A Critique of Obama’s Energy Policy

Listening When We Disagree

Barack Obama has said that energy is going to be one of his top priorities. I believe he is completely sincere about this and that energy will get a lot of attention early on in his administration. I believe he is committed to moving the U.S. toward energy independence and a greener energy future. However, one can recognize energy as an important priority, yet sharply differ on the policy direction that is needed. For instance, some may have energy as a high priority because they feel that gasoline is too expensive. Their priority may be to keep gasoline prices low so people’s budgets aren’t adversely impacted by their fuel bills. Some can see energy as a top priority, and yet see a solution as suing OPEC to provide more oil.

On the other hand, someone else may have energy as a top priority, but think gasoline prices need to be much higher in order to shift our demand away from fossil fuels. This is the nature of my disagreement with some aspects of Obama’s energy plans: We broadly agree on the big picture, but differ on how to get there. And since I recently heard him say “I may not agree, but I will listen”, here is my attempt to highlight what I feel are the flaws in his energy proposals.

Up front, let me state my assumptions. These will of course influence my opinion on his proposals. I believe that the present rate of fossil fuel usage in the U.S. is unsustainable. I believe that world oil production is very near a production peak, and an energy policy that is keenly aware of the potential for energy shortfalls – which will lead to severe oil price volatility – is paramount. I believe that even if oil production does not peak in the next five years, oil production will not be able to be expanded quickly enough to stay ahead of demand. Finally, I believe our current breed of liquid biofuels is too fossil-fuel dependent to enable them to make up for significant energy shortages, and that there are no obvious silver bullet technological fixes around the corner.

These key assumptions impact the direction that I believe energy policy should take. While I believe the evidence supports human-caused global warming, I don’t think the world has the collective will to voluntarily reign in greenhouse gas emissions. I think this will ultimately only be accomplished by a combination of high prices and lack of availability. So the energy policy that I would propose would not focus on protocols and agreements for reducing greenhouse gases. Even though many countries signed on to the Kyoto Protocol, carbon dioxide continued to accumulate in our atmosphere – even from the signatories of the agreement. There will always be countries that will choose not to be a party to such protocols, thus I believe a greenhouse gas reduction will only come about as a consequence of a reduction in fossil fuel usage.

Thus I believe a sound energy policy should focus on 1). Minimizing per capita energy usage; 2). Finding sustainable, affordable alternatives; 3). Managing the down side of the production peak such that severe shortages are avoided. 4). Communicating to the public the nature of the problem, and explaining why sacrifice is needed.

The Fossil Fuel Blind Spot

While I think many of Obama’s proposals are spot on, and with a little tweaking he could have a great energy plan, I think he overestimates how easily alternatives can displace fossil fuels. Thus, he largely ignores the need to slow the decline of U.S. oil production. Late in the campaign, he started to pay some lip service to the need to (responsibly) drill, but not too many people are expecting him to put much emphasis on that aspect. That “responsibly” qualifier is usually a sign that 1). Someone thinks drilling is not presently responsible; 2). They are going to put hurdles in place that discourage drilling. In fact, one of the Obama proposals is

• A “Use it or Lose It” Approach to Existing Oil and Gas Leases.

Oil companies have access to 68 million acres of land, over 40 million offshore, which they are not drilling on. Drilling in open areas could significantly increase domestic oil and gas production. Barack Obama and Joe Biden will require oil companies to diligently develop these leases or turn them over so that another company can develop them.

That sounds great. Just one problem, though. There already is such a provision. To continue to beat this drum is either pandering, or demonstrates a fundamental misunderstanding of the oil and gas regulations in the U.S. The way these leases work is that companies bid on them competitively. They bid because they think there might be oil there. They then pay annual fees to the government over the course of the lease as they explore, and then if they find economically recoverable oil they begin to develop the lease. But the time between acquiring the lease and the beginning of production (should oil be found there) is several years. You don’t acquire a lease and immediately start producing oil. Further, if an oil company did acquire a lease and didn’t develop it (which would happen if they don’t find any oil there) then it goes back to the government anyway. Oil companies can’t keep leases tied up indefinitely without developing them.

The fact that these are the sorts of policies that are highlights of Obama’s domestic exploration plan indicate to me that he doesn’t look at domestic oil production as a big part of his overall energy plan. In fact, Geoffrey Styles recently noted the same in an essay that examined Obama’s plans in detail:

Senator Obama appears to consider the US tapped out for oil, and apparently expects his energy independence goals to be met without more help from that quarter. That assessment pervades his approach to the oil & gas industry, though recently he has described natural gas in more favorable terms. It is also consistent with his periodic citations of the “3% of reserves vs. 25% of consumption” soundbite, which drastically understates the remaining resource potential of the US. This may explain his 2006 vote against a modest expansion of the allowed drilling area in the Gulf of Mexico, and his restrained support for expanded access to oil & gas during this summer’s Congressional debate on various drilling proposals.

I think the vast majority would agree for the need to move away from oil as our principal source of energy. But fossil fuels and nuclear power presently combine to provide more than 90% of America’s energy needs (Source: EIA). And I think there are too many people who fail to understand exactly why that is the case. As Geoffrey Styles put it so well in the afore-mentioned link “it is counter-productive to pit solar, wind and biofuels against domestic oil & gas, which today contribute roughly 30 times as much net energy to the US economy, and could do more.”

Not understanding the problem can lead to unrealistic choices. A key question for me is whether Obama will sit down with the oil companies, explain his vision, but then also listen to these companies explain the view from their vantage point. After all, these are the companies that provide the vast majority of our energy today. They might know a thing or two about energy.

I believe that 10 years from now (the time frame we could reasonably expect today’s exploration projects to start putting supply on the market) we are going to find ourselves falling in a deep supply hole, and while biofuels can help, they aren’t going to fill the void. By adopting policies now that will encourage U.S. oil production, the supply void will shrink, and prices should be more stable. And as I have argued before, we can earmark the tax revenue from new production to fund alternative energy. The point here is not to keep us dependent on fossil fuels; it is to address what I see as a pending supply shortage in 10 years. Adopting policies that discourage U.S. production will exacerbate that supply shortage. If we are near an oil production peak – as I think we are – then those policies that discourage domestic production will put the country at great risk.

Yet there is a second proposal in Obama’s plan that will discourage domestic production:

• Enact a Windfall Profits Tax to Provide a $1,000 Emergency Energy Rebate to American Families.

Obama and Biden will enact a windfall profits tax on excessive oil company profits to give American families an immediate $1,000 emergency energy rebate to help families pay rising bills. This relief would be a down payment on the Obama-Biden long-term plan to provide middle-class families with at least $1,000 per year in permanent tax relief.

I have had an internal debate on this one for quite a while. I favor higher gas taxes to reduce consumption. (And I give Obama high marks for resisting the calls by McCain and Clinton for a gas tax holiday over the summer). If a windfall profits tax is in place, I believe that this will discourage investment, and ultimately lead to higher prices as supply is constrained. Hence, the same objective is ultimately achieved – except the oil companies get blamed instead of the politicians. But the biggest difference is that gas taxes can be implemented or removed in short order. Taxes that discourage investment will have unpredictable results.

Let’s also be clear here. The oil industry does make big profits, but they are also already one of the most heavily taxed industries. And their tax payments to governments increase along with their profits. There has been a lot of coverage given to the record profits being made by the oil companies, but much less to the record windfalls in the form of taxes that governments have received over the past few years as a result.

And don’t forget that we have experimented with a windfall profits tax before. It raised far less revenue than anticipated, and caused investment to fall. An article from the Cato Institute notes:

We’ve actually been down this road before in the form of the Crude Oil Windfall Profit Tax of 1980. According to a study published by the Congressional Research Service, the tax discouraged investment in the domestic oil industry to such a degree that domestic oil production was 3 percent to 6 percent less as a result of that tax, and foreign oil imports grew accordingly by 8 percent to 16 percent. There isn’t a single credentialed oil economist in the country who would argue that windfall profit taxes are good for consumers.

