Tag Archive | "Deepwater Moratorium"

Obama, Energy Promises, and Empty Rhetoric


Voters in the November election will be acutely aware of two key economic variables above all others: the national unemployment rate, and the price they pay for a gallon of gasoline. President Obama senses his vulnerability on gasoline prices, and is busy erecting a defense against charges that his actions (or inactions) have contributed to high prices.

His weekly radio address focused on the problem of rising gasoline prices and energy policy in general:

Ending this cycle of rising gas prices won’t be easy, and it won’t happen overnight. But that’s why you sent us to Washington – to solve tough problems like this one. So I’m going to keep doing everything I can to help you save money on gas, both right now and in the future.

Earlier this week, Obama said that gasoline prices are rising in part because of international bottlenecks and supply disruptions that affect the crude oil market.

Obama cites bottlenecks, speculation as possible gasoline price factors

US President Barack Obama said his administration is looking at whether it would be possible to ease both international and US supply bottlenecks as an immediate response to rising gasoline prices. … “We’re concerned about what’s happening in terms of production around the world. It’s not just what’s happening in the [Persian] Gulf. You’ve had, for example, in Sudan, some oil that’s been taken offline that’s helping to restrict supply.”

In its Mar. 6 Short-Term Energy Outlook (STEO), the US Energy Information Administration said several notable production disruptions outside the Organization of Petroleum Exporting Countries began or intensified during the last 2 months, leaving an average 1 million b/d [barrels per day] offline in February. [Emphasis added.]

Those production disruptions include a year-on-year loss of 230,000 b/d in the Sudan, 80,000 b/d in Yemen, and 140,000 b/d in Syria. That’s 470,000 b/d total shortfall from just those three hotspots.

I agree with this analysis, which acknowledges the supply/demand dynamics of the crude oil market. I have often maintained that crude oil is a world market that is balanced on a thin margin of “overhang”: global markets operate best if production capability exceeds demand by 1 to 2 million barrels per day. Anything that erodes that overhang (supply disruptions, increasing demand) can send crude oil rapidly higher.

Bottom line: gasoline prices are closely correlated to the crude oil price, and crude oil disruptions in half-million barrel per day “chunks” are significant to the crude oil price on a global scale. President Obama’s Sudan/Yemen/Syria excuse acknowledges as much.

But the President seems to forget supply and demand when it comes to domestic energy policy.From the weekly radio address:

As usual, politicians have been rolling out their three-point plans for two-dollar gas: drill, drill, and drill some more. Well, my response is, we have been drilling. Under my Administration, oil production in America is at an eight-year high. We’ve quadrupled the number of operating oil rigs, and opened up millions of acres for drilling. But you and I both know that with only 2% of the world’s oil reserves, we can’t just drill our way to lower gas prices – not when consume 20 percent of the world’s oil.

“We’ve” been successful finding new sources of oil on private lands, under state jurisdiction (primarily North Dakota, Texas and Oklahoma), driven by market incentives. Federal action deserves little or none of the credit.

But oddly, Obama’s position is “Drilling is up, production is up, but gas prices are still high!”, implicitly contradicting the supply/demand dynamic. One can only imagine how high gasoline prices would be without the recent supply surge.

There’s a reason President Obama must discount the positive effect of increased domestic supply: his policies have been hostile to it as a strategy.

The graph below depicts crude oil production from the U.S. Gulf of Mexico during President Obama’s term in office. Daily production of oil has dropped from a third of domestic supply to less than a quarter since the BP spill.

Gulf of Mexico crude oil production during President Obama's term in office. The dashed black curve is the forecast from the EIA's Short Term Energy Outlook for May 2010; actual data from the most recent STEO is in red. The May 2010 STEO was the last projection that did not take into account the impact of the BP spill.

