed the law to prevent drilling in the ANWR.

    Second, oil from the ANWR won't be the cheap $125/barrel oil we are currently pumping out of the ground. It will cost more - and if it takes a decade to extract - appreciably more.

    The country's problem with oil is chronic. ANWR is simply hyperbole.

     
  • At 7:04 AM, Blogger Dave Lankshear said…

    Exactly! ANWR will take so long to ramp up to its own peak production that by the time we do ramp it up, American production will have already declined by MORE than ANWR's daily capacity.

    So while I think the post-peak oil economic conditions will eventually have all consumers screaming for new production to be opened up any and everywhere, ANWR will only ever form a minor bump on the downward march of American post-peak oil production. The 1970's peak production will never again be reached.

    See this movie for more.

     
  • At 7:08 AM, Blogger Dave Lankshear said…

    Sorry, this link will be better for that short 55mb movie, "Peak Oil for policymakers." Click HERE to see download options?. It's free and burns to CD well.

     
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