Geoffrey Styles also weighed in on this provision:

If anything, [Obama] seems to regard the domestic oil industry not as a potential source of new supply, but as a source of new tax revenue. His short-term energy program leads off with one-time energy rebates–$1,000 per family or $500 per individual taxpayer–funded by a windfall profits tax on oil companies. He hasn’t put a price tag on this, but assuming all taxpayers would be eligible, it would require on the order of $20 billion dollars per year in new taxes over the next five years. Although there are legitimate differences of opinion on the justification for such a tax, its consequences for future US oil output are unambiguous: what you tax more, you get less of.

I don’t think there is any doubt that a windfall profits tax won’t help add to supplies. And refunding it back to consumers sends the wrong message: If gas prices go up, the government will protect you by taking the money from the oil companies and giving it back to you. Where is the incentive for the consumer to conserve? For the oil companies themselves, the likely impact would be that foreign earnings wouldn’t be repatriated back to the U.S., and would just be reinvested overseas. For that matter, a steep windfall profits tax would provide incentive for U.S. oil companies to simply relocate overseas.

The Ethanol Blind Spot

One reason Obama feels like he can shun the oil industry is that he comes from a ‘corn state’ and has ties to the ethanol industry. A recent Bloomberg story reported that he wants to bail out the financially strapped ethanol industry, keep the protective tariffs on Brazilian ethanol in place, and is “fully committed to it and sees tremendous value in the renewable fuels standard and continuing down this path.”

Here we have a fundamental disagreement. I have written tens of thousands of words on my opposition to corn ethanol (a random sample here). I won’t repeat all of my reasons here, but will highlight the key sticking point from my perspective. Sustainability and net energy are important. I think we should make every effort to make agriculture sustainable so we leave the soil in good condition for future generations. But the way we make corn ethanol encourages highly unsustainable agricultural practices.

Where do we pay the price for strip-mining the soil? Who is going to get the bill for degraded soils and depleted aquifers? Our children will. If we are consuming natural resources and making them unavailable for future generations, there needs to be a really extraordinary reason, like a crisis that threatens our existence. Yet we are depleting our soil to keep our cars running on a fuel that delivers a very small energy return. Most of the energy in ethanol is derived from the fossil fuels used to produce it. If we put higher carbon taxes in place, not only would it encourage conservation, but it would directly discourage ‘alternative’ energy that relies heavily on fossil fuels. A cap and trade system, or a system in which the EPA has to quantify greenhouse gas savings – will quickly degrade to a lobbying effort if the ethanol industry finds itself at a disadvantage as a result of the rules (see this example).

The “benefit” of corn ethanol – unless you happen to be a corn farmer or ethanol lobbyist – is questionable. The negative consequences need to be a part of the analysis when determining whether to continue pursuing ethanol policies. At present the environment would be better off if – instead of using natural gas to produce fertilizer and steam for the ethanol plant – the natural gas was just burned directly in CNG vehicles. (To his credit, Obama does favor increased use of CNG).

However, I think we have put an ethanol infrastructure in place that can’t be easily dismantled without severe consequences on Midwestern communities. I would not advocate pulling the support out from under the corn ethanol industry, but I would be looking for an exit strategy. Instead, Obama wants to expand the program. What I wish he would do – instead of making a priori assumptions about the value of ethanol for our energy policy – is put a task force together consisting of opponents and proponents – and let them document the pros and cons around all of the sticking points. Some, like the long-term consequences of aquifer depletion – don’t even seem to be on Obama’s radar. Present policy calls for sending that bill to our children.

The Nuclear Blind Spot

Nuclear power gets a bad rap. While it is true that there have been some very serious incidents involving the nuclear industry, the truth is that all of our energy options involve difficult tradeoffs. It is also true that countries like France derive almost 90% of their electricity from nuclear power. While the majority in France supports nuclear power, in the U.S. we have attached a particularly strong stigma toward the topic. Personally, I would rather see the U.S. use more nuclear power and less coal (particulate pollution kills thousands every year).

As is the case with fossil fuels, nuclear gets only a passing mention in Obama’s energy plan. The reasoning is clear: He thinks we are better off with ‘clean coal’ technology and a mix of renewables. In my opinion, if we discourage nuclear we will ultimately ensure that coal continues to play a dominant role in producing our electricity. While I would be the first in line for 100% solar, wind, and geothermal electricity, the EIA projects that by 2030 renewable energy will only provide 12.5% of our electricity. The EIA has a spotty prediction record, but they do a good job laying out the obstacles that renewable energy has traditionally faced:

Renewable Energy is Expensive and Capital-Intensive: Renewable energy plants are generally more expensive to build and to operate than coal and natural gas plants. Recently, however, some wind-generating plants have proven to be economically feasible in areas with good wind resources, compared with other conventional technologies, when coupled with the Renewable Electricity Production Tax Credit (described below).

Renewable Resources Are Often Geographically Remote: The best renewable resources are often available only in remote areas, so building transmission lines to deliver power to large metropolitan areas is expensive.

I personally believe we are going to exceed the EIA’s projections, but I also believe that fossil fuel depletion is going to put pressure on all sources of energy. Thus, I don’t believe we can afford not to encourage further development of the nuclear industry.

What I Like in Obama’s Plan

As I stated, there is much that I like about Obama’s plan. I have suggested my own plan in the past, and there are several areas of overlap. We agree on the need to push plug-in hybrid cars and to incentivize the purchase of these vehicles. We agree on the need to invest in a green energy future, but we differ on the details. I like his proposal to weatherize a million new homes a year, and I think incentivizing the solar, wind, and geothermal industries will pay big dividends. (I just don’t know how some of this stuff is going to be paid for). I certainly agree with the need to take our energy security out of the hands of foreign powers, but we have some fundamental disagreements on how to get there.

Also, I like the aggressive targets, but I think the most realistic way of achieving them is via a pricing lever. This is one reason I haven’t been overly enthusiastic about the efficacy of raising CAFE standards: We already make fuel efficient vehicles. What we need is the incentive to purchase them, which will be incentive to the auto industry to continue making and improving them.


While I think Senator Obama has great potential in front of him, and like a lot of his ideas, I can’t fully embrace his energy policy proposals. I think there are many positive elements, but in my opinion there are glaring blind spots that could lead to energy shortages. I recognize that he is going to have people trying to pull him in many directions, and this often leads to compromise in favor of the politically expedient over the technically best solutions. As he prepares to govern, he has to be very careful that some of the politically expedient solutions don’t carve out a huge energy shortfall.

Additional Reading

Obama’s Plan: New Energy for America
Geoffrey Styles on the Obama Plan
The Outline of My Energy Plan
CNN: Putting Obama’s energy plan to the test
Energize America

46 thoughts on “A Critique of Obama’s Energy Policy”

  1. Great post! One thing that intrigues me about Obama’s upcoming administration is that their website, http://change.gov has a for to submit comments on policies. Who knows whether they’re actually read, but you may want to paste your post into that form. Click on the “American Moment” button.

  2. I think dkastner’s suggestion is a good idea !

    I know some TOD’ers have posted there.


  3. dave mathews’ comment is unfair. RR is an intellectually honest blogger and his views need to be heard and paid attention to.

    Having said that, I do feel that Robert misunderstands the philosophy of the windfall profit tax and underestimates the conviction of Obama-Biden to implement it.

    The rationale is this: oil companies are unfairly benefiting from the scarcity of a resource, at the expense of the population. Contrary to what Robert says, Obama-Biden are convinced that the oil majors have been underinvesting as it is, to keep the prices high, and therefore taxing their windfall profits will not be particularly disincentivizing for investment. In addition Obama-Biden think that the government would play a better role as an energy investor – by shifting the balance to alternatives – than the energy sector. Thus, the argument goes, taxing the oil majors to pay for some of that investment burden by the government is in the public interest.