As for 2012, the EIA’s Annual Energy Outlook for 2010 (AEO2010), published in December 2009, forecast GoM crude oil production to average 1.76 million b/d. The latest estimate is 1.26 million b/d. (For those keeping score, that’s a loss of 500,000 b/d, using the government’s numbers, not mine.) The Department of the Interior’s reaction to the Macondo blowout was a drilling moratorium and permitting slowdown which led to the exodus of 11 deepwater drilling rigs from the Gulf.

In my humble opinion, the Federal reaction to the BP spill was mostly overreaction. The most significant step in insuring industry’s capability to contain and control a future deepwater blowout event was a private initiative.

As for bottlenecks, none is perhaps more significant than the bottleneck that is currently keeping midcontinent oil, pegged to the West Texas Intermediate crude oil benchmark, trading at a discount to the world price. That bottleneck could be alleviated by the Keystone XL pipeline, among other projects. Keystone XL could deliver 700,000 b/d to Gulf Coast (and hence, international) markets.

With respect to domestic supply, Keystone XL is especially important to North Dakota operators. An improved oil marketing outlook for the region could spur an even greater pace of drilling in North Dakota’s Bakken formation, which is largely responsible for the current domestic supply surge.

An enhanced domestic supply of petroleum, along with efficient, modern infrastructure, are key elements of our nation’s energy security. The President is correct in his assertion that tight crude oil supplies lead to escalating gasoline prices. But domestically, his policy initiatives seem designed to discourage drilling and to erect stumbling blocks for producers.

I’m going to keep doing everything I can to help you save money on gas, both right now and in the future.

I just don’t buy it. His lips keep moving, but there’s a big disconnect between President Obama’s campaign rhetoric and his policies.

Cross-posted at stevemaley.com.


Posted in News, Politics, RedStateComments Off

Obama, Energy Promises, and Empty Rhetoric


Voters in the November election will be acutely aware of two key economic variables above all others: the national unemployment rate, and the price they pay for a gallon of gasoline. President Obama senses his vulnerability on gasoline prices, and is busy erecting a defense against charges that his actions (or inactions) have contributed to high prices.

His weekly radio address focused on the problem of rising gasoline prices and energy policy in general:

Ending this cycle of rising gas prices won’t be easy, and it won’t happen overnight. But that’s why you sent us to Washington – to solve tough problems like this one. So I’m going to keep doing everything I can to help you save money on gas, both right now and in the future.

Earlier this week, Obama said that gasoline prices are rising in part because of international bottlenecks and supply disruptions that affect the crude oil market.

Obama cites bottlenecks, speculation as possible gasoline price factors

US President Barack Obama said his administration is looking at whether it would be possible to ease both international and US supply bottlenecks as an immediate response to rising gasoline prices. … “We’re concerned about what’s happening in terms of production around the world. It’s not just what’s happening in the [Persian] Gulf. You’ve had, for example, in Sudan, some oil that’s been taken offline that’s helping to restrict supply.”

In its Mar. 6 Short-Term Energy Outlook (STEO), the US Energy Information Administration said several notable production disruptions outside the Organization of Petroleum Exporting Countries began or intensified during the last 2 months, leaving an average 1 million b/d [barrels per day] offline in February. [Emphasis added.]

Those production disruptions include a year-on-year loss of 230,000 b/d in the Sudan, 80,000 b/d in Yemen, and 140,000 b/d in Syria. That’s 470,000 b/d total shortfall from just those three hotspots.

I agree with this analysis, which acknowledges the supply/demand dynamics of the crude oil market. I have often maintained that crude oil is a world market that is balanced on a thin margin of “overhang”: global markets operate best if production capability exceeds demand by 1 to 2 million barrels per day. Anything that erodes that overhang (supply disruptions, increasing demand) can send crude oil rapidly higher.

Bottom line: gasoline prices are closely correlated to the crude oil price, and crude oil disruptions in half-million barrel per day “chunks” are significant to the crude oil price on a global scale. President Obama’s Sudan/Yemen/Syria excuse acknowledges as much.

