David Axelrod, an Obama spokesperson, claims anyone who advocates increased drilling is peddling “snake oil.” At the same time he, his colleagues, and the administration call for both energy independence and increased oil output from Persian Gulf countries. President Obama also touts high levels of domestic production but rules out any positive effect from additional drilling because we “have only 2 percent of the world’s oil supply, while we consume 20 percent of world output.”
Let’s review some basic oil economics. The president says the reserves that matter are “proven oil reserves.” Proven reserves are the industry’s inventories of oil ready to be pumped. Like all inventories, rational firms try to minimize inventory investment and carry only what they need to support current production. Today’s proven reserves are much the same as they were in 1945. The size of “proven reserves” is a grossly misleading number when referring to our potential oil output.
The relevant reserve number is “potential reserves.” This number is an estimate based on current drilling/recovery technologies, what we know from existing exploration, and the geologic evidence that suggests oil can be found in places where we have not yet drilled. It is an inherently conservative number because we know recovery and drilling technology will continue to improve. If you include oil recovered from oil shale you get an even larger number for potential reserves. Add in oil from Canada and Mexico and the number is in excess of a trillion barrels of oil.
Contrary to what President Obama says, we do not have a shortage of oil reserves; in fact we could make ourselves energy independent within a decade and we could stay independent for a century thereafter. We will never “run out of oil” because we will move on to alternative energy sources long before that happens.
The lag between the time drilling permits are let and oil begins to be produced varies from five to 15 years, depending on whether the new well is a development well or a wildcat well in a previously undrilled area. A development well is a new well in an area already known to have oil and is likely to be close to existing pipelines; hence, it can reach the market in a shorter period of time. It can take a decade or more before a new strike can reach the market.
Most of the new U.S. production now reaching the market began the trip well before President Obama came to office; he has no business taking credit for other people’s work. Further, most of the current production is coming from private land over which the administration has no control. In fact, the administration has blocked further drilling on federal leases both onshore and offshore; as they have blocked the XL pipeline. In addition, they are openly hostile to the U.S. oil industry and are advocating higher taxes on the industry.
From the beginning the administration’s policies were designed to drive energy costs up; now that higher gasoline prices are here and President Obama is in real political trouble he is denying he had anything to do with higher prices. The president’s position reflects either a profound ignorance of basic energy economics or a chilling cynicism that voters are too stupid to see through his policies. The only “snake oil salesmen” in this whole sorry scenario are found in the Obama administration.
Bob Martin is Emeritus Boles Professor of Economics at Centre College.