    What Obama sees is that the course taken by many governments in getting a bigger bite from the oil revenue – such as Venezuela, Russia, and most surprisingly …Alaska under Gov. Palin – have led to strengthening of government budgets, has paid off for various programs, and generally benefited the population.
    I support the WPT, with one important qualifier: oil revenue from non-traditional sources should be excluded. This should cover EOR, heavy oil, deep offshore, and tar. These are capital-intensive projects and excluding them from the WPT should incentivize investment. Interestingly, both Putin and Chavez understand this and have implemented favourable tax treatment for extra-heavy oil and for EOR.

  4. What happened to Mathews’ comment? Robert, did you delete it? I don’t think you should do that; it is true that it was malicious, however, most people would have come to that conclusion by themselves.

  5. Hi Krassen,

    Dave Mathews is an attention troll. He knows, for instance, that I was not a fan of Bush or Cheney, that I was opposed to the war in Iraq, etc., etc., etc. Yet he still comes on and spews his venom. After warning him a number of times – including a final warning – I told him that nothing he ever writes here again will be allows to stand. Not even “Good day.”

    He still tries. I guess it is somehow cathartic for him. But I can’t tell you how funny it is after having been outdoors all day to come home to multiple rants from him telling me to spend more time away from the computer. Seems that irony isn’t something Dave understands. But enough of him. He has been banned from numerous other boards, and you don’t have to worry about responding to him here. He is not someone interested in an honest debate.

    Now, regarding your point, I do expect a windfall profits tax to be implemented. I also expect it to reduce investment. Refining is already in the crapper again, and with a WPT on the horizon there is further disincentive to invest.

    I am also curious as to whether you would support WPT on others who benefit from the scarcity of a resource. If homes in an area are at a premium and I sell mine for a healthy profit, why shouldn’t I pay a WPT? How about corn growers over the past year, who made far higher profits than in years past? Gold mining companies? What is the justification for singling out an industry that is already heavily taxed?

    Cheers, RR

  6. Krassen, if you want more information on why Dave’s posts will always be deleted, here is what I posted (over a year ago!) after a particularly nasty post from Dave in which he slandered me, called me a racist, and said I supported assassinating Hugo Chavez. Since then, I have deleted dozens of posts by Dave, all of them hate-filled rants.


    Dave Mathews continues to attempt to pollute every thread in this blog. I have had to delete 2 off-topic rants in this thread already. As I said, I will enable comment moderation if necessary. Note that if I do, his comments will be the only ones removed (and I know which ones belong to him).

    Dave, in case you didn’t get the message, you wore out your welcome with your charges of lies, racism, and just general slander. As I said, get your own blog and you can rant to your heart’s content. But this blog is for energy discussions. It is not a forum for a mentally disturbed person’s rants.

    I gave you many chances – even after you called me a liar, after you made all kinds of false accusations. But you showed that you could not even demonstrate the minimum level of civility. So at this point, nothing you say is welcome here. Not even, “It’s a nice day.” Notice that I have other critics, and I haven’t had to take this action with anyone else. Why? Because while they may disagree, they don’t resort to childish, off-topic rants. (I can’t believe that you don’t understand why TOD would ban you).

    Now, instead of obsessing over me, why don’t you go and enjoy life yourself? Get away from that computer for a while. It’s clear from your long diatribes here and at Kunstler’s blog, you haven’t been away from it much lately.

  7. I don’t mean to stir the pot, but Dave also wrote that the Oil Drum seems sad after Obama won. Funny, it seems to me that they were overwhelmingly for Obama and they seem pretty happy over his win. Maybe Dave just needs others to feel sad so he himself can feel happy.

    I get the strong impression that RR also favored an Obama win but won’t come right out and admit it.

  8. Robert,
    I did not know the context with Dave Mathews, so obviously you should do as you seem fit.

    Now, about the WPT. There are other examples of such type of regulation: rents in New York are regulated exactly for this reason. Scarcity of a vital resource would lead to highly negative social consequences if prices are left to the free market.

    The food example is a slightly different story. If the high food prices were solely a function of land scarcity that would be a relevant example. However, the current run-up has much to do with other inputs: petrol, fertilizer, etc.

    Basically, here’s what the public finds noxious and I somewhat reluctantly agree. Whether you own an apartment in New York or the lease on a giant field of sweet light crude, the perception is that you are reaping undeserved rewards. The apartment upkeep costs are minimal and the the barrel of crude still costs a buck or two to pump out from your giant field. The story is much different with the more difficult projects, as I said, EOR, deep offshore, extra-heavy, etc. This is where you have to “sweat” for the oil by investing heavily.

    Free markets should be regulated to richly reward productive work and risk-taking.

  9. krassen,

    "oil companies are unfairly benefiting from the scarcity of a resource, at the expense of the population."

    Why is it "unfairly?" It might be undesirable, you might prefer a different outcome, but I don't see the logic on why this is unfair. If you bought a house in 1998 and sold it in 2005 and made $300,000, is this unfair? Why or why not?

    Higher profits will tend to be made on any scarce (real or perceived) resource, whether it's gold or platinum or wheat…. or iPhones. This is basic economics – it would only be "unfair" if there was a malicious intent by the western oil industry to create the scarcity. You seem to believe that the oil industry is responsible for oil prices?

    "Obama-Biden are convinced that the oil majors have been underinvesting as it is, to keep the prices high"

    This is a ludicrous argument, and indicates that Obama is getting poor advice. There are a number of obvious reasons why this commonly heard claim is false.

    1) The western oil companies simply aren't big enough to impact oil prices, probably not even if they colluded on this scale, through any kind of supply manipulation. Exxon, Shell, BP, Total, Conoco, and Chevron combined produce about 14% of the world's oil. Any incremental cutback by any or all of them is not likely to have a material effect on global oil prices.

    2) Senior industry executives are rewarded by increased reserves, profits, and production. The assumption that reducing supply by some small increment X will increase price by some increment Y which will lead to higher profitability, is unproven. Any CEO who willingly leaves a project undeveloped is taking a very foolish risk that a competitor may take it away from him. It simply doesn't happen. People who make this claim have no industry experience.

    3) Consider the incremental investment. Suppose Shell has a 10,000 barrel per day project. This volume would have zero impact on global prices, as it would represent only 0.01% of global production. Yet it would make Shell roughly $200 mm in revenues. If you were a Shell exploration manager, would you recommend putting this project on ice? All 13,800 E&P companies in the US are making incremental development decisions daily. None of them are going to turn profit away today in the hope that their individual small project (on the global scale) will earn them more at some unknown time in the future (hopefully before their lease expires!) by not doing it today. The industry just does not work that way.

    4) Historical data proves that industry investment increases with price. Corresponding to the dramatic increase in price in recent years, there has been a sharp increase in drilling rig utilization as well as other activity indicators. Companies are spending more, not less.

    5) What of the oil company who "underinvested" in a big project in 2005 at $60 oil, only to see prices rise to $150 then fall to $60 today? This kind of volatility happened before in 1986, and again in 1998. Experienced managers know that the incremental oil price impact from any small (on the global scale) steps they take can be overwhelmed by market forces. They simply don't attempt this kind of hubris.

    The simple fact is that companies invest more in oil when prices are up, because they can earn more profits as smaller and/or more expensive projects become commercial. They invest less when prices are down. With lower prices, many projects fall on the wrong side of the hurdle rate, and they are simply postponed, sold, or abandoned. Like companies in any industry, oil companies are not going to invest if they believe they'll lose money. When the demand for widgets drops, companies produce less widgets. You and Obama assume there must be some kind of scheming going on here. There isn't. It's basic economics.

