by Paolo von Schirach
May 5, 2011
WASHINGTON – Long after the “Drill, Baby Drill” populist slogans of the 2008 presidential campaign, in America we are still not having a serious conversation on the merits of exploring for and extracting more oil from domestic sources. Supporters claim that this is the miracle cure; detractors assert that it would do nothing good. Sure enough, in an ideal world, we would try and move away as fast as possible from high polluting hydrocarbons and focus instead on clean, renewable sources. We have heard all the anti-oil arguments based on environmental damage, public health hazards, global warming, and what not.
Clean fuels still too expensive, meanwhile oil is at more than $ 100 a barrel
Except that the clean fuel alternatives as yet are not economically practical; while we have a gigantic oil bill due to our continued reliance on oil. And we need to import 60% of total consumption, because we do not produce enough of it. And that is about 9 million barrels of imports –every day. At a price now in excess of $ 100 per barrel, that is a lot of money. Our oil bill is far greater than the scary trade deficit with China that is usually depicted as a national calamity. Indeed, if you consider it cumulatively, the money that we pay oil exporters to satisfy our energy needs is one of the largest wealth transfers in history.
Conservation is good, but not enough
Of course, we could reduce our total consumption and therefore the amount that we need to import simply by using less. America is still a very wasteful society. Our continued reliance on cars versus mass transit and on high fuel consumption vehicles is dumb. We could do a lot better. Still, even a more judicious energy use would not eliminate imports of an increasingly expensive commodity. Hence the economic value of increasing domestic energy supplies, even if combined with more aggressive energy conservation measures. And that includes producing more oil and natural gas, now very abundant and very cheap. (More on gas below).
Increased domestic oil production is good economics
Now, no sane person would suggest that more oil drilling in the US, on shore and off shore, would magically yield the 9 millions barrels a day that we currently import. However, given the high and growing cost of oil, it would make economic sense to reduce our energy bill as much as we can by increasing domestic supply. The more we produce at home, the less we have to buy abroad. Increased supply will not solve our basic dependence problem; so we should not oversell its benefits. Still, it would reduce somewhat our energy imports and our chronic balance of trade deficit. Not to mention improved economic conditions where new oil is found and produced. Check with the people of North Dakota. They are now enjoying a real economic boom due to significant oil discoveries in Bakken, with estimated reserves totaling 11 billion barrels. All this does not sound very complicated. I do not see why it should be so controversial.
The natural gas revolution
But, down the line, an even greater help to domestic energy supply and to out balance of trade is coming from a veritable US “natural gas revolution“. America has a lot of “unconventional” gas and now it is exploiting it massively through “fracking” and horizontal drilling. These are technologies that allow getting to gas trapped in deep rock formations. There are issues about safety and reliability. There have been some widely reported accidents involving water contamination due to poor well design and more. But, on balance, while regulatory tightening to ensure safety may be in order, there is no indication that getting this gas off the ground is inherently unsafe. Thousands and thousands of wells using fracking have been safely drilled.
Why would gas help with oil imports?
But what has gas got to do with oil? Americans usually think of gas as fuel for electric power generation and for heating systems, while we use oil mostly to make gasoline and diesel to power vehicles. Well, the open secret is that natural gas can be and is already used as transportation fuel. This is an old and proven technology.
The incredible abundance of cheap natural gas combined with sky high oil prices presents the opportunity to convert at least part of the national vehicle fleet to natural gas. Most experts agree that the most cost effective starting point for a “switch” from oil to natural gas should be heavy vehicles. Natural gas as fuel for heavy trucks would be about 1/7 the price of diesel!
Legislation to induce fleet operators to get trucks using natural gas
And it would appear that we may soon have legislation in place that would provide the inducements for large 18 wheeler fleet operators to hurry up any (admittedly expensive) fleet conversion process. Largely the brain child of a 7 year lobbying effort promoted by veteran oil man T. Boone Pickens, a new version of earlier and failed attempts to have a Natural Gas legislation may actually be on the horizon.
According to an April 18, 2011 story in TopStockAnalysts, H.R. 1380, the “New Alternative Transportation to Give Americans Solutions (NAT GAS) Act.” has been introduced in the House of Representatives by a bipartisan group. Congressmen Kevin Brady (R-TX), John Larson (D-CT), Dan Boren (D-OK) and John Sullivan (R-OK) have submitted this bill.
According to T. Boone Pickens, this draft legislation has already almost 200 co-sponsors from both parties and it has good chances of passing the House. It may face greater opposition in the Senate; but, considering also White House political support, it has a decent chance of becoming law.
Why legislation if gas is such a good deal?
But why do need legislation, tax brakes and other sweeteners, if the numbers in favor of natural gas are so compelling? Well, because we need to jump start a gigantic national conversion process practically from zero. There is the one time cost of replacing expensive heavy vehicles. There will be additional investments necessary to create the refueling infrastructure for fleet operators.
Tax brakes and other incentives provided for by this legislation, combined with very low fuel cost, would prod businesses to get the new trucks that will use the new fuel, this way expediting the conversion process. Conversion to domestic natural gas will translate into lowering demand for imported oil and significant savings for America. The sooner we start, the more we save. In addition, the adoption of natural gas will jump start an entire new industry that will include down the line regular natural gas powered automobiles.
America can cut oil imports by 2 1/2 million barrels a day
The estimates are that by converting just heavy vehicles to natural gas America could cut down its imports by about 2 1/2 million of oil a day. Now that’s a saving of 2 1/2 million out of 9 million. Not so bad as a way to cut our oil bill by relying on a cheaper and cleaner domestic energy source.
And there will be other economic advantages. More demand for natural gas will incentivize supply, this way increasing employment in the domestic energy industry. And as Americans will realize the enormous price difference between natural gas and gasoline they will start clamoring for regular cars that use natural gas. And this demand will create new manufacturing jobs. Not a bad deal altogether.
Gas is not the final solution; but it is a really good deal
Natural gas will not solve all our energy problems. And at some point we may indeed get cost effective, zero or low emission renewable fuels. So consider natural gas a temporary solution. (Still, at current consumption rates America has enough gas for another 100 years). But between now and our renewable energy future, here is the alternative: “Do you want to pay $ 4 dollars a gallon for mostly imported gasoline, or do you prefer paying $ 1 dollar a gallon for natural gas produced at home?“ I would go for natural gas. It is good for the consumer and it is good for America.