But the President seems to forget supply and demand when it comes to domestic energy policy.From the weekly radio address:

As usual, politicians have been rolling out their three-point plans for two-dollar gas: drill, drill, and drill some more. Well, my response is, we have been drilling. Under my Administration, oil production in America is at an eight-year high. We’ve quadrupled the number of operating oil rigs, and opened up millions of acres for drilling. But you and I both know that with only 2% of the world’s oil reserves, we can’t just drill our way to lower gas prices – not when consume 20 percent of the world’s oil.

“We’ve” been successful finding new sources of oil on private lands, under state jurisdiction (primarily North Dakota, Texas and Oklahoma), driven by market incentives. Federal action deserves little or none of the credit.

But oddly, Obama’s position is “Drilling is up, production is up, but gas prices are still high!”, implicitly contradicting the supply/demand dynamic. One can only imagine how high gasoline prices would be without the recent supply surge.

There’s a reason President Obama must discount the positive effect of increased domestic supply: his policies have been hostile to it as a strategy.

The graph below depicts crude oil production from the U.S. Gulf of Mexico during President Obama’s term in office. Daily production of oil has dropped from a third of domestic supply to less than a quarter since the BP spill.

Gulf of Mexico crude oil production during President Obama's term in office. The dashed black curve is the forecast from the EIA's Short Term Energy Outlook for May 2010; actual data from the most recent STEO is in red. The May 2010 STEO was the last projection that did not take into account the impact of the BP spill.

As for 2012, the EIA’s Annual Energy Outlook for 2010 (AEO2010), published in December 2009, forecast GoM crude oil production to average 1.76 million b/d. The latest estimate is 1.26 million b/d. (For those keeping score, that’s a loss of 500,000 b/d, using the government’s numbers, not mine.) The Department of the Interior’s reaction to the Macondo blowout was a drilling moratorium and permitting slowdown which led to the exodus of 11 deepwater drilling rigs from the Gulf.

In my humble opinion, the Federal reaction to the BP spill was mostly overreaction. The most significant step in insuring industry’s capability to contain and control a future deepwater blowout event was a private initiative.

As for bottlenecks, none is perhaps more significant than the bottleneck that is currently keeping midcontinent oil, pegged to the West Texas Intermediate crude oil benchmark, trading at a discount to the world price. That bottleneck could be alleviated by the Keystone XL pipeline, among other projects. Keystone XL could deliver 700,000 b/d to Gulf Coast (and hence, international) markets.

With respect to domestic supply, Keystone XL is especially important to North Dakota operators. An improved oil marketing outlook for the region could spur an even greater pace of drilling in North Dakota’s Bakken formation, which is largely responsible for the current domestic supply surge.

An enhanced domestic supply of petroleum, along with efficient, modern infrastructure, are key elements of our nation’s energy security. The President is correct in his assertion that tight crude oil supplies lead to escalating gasoline prices. But domestically, his policy initiatives seem designed to discourage drilling and to erect stumbling blocks for producers.

I’m going to keep doing everything I can to help you save money on gas, both right now and in the future.

I just don’t buy it. His lips keep moving, but there’s a big disconnect between President Obama’s campaign rhetoric and his policies.

Cross-posted at stevemaley.com.


Posted in News, Politics, RedStateComments Off

Obama/Salazar Moratorium Has Crippled Domestic Oil Production


In 2011, Gulf of Mexico oil production will under-perform the government’s pre-Macondo forecasts by 355,000 barrels per day — almost 130 million barrels for the year. In 2012, the shortfall rises to 550,000 barrels per day — 200 million barrels. That’s fully one-third of the Gulf’s oil producing capability, and over 10% of total domestic oil production.

These are staggering numbers.

Alaska, our #1 oil producing state, will supply roughly 200 million barrels in 2012.

Two hundred million barrels is about what the U.S. imports from Iraq every year. Or roughly half of our Saudi Arabian import volume. Two hundred million barrels would supply all of Ohio’s yearly petroleum use, with quite a bit left over.