    If you want WPT, then you have to recognize that it's going to put some projects below the margin and result in an incremental drop in US supply. There is no way around that. There may be a number of legitimate pro and con cases for WPT, but industry sandbagging on supply to artificially increase price is not one of them.

  10. I did not know the context with Dave Mathews, so obviously you should do as you seem fit.

    If you saw the latest two rants that I just deleted, you know why I don’t let anything from Dave stand. I used to just let him try to get it out of his system, but he never stopped. He kept escalating; trying to get attention. Finally I did what every other web site has had to do with him: Not allow him to post. He insults and insults, and if he doesn’t get a response he starts to lie and just make things up. (Yet he claims to be a Christian; again there’s that irony).

    There aren’t too many things that I will delete here: Excessive profanity, excessive personal attacks, and advertising. To say that Dave’s personal attacks have been excessive – despite being warned again and again – is putting it mildly. I think the only thing keeping him going is that he thinks I am distraught that Obama won and this gives him some degree of pleasure. I let my wife read one of his rants the other day, and she said “What he is writing is 180 degrees from what you believe. Is he completely out of touch with reality?” Yes, it would seem that he is.

    Now, that’s the last comment I will make on Dave. If he has nothing better to do than to spend his time writing responses that are immediately deleted, then his life is just as pathetic as I had presumed.

    Now, to your point:

    Scarcity of a vital resource would lead to highly negative social consequences if prices are left to the free market.

    I disagree. By attempting to artificially keep the price low, we fail to make the necessary adjustments for a lower petroleum world. High prices lead to conservation and alternatives.

    It is late here and I think armchair did a pretty good job of responding, so I will sit the rest of this round out. I fly to Europe tomorrow and need to put kids to bed anyway.

    Cheers, Robert

    P.S. Not sure if you are aware, but I referenced your work at ASPO this year. I was asked numerous times about algal biodiesel, and referred people to your work and that of John Benemann.

  11. armchair,
    thanks for the comment, however, things don’t quite work the way you describe. To greenlight a project, the oil companies don’t look into today’s price on CNBC; they make assumptions. The evidence for the past few years is that the oil majors were assuming too low prices (~$30) to assess project viability and were mostly hoarding cash and reserves. That’s why you hear this talk about the idle acres, etc. (Now, the oil executives have been saying that they had learnt their lessons from the 70s-early 80s when they overinvested only to crash in the late 90s with oversupply. There may be reason in that, I am not trying to demonize them…)

    To the point. If you read again my comment you will see that I strongly support excluding oil from capital-intensive projects from the WPT. These are the ones that are marginally profitable and could be killed if profitability is overtaxed.
    The profit margin on conventional oil is humongous at current prices. There is no disincentive whatsoever to kill a project that is profitable at $25-30, only because $100+ would trigger WPT.

    If, however, Obama decides to tax the entire mix, that would be a bad mistake. Even Chavez and Putin are smarter than this.

  12. Robert,
    I did not know that you were familiar with my work on algae. Thanks for referencing it.

    It is mid-day here, so I’ll keep going for a little bit more.

    You are right about the benefits of high prices, however, they do have the negative social consequences that I mentioned, as well. Both are true.

    Rents in New York, while regulated are still higher than most of the world. WPT is analogous: it only kicks in at high enough prices, where the market signal towards conservation and alternatives is still strong, yet it gives the government the monetary means to alleviate the social consequences, as well as to directly invest in the alternatives.

  13. Krassen,

    Not only am I aware of your work, I read your blog fairly often and knew about the back and forth you have engaged in with Greenfuels. I also read all about the DeBeers case via your blog and some comments you had made on various boards. I used that in my ASPO presentation on biofuels to show how people can be easily scammed when technology is overhyped.

    Here is a post in which I referenced your work here on this blog about a year and a half ago. Up until I read your analysis, I had been much more optimistic about algae. After reading it, I kicked myself for not figuring it out first.

    Cheers, RR

  14. krassen,

    Yes I know that companies don’t make investment decisions on today’s prices, but today’s prices are due to current supply/demand perceptions that color their assumptions about the future. Larger companies are more strategic, because they typically have much larger investments that have much longer time frames. So they will typically want to be profitable at some assumed flat price, say $30.

    Smaller companies by contrast tend to get involved in much smaller and short term projects and place more emphasis on current prices.

    The net effect is that when prices are high, you see more active rigs. Go to the EIA’s website and you’ll see a very strong correlation between active rig counts and oil prices. At the national scale, investors are in fact making near term investment decisions based on current prices, as the rig data shows.

    The difficulty I have with WPT is in answering questions like these:

    1) At what price does the WPT kick in? (Let’s say $50 for the sake of argument).

    2) If the price hovers above and below $50 for a given year, how do you calculate? What if a heavy oil investment is made in year 1 and production comes in year 2?

    3) Does it impact a company at the bottom line, or only projects where realized prices were above the threshold?

    4) What about cost increases? In 2002, the average US oil well cost $883,000. In 2004 (last year of available data) the average cost was $1,442,000. Costs are higher still now, as are costs for other services, steel, staff, and so on. What if a company is less profitable at $50 than it was at $35? Is WPT fair to that company?

    5) What about inflation? In real terms, oil is now about the same as it was in 1980. Lots of items have gone up more than that since 1980. Why should the oil industry be singled out?

    6) What about high cost conventional oil plays? The Monterey Shale or the Belridge Diatomite plays in California for example. These typically produce light oil, but some projects may be only marginally commercial at any assumed WPT threshold. Should they be exempt from WPT too?

    Finally, consider that the average California oil well produced 14 barrels per day in 2006. Consider that US oil companies ranked in size from #100 to the end, about 13,800, produce about 25% of America’s oil. The average reserve base of almost 13,000 of the those 13,800 companies is 800,000 barrels.
    The big companies will continue to survive with WPT, but WPT is going to end up hurting a lot of small producers, and I believe it would have a pronounced impact on domestic production.

  15. (Really on my soapbox tonight… apologies)

    I wanted to add a note to explain some detail behind the ridiculous notion of “use it or lose it.” This is another indication of bad advice going Obama’s way. As RR said, such provisions already exist. This is why they are called “leases.”

    If a prospect is 100 acres in area, it doesn’t mean you just run out and surgically lease those 100 acres. You are likely to have to acquire a collage of several leases, combining for significantly more than 100 acres, to protect your interests. It may turn out that one or more, or portions of, those leases are ultimately found to have no oil.

    Good leases can cost hundreds or even thousands of dollars per acre. A square mile lease could easily cost well into the six figures. A prime offshore lease can go into the tens or even hundreds of millions. Additionally, an oil company is usually required to pay annual rentals on idle leases. And, it may find that its royalty interests due to the lessor increases for each year the lease remains idle. There is absolutely no incentive for a company to tie up millions in non-performing leases and then pay more millions in rentals on leases it has no intention of ever drilling.

    Companies may buy many leases at one time, for example in an offshore lease sale. It may have a number of prospects it wants to drill in its lease inventory. But no company then rushes out to drill all of them at once. Why not? Because a) there would be very high short term capital requirements; b) staff and rig availability constrain the pace of drilling; c) by drilling through the inventory in a thoughtful and strategic way, a company can learn more about geologic and engineering aspects of the prospects, such that each well will be more intelligently located and drilled. Often there is a cost reduction associated with a learning curve. Some poorer prospects may be condemned without drilling in this way, thus saving companies millions. There aren’t enough geologists, engineers, and drilling rigs for all companies to drill all new prospects immediately after acquiring them.

    Some dry holes have negative implications for remaining prospects, such that management may now feel they are too risky to drill with a high level of capital exposure. Sometimes companies have to prioritize due to lack of capital, and put the prospects in a queue. Sometimes there are geologic or engineering issues associated with a prospect that makes its viability highly uncertain. Often there will be an attempt to sell interests in such prospects to joint partners. This process can drag out for months or even years. The leases stay in inventory until they are placed.

