Just Say "Drill"
by David A. Ridenour
To burst the oil bubble, just use a drill.
If Congress has the political will to stand up to special interests and develop domestic sources of energy, oil prices will come tumbling down. The U.S. has ample reserves of oil.
For more than a decade, environmentalists have prevented the U.S. from drilling for oil and natural gas in the "1002 Area" of the Arctic National Wildlife Refuge (ANWR), an area in ANWR's Northern Coastal Plain that was set aside by President Carter and Congress for possible oil development back in 1980.
At 1.5 million acres, 1002 Area is less than eight percent of the entire refuge. An Energy Information Agency estimate puts the amount of recoverable oil there at 10.4 billion barrels.1
President Bill Clinton vetoed a bill authorizing drilling in ANWR under pressure from environmentalists in 1995. Had he not done so, nearly 1.4 billion barrels of oil would likely be flowing from ANWR this year.2 That's equal to about one-quarter of our current imports.3
Subsequent efforts to open as little as 2,000 acres to oil and gas exploration have failed repeatedly, but Senator Pete Domenici is trying again this year.
If you think oil prices are inflated, consider environmentalist claims that opening 2,000 acres to development would have a devastating impact on ANWR. The acreage involved is just 0.01 percent of ANWR's total.4
The U.S. also has enormous oil and gas reserves in the Outer-Continental Shelf, but environmental lobbyists have succeeded in keeping these resources locked away, too. There's been a moratorium on offshore drilling in place since 1981.
The U.S. Department of Interior's Minerals Management Service estimates that the areas covered by the moratorium contain nearly 19 billion barrels of oil that can be recovered, equal to about four years of U.S. oil imports.5 Don't look for the Outer-Continental Shelf to be opened anytime soon, however. A U.S. House Appropriations subcommittee rebuffed an effort to lift the 27-year moratorium in early June.6
The U.S. also has considerable reserves of oil shale - a sedimentary rock that produces oil when heated. The Bakken Formation, located in North Dakota and Montana, contains between 3 and 4.3 billion barrels of previously undiscovered, recoverable oil7 while the Green River Formation, located in Wyoming, Utah and Colorado contains between 500 billion and 1.1 trillion barrels of recoverable oil. The midpoint estimate for the Green River Formation alone - 800,000 billion barrels - is three times the known reserves of Saudi Arabia.8
The environmental lobby, predictably, argues that opening more areas to drilling won't solve the energy problem.
Its first argument is that new production from these areas will take years. "...Lifting the ban [on drilling in the Outer-Continental Shelf] would do nothing to reduce gas prices for the average American family," said Carl Pope, executive director of the Sierra Club. "It would take a decade to bring new leases into production and then they would only line the coffers of the oil industry..."9
While production may be years away, the decision to drill would have the immediate result of bursting the oil bubble created by investor speculation. Speculation has contributed significantly to the price of oil. In April, when oil prices were hovering around $100 per barrel, executives from the five largest oil companies testified before the Senate Energy and Natural Resources Committee that crude oil should be priced at approximately $55 a barrel, based on the supply and demand levels at that time.10 More recently, Mary Novak of the economic forecasting firm Global Insights estimated that if investor speculation were eliminated, the price of a barrel of oil would be just $75-$80 a barrel.11
Why are so many investors flocking to oil? Because two American reserves are going in opposite directions. The Federal Reserve has produced a veritable gusher of dollars, driving down the dollar's value, while our oil reserves are kept below ground, keeping oil prices high. As long as investors expect demand for oil to grow and supplies to remain the same or shrink, they'll continue using oil as a hedge against the devaluing dollar.
Drilling would change all that.
The greens' second line of argument is that OPEC will respond to our domestic oil development by reducing oil output, keeping prices high.12
The reality is that sustained high prices aren't in OPEC's long-term interest, as high prices provide incentives to some oil development projects that wouldn't exist otherwise. The Rand Corporation estimates that crude oil prices have to be between $70 and $95 per barrel for oil development in Green River to be profitable.13 Once developed, these resources would be here to stay, cutting into OPEC's share of the market.
Members of Congress would do well to think of themselves as members of the Federal Reserve and oil as the money supply.
The facts are clear: Developing domestic sources of oil will help end the current energy crisis, and with two-thirds of the American people now favoring drilling in the Outer-Continental Shelf,14 the time to act is now.
David A. Ridenour is vice president of the National Center for Public Policy Research.
1 "Analysis of Crude Oil Production in the Arctic National Wildlife Refuge," Energy Information Agency, May 2008, available at http://www.eia.doe.gov/oiaf/servicerpt/anwr/pdf/sroiaf(2008)03.pdf as of July 2, 2008.
3 "U.S. Crude Oil and Petroleum Products Imports from all Countries," Energy Information Agency, June 2008, available at http://tonto.eia.doe.gov/dnav/pet/hist/mttimus1A.htm as of July 2, 2008.
4 Peyton Knight, "ANWR: To Drill or Not to Drill? There is No Question," National Policy Analysis #535, The National Center for Public Policy Research, December 2005, available at http://www.nationalcenter.org/NPA535ANWR.html.
5 Coalition Letter on Outer-Continental Shelf Energy Production, The National Center for Public Policy Research, June 28, 2006, available at http://www.nationalcenter.org/OCSLetter0606.pdf.
6 Nick Snow, "House Subcommittee Rejects Peterson's Latest OCS Amendment," Oil and Gas Journal, June 12, 2008, available at http://www.ogj.com/display_article/331453/7/ONART/none/GenIn/1/US-House-subcommittee-rejects-Peterson's-latest-OCS-amendment/ as of June 16, 2008.
7 "3 to 4.3 Billion Barrels of Technically Recoverable Oil Assessed in North Dakota and Montana's Bakken Formation -- 25 Times More Than 1995 Estimate," U.S. Geological Survey press release, April 10, 2008, available at http://www.usgs.gov/newsroom/article.asp?ID=1911 as of July 2, 2008.
8 James T. Bartis et. al, "Oil Shale Development in the Unites States: Prospects and Policy Issues," Rand Corporation, 2005.
9 Carl Pope, "McCain Energy Plan: Same Old Drilling," Sierra Club press release, June 16, 2007, available at http://www.sierraclub.org/pressroom/releases/pr2008-06-16.asp as of July 2, 2008.
10 Lisa Desjardins, "Senate Committee Tackles Oil Prices," CNNMoney.com, April 3, 2008, available at http://money.cnn.com/2008/04/03/news/economy/senate_oil_prices/ as of July 2, 2007.
11 Rick Stouffer, "Speculators Will Drive Crude Oil Prices Higher Until Demand Collapses," Pittsburgh Tribune-Review, May 29, 2008, available at http://www.pittsburghlive.com/x/pittsburghtrib/s_569868.html as of July 2, 2008.
12 Rosalie Westenskow, "Will Domestic Drilling Decrease Prices?" United Press International, May 23, 2008, available at http://www.upi.com/Energy_Resources/2008/05/23/Will_domestic_drilling_decrease_prices/UPI-38491211580671/ as of July 2, 2008.
13 James T. Bartis et. al.
14 "67% Support Offshore Drilling, 64% Expect it Will Lower Prices," Rassmussen Reports, June 17, 2008.
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