Replacing 200 million barrels of oil will require an additional supertanker full of oil every two days.

The Department of Energy’s Energy Information Administration (EIA) provides a rather dry but telling explanation:

Off shore oil production in [the 2011 forecast] is lower than in [the 2010 forecast] throughout most of the projection period [through 2035] because of expected delays in near-term projects, in part as a result of drilling moratoria and in part due to the change in lease sales expected in the Pacific and Atlantic outer continental shelf (OCS), as well as increased uncertainty about future investment in off shore production. [AEO2011 Preview, p. 8. Emphasis added.]

Moratoria, access and uncertainty: issues which fall squarely in the laps of Barack Obama and Ken Salazar. Their misguided policy decisions come in times of rising global demand and rising world tensions.  By the fall of 2012, we might look back on the “good old days” of $105 per barrel oil and $3.75 per gallon gasoline.

The projected shortfall comes from EIA forecasts. EIA’s Annual Energy Outlook, with detailed production and consumption forecasts covering the next 25 years, is published each April; AEO2011 is due to be published April 26, but a Preview came out last December.

Short Term Outlooks are published monthly. The most recent STO was published March 8.

The shortfall is the difference between the March 2011 STO (”where we are”) with the May 2010 STO (”where we might have been”). The May 2010 STO was the last monthly forecast which did not take post-Macondo regulatory actions into account. Since the STO only covers a 24-month time frame, supplemental values for 2012 came from last year’s Annual Energy Outlook.

The cumulative shortfall, just through the end of 2012, will be 387 million barrels, plus 723 billion cubic feet of natural gas (which contains the equivalent energy value of about 120 million barrels of oil).

How much are we talking about in dollar terms? Just on the value of the oil and gas alone, over $40 billion dollars worth. Somewhere around $6 billion of that would have flowed straight to the U.S. Treasury as royalty. This analysis is too simplistic to address the real economic cost, in terms of lost jobs, capital investment, income and payroll taxes, etc. Notice in the graph below that the cumulative value really starts to take off in 2012 as the volume loss accelerates.

Consider, too, that this shortfall does nothing to curtail demand. Not a single consumer will alter their consumption habits (that is, until the price adjusts). This volume of oil will be made up from imports, adding to our national trade imbalance.

Ultimately, as I have argued before, a half million barrels a day can make a substantial difference in the market price of oil. As we have seen supply disruptions (Libya, Yemen and elsewhere) against growing demand, buyers will inevitably bid up the value of that last barrel to come on the market.

This shortfall could be erased by an administration that correctly viewed the oil and gas industry, not as a convenient whipping-boy, but as a potential growth engine for our tepid economy. Capitalist risk-takers have already proven the potential of oil from shale plays such as the Eagleford of South Texas and the Bakken of North Dakota. We find ourselves at a moment in time when a true visionary in the White House could realistically set a goal of 50% or more growth in domestic oil supply, and couple it with a commitment to develop our plentiful, clean American natural gas resources. Such a visionary leader could become the first president since the 1973 embargo to succeed in putting America on a course to true energy security –

Hey, a fellow can dream, can’t he?

Cross-posted at VladEnBlog.

Follow VladimirRS on Twitter

References

March 2011 Short Term Outlook (Mar 2011 STO) - .xls file

May 2010 Short Term Outlook (May 2010 STO) - .xls file - .pdf file

[Refer to worksheet "4atab" for oil projections, "5atab" for natural gas.]

2011 Annual Energy Outlook Early Release (Dec-2010) - website

Annual Energy Outlook 2010 (AEO2010) - .pdf file

Annual Energy Outlook 2011 (AEO2011) Early Release Overview - .pdf file

“This release is an abridged version of the Annual Energy Outlook that highlights changes in the AEO Reference case projections for key energy topics. The Early Release includes data tables for the Reference case only. The full AEO2011 will be released April 26, 2011.”

2010 & 2011 AEO Annual Projections by Year through 2035 - flash table browser

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