    Many companies have what is known as “fee” acreage. This means the mineral rights are owned outright. The acreage could be a result of some deal made many years ago, for example with railroad companies in California. Many of these kinds of assets have little mineral rights value.

    The bottom line is that you can’t translate acres into barrels with a simple formula, as the Obama policy statement seems to suggest. Some leases are better than others. If new leases, such as in offshore California for example, come up for sale, then some of these will likely have far better potential than many existing leases. The net result will be an upgrade to the prospect inventory at a national level, a reprioritization of the domestic drilling agenda, and higher reserves and production in the future.

    As to the 3% of reserves and 25% of consumption argument, consider that North Slope ultimate reserves (established to date) amount to something in the range of 1% to 2% of world reserves. In the late 1980’s, the North Slope provided around a quarter of US production, and even now still account for one-eighth of US production, 20 years later. These small percentages of world reserves can be highly significant to the US energy supply and balance of trade, not to mention jobs and oil prices. The North Slope peaked at around 2 million barrels per day. What would have happened to oil prices earlier this year if 2 mmbbls of US production were taken off the market?

  16. “There is no disincentive whatsoever to kill a project that is profitable at $25-30, only because $100+ would trigger WPT.”

    This is of course true, as stated. But to categorically say that all conventional oil projects have humungous profits at current prices can’t be correct. There is always a margin for conventional projects, no matter what the price.

    Would you develop a 1 million barrel oil field in 8,000 ft of water at $60 oil? How about $100? Or $2000? Clearly, as price goes up, more and more projects previously beyond the margin begin to become attractive. The same is true, in reverse, when prices fall. Projects start to fall out of the inventory.

    To say that “the profit margin on conventional oil is humongous at current prices” disregards the material differences in reserve volumes, flow rates, development costs, risks, and financial terms that exist among the thousands of projects around the globe.

    Risk is not often considered in the WPT debate. If you take away an industry’s upside with WPT, then you have decreased that industry’s expected long term return on investment without reducing its risk. If you have two investments to choose from, both of which have the same average return, but one is riskier, which one would you invest in? WPT, apart from eliminating projects at the margin, should also reduce long term investment in the industry, as investors would tend to seek similar returns in less risky places.

  17. wow, Robert, I had no idea that serious energy people are checking out my blog. You inspire me to cut down on the rants and raise the substantive energy posts.

    all valid points, very valid.
    I think you should consider forwarding them to the office of the President-elect, as suggested above. I am a big fan of Obama, however, he needs to deliver on the promise of being reasonable and thoughtful.
    If the Internet was good enough for cash and volunteers, it should be good enough for policy feedback and advice.

  18. The market rewards those who invest correctly. If you think, a particular business is under-invested (like oil), you should invest in that business (buy a lease or invest in a company that is active in getting oil produced). If you are correct, then the price of oil will increase and you will be rewarded with money. If you are incorrect, then you will lose money.

    Put your money where your mouth is. Have the guts to ante up. If you didn’t have the foresight to invest before, then by not investing, you took the position that the price wouldn’t rise.

    Looking back and saying there should have been more investment is just stupid. I can wish all I want that I had invested in Microsoft 20 years ago, but I didn’t. I didn’t even think about it. The market rewards those who invest correctly and punishes those who don’t…even if don’t do anything.


  19. krassen – I’ve read your work as well. I hope you will cast a skeptical eye towards the Obama administration just as you have with M2E and others in alternative energy. There may actually be more hype and unrealistic expectations surrounding Obama than there are with the energy hucksters.

    Obama has built his run to the presidency not on a record of solid political accomplishment, but rather on his rhetorical and speaking skills. What little track record he has is quite dismal. When Obama was in a position to help his constituents, he instead helped private developers who could in turn help Obama achieve higher political office. John McCain should have taken the Straight Talk Express to the Grove Parc Plaza.

    We HOPE for CHANGE from Obama and that he will do much better as president than he did for his constituents on the south side of Chicago.

  20. The theory behind WPT, and the reason it does not apply to corn or houses, is the world oil trade is dominated by a cartel which actively manipulates prices. Cartels severely distort the supply/demand response upon which free markets depend. That’s why we outlaw them. When US companies benefit from cartel price manipulation they receive a windfall which they would not have received in a free market.

    You may argue there are better ways to deal with windfall profits than a tax, but arguments which deny the windfall itself are intellectually corrupt.

    In other news, transition chief Podesta says Obama will issue executive orders to reverse Bush policies, including the opening of ‘senstive’ Utah lands for drilling. There’s a lot of wishful thinking that Obama will govern from the center, but all evidence indicates otherwise. The left has waited 25 years for an opportunity, and Bush, Greenspan and Wall Street just gift-wrapped the biggest one in 80 years.

  21. Well it didn’t take long for CHANGE .

    Rahm Emmanuel was on ABC yesterday, it was as if he had never heard of “tax cuts for 95% of Americans” . This might set a new record for backpedaling on campaign promises. Most politicians wait until they get in office, it hasn’t even been a week since the election. That’s CHANGE you can BELIEVE in.

  22. doggydogworld,

    I don’t think anyone would deny that windfalls do exist as a result of OPEC policies (in some years – there wasn’t much of a windfall between 1983 and 2003). But OPEC doesn’t answer to western oil companies… so why should those western companies be penalized for something outside their control?


    Thanks, I think I’ll do that.

  23. Krassen, I wouldn’t hold Venezuela up as an example that we should follow. It may be true that stealing the assets of the oil companies after suckering them into making huge, immovable investments, has led to a short-term boost in government revenues. What about the long-run as the property they stole slowly degrades?

    I agree that the resources in some sense belong to the people and that governments should drive a hard bargain with oil companies that want to produce those resources. But having done that, a deal’s a deal. These are long-term investments requiring enormous capital. Who’s going to do that if the outcome, already uncertain, is even more uncertain due to political risks?

    As for the oil companies under-investing in more production, I find this incredibly ironic coming from the Democrats, who have sought to keep oil companies out of the most promising areas in our own country, and may continue to do so (Obama’s already talking about reinstating the drilling ban with an executive order). With foreign reserves increasingly in the hands of thug states and their property being taken from them by same, exactly where do the Democrats think they should be investing?

    Some Democrats answer this last question by mumbling about alternative energy. But what, other than capital, do oil companies have to bring to the table? There are already numerous companies in the PV business, the solar thermal business, the wind energy business. Oil companies aren’t going to become power utilities, so what exactly are the Democrats looking for? In truth, if the oil companies really are running out of things to invest in, the best thing they can do is return the money to their shareholders (namely, all of us in our pension plans and 401ks) and let us put the money into new companies engaged in these alternatives.

  24. RR-
    At $10 a barrel (possibly coming), look for energy policies to be put on back buner…again, and for short-sighted reasons.
    I share RR’s sentiments exactly when it comes to Obama’s energy plan. How Obama will ever stare down the farm lobby is beyond me. All we can hope for now is that corn yields continue to rise per input and that second-gen ethanol plants offer more EROEI.
    And until we see $5-a-gallon gasoline, we will not see the public embrace high mpg cars. A federal gas tax, to support infrastructure rebuilding, is both good energy policy, and also sound conservative economics, as users of the infrastructure would pay for its upkeep.
    We can tax gasoline, and send revenues to the U.S. Treasury, and forestall the day of reckoning for several years. Or we can continue to send hundreds of billions to thug oil states, and get caught pants down in the next oil crucnh, whenever that may be.
    For better or worse, oil prices could be very soft going forward. Here in Los Angeles, used cardboard prices have suddenly collapsed. Why? Until recently, cardboard was bulked up, put into containers, and shipped to China’s very hungry paper industy. No more. China’s demand for cardboard is waning fast.
    I read about factories closing in China, in waves, in the LA Times.
    With no free press, China is really a cipher. They report economic figures, but who knows squat?
    Crude demand has been falling or mushy in the Westernized world for years. Japan uses less now than in 1972, despite long, long periods of relatively cheap oil.
    If China’s demand for crude also drops in months shead…$10 a barrel anybody?
    We see $10 a barrel in 1998, when we still had global economic growth. In a global recession, where is bottom?
    Interesting times.

  25. RR-
    Re Dave Mathews: I think RR is right to delete any poster who insists on ad hominem attacks. One of the joys of RR’s site is that posters usually debate issues, and even take interest in opposing views, rather than just attacking.
    Most posters get it; some do not.

  26. All, I am headed to the airport, on my way to Europe. I will be offline for a couple of days. My wife will be keeping the trolls at bay until then.

    Cheers, RR

  27. Benny – you may be on to something. Cardboard has free shipping back to China as nearly all our imports from their come on container ships that are mostly empty on the way back.

    China buys bulk cardboard to make into boxes for shipping goods back to us. If they don’t need cardboard, likely their factories are piling up with inventory they can’t sell. Earlier this year I wondered if there was a Bejing Olympics effect. The Chinese needed to keep things looking good until after the Olympics. So they were out buying fuel oil for power plants so they could idle coal emissions, keepign factories up to tamp down civil unrest, and spending agressively on infrastructure.

    $10 oil, probably not, but $50 wouldn’t surprise me.

  28. Armchair, as a rule we do not let people profit from illegal activity even when they do not knowingly participate. If you are duped by a Ponzi scheme but are lucky enough to get out with a profit before it crashes, the gov’t will take your money to help reimburse fellow victims. If you as a storeowner unknowingly buy stolen goods the police will confiscate them without reimbursement.

    The politics of WPT may be about punishment but the theory is about preventing gain from market manipulation, even via passive participation.

  29. King-
    $50 oil? The Dated Brent Spot has been trading in sub-$60s already. And the recession may be just starting.
    The doomers obsess on many issues; one issue they never discuss is oil demand in developed nations. Demand in developed nations is mostly stagnant, even during global growth and cheap oil (1982-1998).
    Oil demand in a global recession?
    We may see 3 billion barrels a year piling up worldwide, with no home (assuming a 10 percent drop in global demand). A few years of that, and $10 a barrel may happen. Oy maybe sooner.
    The good news is that applying a federal gasoline tax now could permanently depress U.S. oil demand, thus prolonging the global glut, and retaining hundred of billions of dollars annually within our own economy. A domestic jobs boom would result.
    I hope someone is telling Obama about this option. I don’t think he or the Dems have the guts to apply the tax, though. Even a tax phased in over years.

  30. king@5:44
    I am sure there will be plenty of people holding Obama’s feet to the fire. My thing is being focused, and I DO have something that may turn out to be a story, but it is too early to tell.
    Sapphire Energy is a new algae company that looks a bit suspicious to me, although I can’t quite pin it down yet. I know one of the founders and don’t think she has what it takes to back up their outlandish claims.
    More interesting is who the lead investor is: a lot smarter and more sophisticated person than the GreenFuel and M2E characters, but still with a history of “hype and dump”. What may be interesting to you is that he is one of Obama’s financial advisers. I am tuned-in, and any hint that the administration would “pick a winner” in algae, without serious scientific and technical analysis, will be a major disappointment.

    I don’t like what I am hearing, however, it is too early to to pound. We don’t know much about Sapphire, they are quite secretive, and we don’t know if Obama will be picking winners among competing technologies, much less the ones backed by his fin. advisers.

    anonymous @6:52
    Of course, Chavez and Putin should not be our heroes, however, their experience provides data that we should not ignore. The moral hazard of nationalization is substantial, however, a clever WPT is not the same thing. Also, I think their policies on stimulating EOR and investments in the extra-heavy in Orinoco are clever.

    With respect to oil-permits: it is too politicized on both sides. U.S. can and should accommodate both: increased production and care for the environment. The problems is that the Democrats use the environmental concerns to demonize the oil companies, while the Republicans use the high gas prices concern to demonize the environmentalists. Hopefully, we can get beyond that.

    I think your last point is the most important one. We are witnessing a massive market failure in many sectors. The “free” market signals were unable to protect the banks from themselves, unable to prompt the oil companies to ramp up production and invest massively in alternatives, unable to direct private capital in scientifically sound new technologies (witness my blogs on M2E and GreenFuel).

    Why? Because this is not the free market of your grandparents, where appetite for profit (or “greed” as people like to say now) was always counterbalanced by fear for losing the capital.

    Greenspan says that he was shocked to see that the banks could not protect themselves. Well, “banks” are run by people, and these people lost nothing. Their bonuses from the last few years are not going to be disgorged, their golden parachutes are unchallenged…
    Similarly venture capitalists who invest with utter contempt for the scientific reality, still collect their 2% fees, which can add up to substantial figures on funds in the high hundreds of millions that run for ten years.

    If you think 401(k)s will make prudent investments in energy you are completely mistaken. The whole 401(k) industry exists for one single reason: management fees. When the markets go up the fund managers take credit, when the markets go down, well, it’s the market’s fault, the managers still get their fees.

    The Democrats think that an expanded role for a smart and competent government will fix a lot of the problems, and are probably right for this particular moment. However, in the long run the “free” market needs to be fixed and its incentives and regulations reworked so that it richly rewards productive behaviour and risk-taking and not blatant parasitism.

    A great book in regard to this discussion is “Battle for the soul of capitalism” by Jack Bogle. Highly recommend it.

  31. Krassen: I totally agree with your comment that people risking capital today are not risking their own capital. Today, it is “OPM,” or Other People’s Money. Nearly 10 years ago, we saw the example of Long-Term Capital Management. They leveraged heavily. If they bet right, the managers would have made fabulous fortunes, in the billions. If they bet wrong..well, they still make handsome salaries, and do not go to prison.
    The rational choice for such hedge fund managers is to leverage as much as possible, “bet the moon” and hope you make billions, personally. I would, and you would too.
    Tell me I can manage $100 million, or leverage 100-to-1 and manage $10 billion — yet I keep a fraction of the profit — and I will leverage up. Of course. To repeat, if I bet wrong, I lose $10 billion, and completely wipe out my investors. So what. If I had bet right, I would have kept a few billion personally.
    After LTCM collpased in 1997, we were told it would be impossible to regulate hudge funds and leverage, despite the fact the LTCM collapse had negative global impacts.
    Now, we have dozens upon dozens of LTCMs out there. It is a spaghetti of leverage and debt swaps, and derivatives and what not.
    Obviously, we need to regulate leverage as an institutional investment tool. I cannot believe that leaving the global economy vulnerable to kids tossing around trillions of debt online is our only option. I suspect sanity will prevail after this latest meltdown.

  32. If you think 401(k)s will make prudent investments in energy you are completely mistaken.

    Many plans allow people to invest in index funds, as do most pension plans. If an alternative energy company goes public and gets into the indexes, it will attract capital from these funds, because they are on autopilot.

    The Democrats think that an expanded role for a smart and competent government will fix a lot of the problems, and are probably right for this particular moment.

    Maybe. Up to this point the government has not demonstrated any particular wisdom – it appears driven by political considerations. Thus we are still going strong for ethanol to placate voters in farm states, while dissing nuclear to placate green activists. I would characterize the last 30 years of unwise energy policy as government stalemate/gridlock. Now one party will have it all their way, so at some level you’re correct, there will be progress on one end of the spectrum, but obstruction of any ideas (even good ones) that originate from the other side.

  33. doggydogworld,

    I really don’t understand your perspective on this. OPEC may be manipulating (or some might say managing) the market, but it’s their oil and they aren’t bound by US antitrust law. It is what it is, and western oil companies (and their customers) have no choice but to operate in this environment. This is the reality.

    If OPEC turned on the taps and competed fiercely for market share, assuming that the undeveloped resources are there, here’s what I think we’d see (think back to 1986):
    1) a collapse in oil prices to the low teens or even single digits for the short to intermediate term;
    2) massive increases in fossil fuel consumption, and therefore pollution and greenhouse gasses,
    3) the decimation of the western oil industry and a steep decline in exploration and development investment in the US,
    4) a collapse in funding for alternative energy research, and a decline in incentive to do so as commercial thresholds will be shifted years into the future,
    5) a huge increase in US and most western countries’ oil imports, primarily from low cost Middle Eastern production, and
    6) as a result of these factors, a very severe energy crisis at some point in the future, maybe a few decades down the road, as OPEC finally runs out of spare capacity and begins to decline, or some political event causes supply disruption.

    What do you then suggest as an alternative? Western oil companies voluntarily give away profit upside (good luck finding investors)? Sue OPEC (I can imagine how well that would be received, and what the implications might be)? I think the reality is that we have to live in OPEC’s world, but I would welcome any suggestions to get out of this mess.

    Look, the global oil industry is producing around 85 million barrels of oil per day. OPEC doesn’t set prices, it sets production quotas that in turn influence prices. If OPEC turns on the taps to drop prices, as you criticize them for not doing, then there will be too much oil on the market, because the west is also producing. Inventories will build in the short to intermediate term, until high cost western production starts to be shut in. Why should any industry (or OPEC) invest in capacity for more widgets if the world doesn’t want more widgets? This to me is like criticizing the shoe industry for not producing more shoes, because then they’d be a lot cheaper for everybody. One could charge that they are manipulating the price of shoes by not building more shoe factories. True, there are no shoe cartels, but the realities of supply and demand are the same.

  34. Armchair – here’s my perspective. We run this country on a general economic theory of free markets, with government oversight to handle monopolies and other distortions. When wholesale drywall prices went from $100/msf to 250+ we did not impose windfall profits taxes because our theory said high prices would drive drywall makers to add capacity. And that’s exactly what happened. They not only reinvested every penny of profit into expansion, they borrowed money so they could build new plants even faster.

    Did western oil companies respond similarly? No. During the five year price spike they invested roughly enough to offset depreciation. A little less at first, a little more recently, but their overall investment pattern was the polar opposite of drywall makers. Does this prove oil companies are evil and greedy? Of course not, their response is perfectly rational given their situation. Your own comments show how so-called “Big Oil” is in fact a mere pawn subject to the whim of OPEC, Russia, etc. It is absurd to expect oil companies to follow free market principles when they compete in a rigged market.

    It is equally absurd for us to build our oil policy upon free market logic. We cannot expect high prices to spur XOM, COP, etc. to drown the world in a flood of new oil. Your own comments illustrate they are too small to have much effect on prices. (By extension, your comments also illustrate why a domestic WPT does not dramatically affect oil prices).

    What should we do? As you say, we cannot compel OPEC to follow free market principles. Our response must therefore focus on the demand side. The last few months have shown how powerful demand response can be, but global depression is a pretty self-destructive way to influence oil prices. Our problem on the demand side is not SUVs, suburbs, lack of monorails, etc. We have abundant domestic energy to fuel our lifestyle. Our problem is cars which depend almost completely on oil. If we build true flex-fuel cars which give consumers a choice between oil, coal, natgas, nuke, wind, etc. we will free the oil markets for ourselves and posterity. There would no longer be discussion of windfall profits — if oil prices spiked consumers would merely stop buying oil. It’s a simple concept. The economics are a no brainer and the national security benefits are priceless. The only issue is willpower.

  35. doggydogworld,

    OK I see what you’re saying. But are you criticizing the western oil industry for not investing more? Here are annual wells drilled in the US starting in 2000:
    2000: 29,038
    2001: 35,303
    2002: 27,655
    2003: 32,511
    2004: 36,379
    2005: 42,673
    2006: 49,101
    2007: 48,501

    We’d get similar numbers if we looked around the world. The western oil industry HAS responded in the way the drywall industry did. Investment has soared. The results aren’t there in terms of massive new reserves to drive down prices simply because the geology and politics are non-cooperative, not because the companies are underinvesting to keep supply down, as I think you’re implying (?)

  36. King-
    Get ready to be MOAGed.
    Brent Spot down into mid-$50s already, and NYMEX now below $60. And this recession is just underway, and may be a global downturn (I hope not). Mysteriously, China doesn’t want paper or cardboard from the West Coast of USA anymore. No need for packaging material.
    Speculators control the price of oil on the NYMEX, so where is bottom or top, I cannot say. But at some point, there could be the Mother Of All Gluts (MOAG) on world oil markets. I just invented that: MOAG.
    Get ready to be MOAGed.
    Let’s hope all the stimulus works, and we do not get a global recession.
    If we do, $10 a barrel, here we come.

  37. Benny – look at the $ compared to the Euro and GBP. Over the summer it was $2.02 = 1 GBP. Now it is $1.54. The $ has gained 24% relative to the pound in just 4 months! I might be able to afford to travel to Europe again!

    We are back to fundamental supply/ demand. Somewhere before $10 you start hitting the marginal cost of production. I’ve heard that they are laying down rigs in the tar sands and laying off workers.

    I may want to revise my figure and say that $40 oil wouldn’t surprise me.

  38. Armchair, thanks for the well data. I mostly look at the majors capex vs. depreciation because I can quickly pull that from a few SEC filings. I don’t have a quick and easy source of primary data for the little guys. I’m aware they are net investors, I just don’t know the magnitude.

    Are those wells just oil or do they include gas? The US gas market is healthy. We’re supplied domestically and from free market countries like Canada. The extreme danger of low-priced NOC imports is absent. I know hedge funds and private equity poured huge amounts of capital into the industry of late, but every deal I personally know of was gas.

  39. Great post. Just a detail I wanted to comment on.

    You said:

    If a windfall profits tax is in place, I believe that this will discourage investment, and ultimately lead to higher prices as supply is constrained. Hence, the same objective is ultimately achieved – except the oil companies get blamed instead of the politicians. But the biggest difference is that gas taxes can be implemented or removed in short order. Taxes that discourage investment will have unpredictable results.
    I don’t think there is any doubt that a windfall profits tax won’t help add to supplies. And refunding it back to consumers sends the wrong message: If gas prices go up, the government will protect you by taking the money from the oil companies and giving it back to you. Where is the incentive for the consumer to conserve?

    I completely agree with point #1: A gas tax or carbon tax is easier to turn up and down in response to developments, while a WPT is going to have long term consequences that are hard to control. But I think you also hit on the main benefit of a WPT: it’s politically viable. While a gas tax is better from a technical point of view, if Obama spends all his political capital on that, it will not be able to implement the rest of his agenda, or even stick around to make sure that what he does implement stays on the books long enough to make an impact.

    However, I don’t understand your second point: “Where is the incentive to conserve?” It’s right where it always has been, between the pump and the pocketbook. If everyone in the US gets $500 back, regardless of their energy purchases, then the same overall incentive to use less fuel still exists. The rebate helps alleviate the financial stress on the poor, and it does send the message that the government will help people deal with the consequences of high gas prices. But it does nothing to lower the price of gas directly. If your consumption is sufficiently modest, then you could actually see a net profit (vs., say, $1.50/gallon gas but no rebate). But if you’re wasteful, you’ll just wind up being a little less worse off than you were without the rebate.

  40. However, I don’t understand your second point: “Where is the incentive to conserve?”

    Hi GE,

    I haven’t seen you around in a while. The reason I think it sends the wrong message is because it signals that the government is going to intervene if your fuel bill gets too high. While I have proposed a tax/rebate system, that would a defined, multi-year approach in which I attempted to offset the average person’s tax increase with a tax rebate. In that case, I can see that there is still incentive to conserve. In the case of these one time windfall tax/rebates, I think it just sends a different message; one that says don’t worry, if your fuel bill increases we will take from the oil companies and give back to you. (Also sends a message that it isn’t the fault of the consumer, but rather of the oil companies).

    Cheers, RR

  41. Robert,

    while I share most of your views regarding Obama’s Energy Plan, there is, in my view, a glaring absence of urgency. There is a critical need to implement alternatives that reduce CO2 irrespective of private sector preferences. EOH in basalt or sandstone is not sustainable and clean coal is at least a generation away.

    FDR told the auto industry, look you are going to produce tanks and other military transport, not cars. He told the scientific community to build the atomic bomb, not play with theories of their choice.

    I continue to believe that a Manhattan type project for distributive renewable energy can be placed on a “War Time” footing to manufacture and deploy, turbines for wind and water energy, solar cells, and biofuels not ethanol in five years or less. We need as you say to eliminate coal as a source of energy. It would take enormous political awareness and will power to achieve, but so did the war effort when it was clear that money could be made to lift us out of the depression. We are on our way there now. Deja vue all over again.

    A powerful argument needs to be made for using flowing water for energy rather than passing through it to retrieve oil and gas. There’s something terribly stupid about that process.

    We have the technology but not the wisdom or fortitude to employ it. Alexander Gorlov’s technology http://www.gcktechnology.com, along with Verdant’s rotors and government financed tidal barges in five or six locations around the East And West coast could create the spark for a serious effort to reduce coal fired plants in the East and Pacific Northwest. These technologies could be in place by the middle of next year. Experts have calculated that 1% of the energy fromk the oceans can power the entire planet. And, 1% of the energy from the Gulf Stream can power the Northern Hemisphere.

    There is no doubt that CO2 is the enemy, we need to find solutions that will not take five to ten years to implement. Nor can we afford a shotgun approach in the allocation of resources in an effort to please all of the energy alternatives.

    Knowing the dangers of methane hydrate disasociation, and an overly acidic ocean is critical to initiating immediate, actions designed to stem and reverse the chemical dissolution of the planet.

    The climate situation is much, much worse than most know because: The oil and gas industry has been mining for oil using fresh water, carbonated, fresh water to pressurize their wells, since the mid 1800s. They also use phosphoric acid, the ingredient needed for RNA and DNA formation.

    They only use fresh water. Salt water will not do; if you see it mentioned it is the rare case of desalinization. As a consequence, they have used up as much fresh water from our planet as they have produced oil since the beginning, which is now a little over 150 years ago.

    Unlike other industrial uses of
    H2O, the depth they put the water means it is never coming back to the water table, and it is polluted, because the acid brew has been dissolving the crust of the earth slowly but surely, chewing up metals dissolving them into their sulfides and even forming methane gas, a simple chemical reaction when you have CO2and H2O way down there in the earth where there is a lot of fully decayed carbon.

    We are a closed system. We are not making any new water at this point in our planet’s history. Our shortage of water on Earth today, and it is getting critical, is due to the oil and gas industry, not only because they remove water, but because when you remove water from rivers, lakes and streams, and the depth gets lower and narrower, it evaporates faster, and soon you have drought.

    Removing it directly from the water table has even worse results. Rain for the most part stays in place; what goes up comes back down. The only new water comes from rain storms in coastal areas where water evaporates from the ocean and comes back down on the land.

    Now you know what caused the dust bowl in the 30’s; it was the first round of oil exploration in Texas, Oklahoma, California etc. all the water they used from the immediate area to drill.

    I sent Andersen Cooper an email when he stood in front of the disappeared Lake Chad in CNN’s Planet in Peril series, a program sponsored by Conoco Phillips, to tell us the lake had disappeared due to global warming. I suggested that he go back and tell the public that the water was used by his sponsor and other fossil fuel producers from the early 1900 on to drill for oil in the Mid`East and Africa. He did not take me up on my suggestion; I did not even get an answer, but I notice that Conoco Phillips is no longer a sponsor; now it is Dow Chemical the company that makes all those “petro” chemicals.

    Methane gas likes water; with fresh water, and fresh water only, it can form its hydrate. It does this by compressing itself about 170 times into an ice lattice. Methane in all but one case on Earth needs low temperature and high pressure to form as it does deep in the earth where the industry finds oil and gas. The one exception to the rule is the Arctic; it is the only place that methane can form its hydrate at atmospheric pressure, because it gets cold enough to put it in the hydrate stability zone without high pressure.

    In fact, that is where methane hydrates were first discovered on modern day Earth, in the late
    1930’s, and they were discovered by the oil and gas industry forming in their pipe line, which was only buried a few feet deep in the Arctic permafrost, and which the industry had built from Norman Wells in Canada’s North West Territories to Alaska’s Pacific Coast to serve the needs of World War II for the allies.

    Now you would think that it would have made the cover of Time magazine, something new, never seen on earth before, and you would think that the oil and gas industry might have figured out, or at least had a passing thought that what they were doing in the Arctic, draining all the summer permafrost lakes, ponds and puddles and the Mackenzie river to use for oil well pressurization, had something to do with this new “thing.”

    You will see online when you research the Canol pipeline (at least the last time I looked), that they say they had to shut the pipe line down, because it had problems, but they do not say what the problems were.

    The oil and gas industry grabbed Groucho Marx’s flying duck, and had it fly away with this new secret word . . . “methane hydrate.” You may have seen the duck recently, without fanfare, dropping in and quickly out again with this now decades old cloistered word; most recently on the top left hand corner of page three in big newspapers in a story about this thing called gas hydrate.

    The duck uses the Associated Press for its delivery , and the duck is fibbing. It says that there may be some new technology that will allow the hydrates on the North Slope of Alaska to be harvested; the duck then tells us that the oil companies are skeptical. Of course the duck really knows just what the oil men know: You cannot harvest an explosion.

    So this story is really a prelude to either the implosion or the explosion of Alaska’s North Slope because: Methane gas likes its hydrate bride better than anything else and when it gets threatened by something say like the Arctic summer heat and thinks it is going to have to return to its gaseous form(destabilize), it counters this with a cleaver little attribute; It takes up heat into its methane molecule, a lot of heat, a very lot of heat; it can hold up to 400 degree F- in every molecule of methane -without- and I repeat -without melting the ice that encircles it. Pretty nifty, huh?

    Well alas at some warm point in time it cannot hold on to its water bride any longer, and it destabilizes, first fizzling and then exploding, and it releases the gas and the heat. That is why for the first time, in 1941, after two years of geared up production for the war you had a 101 degree F day in the Sub Arctic.

    All winds originate from the Arctic. You cannot normally get Palm Springs weather in the Sub Arctic, without an artificial stimulus, and the coldest places on earth cannot warm faster than the hottest places- without a outside stimulus also. So you see the reason the Arctic ice is melting faster than everyone thought is because it is warm enough now to start chain reactions every summer and leak tons of released hydrate (gas), into the atmosphere and the Beaufort Sea, and it is chock full of heat, tremendous heat from up to 85 Arctic summers.

    When does this effect begin in the North Slope, if it has not already begun. At that point we can kiss our booties goodbye. What? five, ten, fifteen years before the permafrost melts enough to expose the methane hydrates.

    Looking forward to you comments


  42. Rob,

    That was a great post; too good to be buried down the page like this. Can I post it as a stand alone entry? If so, would you like for me to take it as is, or is there anything else you would like to add? If so, you can send it to my e-mail (which you can find if you click on my CV link).

    It’s just that you put so much into that post, it deserves more eyes on it. You would need to be prepared to defend it, as there are some posters here who have a contrary view of climate change.

    Cheers, Robert

  43. Ok, I’ll do inow it may tke awhile the Redskins play today and I live in Redskin country. Need to see if they can at least beat the worst team in the NFL.


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