The energy election
John McCain and Barack Obama both want the US to buy less foreign oil. Will the Republicans' wish to open the country's offshore to drillers make a difference? Derek Brower reports
"DRILL, BABY, drill," rang the spontaneous chant of delegates at last month's Republican Party convention in Minnesota. If their man is elected president in November, the baying crowd will get what it wants. For John McCain, the issue is straightforward: the US has plenty of oil and gas waiting to help solve the country's energy problem – so let the companies at it.
"John McCain will commit our country to expanding domestic oil and gas exploration," runs a statement of his policy on his electoral website. "The federal moratorium on drilling in the Outer Continental Shelf (OCS) stands in the way of energy exploration and production. John McCain believes it is time for the federal government to lift these restrictions and work with states to put our own reserves to use. There is no easier or more direct way to prove to the world that we will no longer be subject to the whims of others than to expand our production capabilities."
The statement goes on to explain that the US has "trillions of dollars worth of oil and gas reserves" at a time when it is spending billions to import foreign energy – "the largest transfer of wealth in the history of mankind". It adds: "We should keep more of our dollars here in the US, lessen our foreign dependency, increase our domestic supplies and reduce our trade deficit – 41% of which is due to oil imports."
McCain's running mate, Alaska governor Sarah Palin, has been even more forthright, calling for the US to achieve "energy independence" so that foreign producers cannot hold the country to ransom over its supplies. "To confront the threat that Iran might seek to cut off nearly a fifth of world energy supplies," she told the Republican convention during her speech to accept the nomination as vice-presidential candidate, "or that terrorists might strike again at the Abqaiq facility in Saudi Arabia, or that Venezuela might shut off its oil deliveries, we Americans need to produce more of our own oil and gas."
She added: "And take it from a gal who knows the North Slope of Alaska: we've got lots of both." Palin would also open the Arctic National Wildlife Refuge, although McCain opposes this. However, if elected, McCain plans to put the North Slope gal in charge of the country's drive to energy self-sufficiency.
Her speech – like other pro-drilling statements at the Republican convention – was received with rapture. With gasoline prices in the US hovering near record highs (despite a recent softening amid an easing of international oil prices) and fear of nefarious anti-American foreigners an undertone in the presidential election season, McCain's team is tapping a broad swell of public sentiment – and it might help him in next month's election.
Pricey gasoline has mobilised ordinary folk in the country. Since April, an evangelical Christian group in Washington DC has been holding "pray at the pump" meetings in forecourts. God, not market forces, had softened the oil price by August, they claimed. Meanwhile, the movement to open the OCS – which is backed by a petition of almost 1.5 million people – does not just have the support of Rush Limbaugh and other influential rightwing radio hosts and bloggers, it also has its own catchy anthem in the form of country music star Aaron Tippin's new hit single, Drill here, drill now (see box).
The US Minerals Management Service (MMS), a branch of the Department of the Interior, estimates OCS' reserves to be 18bn barrels of oil and 77 trillion cubic feet (cf) of gas. And by putting more drilling at the centre of his election platform, McCain has stolen a march on his Democrat-party rivals, say analysts.
On Capitol Hill, Democrat opposition to President George Bush's plan to lift an executive order banning drilling in the OCS was plain as recently as July. Nancy Pelosi, the Democrat's leader and speaker of the House of Representatives, dismissed the plan as a "political stunt" and "hoax" cooked up by "the oilman in the White House".
Since then, however, the party's presidential nominee, Barack Obama, has had to respond to the popular support for more drilling. Having also initially opposed the plan, proposing instead a raft of energy conservation and other measures, Obama now backs a cross-party initiative to open some of the OCS – provided efficiency targets and clean-energy projects also receive backing. In July, he told reporters in Florida that his "interest is in making sure we've got the kind of comprehensive energy policy that can bring down gas[oline] prices", adding that he may have "to compromise in terms of a careful, well thought-out drilling strategy that was carefully circumscribed to avoid significant environmental damage – I don't want to be so rigid that we can't get something done."
The Obama camp also has some of its own populist proposals to bring down the price of gasoline. "With oil prices doubling in the past year, Barack Obama believes we have an economic emergency that requires a limited, responsible swap of light oil from the Strategic Petroleum Reserve (SPR) for heavy crude to help bring down prices at the pump," says his campaign.
Meanwhile, Obama is also proposing a "'Use it or Lose It' approach to existing oil and gas leases". He would "require" oil companies to develop some 68m acres of land (40m of which are offshore) they have already leased but are yet to drill. Why spoil the country's coastline, runs this argument, when the oil companies already have plenty of land they think holds oil – and aren't extracting it?
It's the rhetoric, stupid
With both camps racing to persuade car-addicted, but cash-strapped voters to back their man – and his method of bringing down pump prices – it is no surprise to find each measure to be richer in rhetoric than reality. Indeed, it is hard to tell which of the proposals from both candidates makes least sense. Obama's proposals belie the efforts to present him as a measured visionary. But McCain's are confusing. Neither candidate knows the oil industry well, say insiders.
The plan to release oil from the SPR could bring US gasoline prices down. But the SPR had just 0.7bn barrels in stock last month (most of it sour crude) – equivalent to about 31 days of consumption in the US. So any relief would be temporary and leave the country with a reserve of even heavier oil. Whether cheaper gasoline constitutes the kind of "strategic" purpose for which the SPR is reserved is also debatable, given that US gasoline prices are still much lower than in many other developed countries. Some oil was recently released from the SPR to help mitigate the impact of Hurricane Ike, which devastated parts of southern Texas, bruised local refineries and toppled some rigs in the Gulf of Mexico (see p12).
Meanwhile, the use-it-or-lose-it proposal taps another populist vein – blaming oil companies for high gasoline prices in the US – but hardly bears scrutiny either. Oil prices may have fallen from their peak in the spring, but they remain high (around $95 a barrel in New York last month): if companies could bring more oil on stream from the acreage they lease, they would. Forcing them to relinquish acreage they have not yet drilled would not solve a worldwide shortage of rigs or personnel to manage them – two significant factors behind sluggish rate of drilling (see p14). But it might make that acreage less attractive to drillers in future, if more speed means less haste.
Obama's instinctive opposition to widespread offshore drilling sits easily next to his efforts to claim the environmental high ground. But it sits less comfortably alongside his proclaimed multilateralism. As Opec has been pointing out, US calls for producers around the world to drill more oil and increase production smacks of hypocrisy when the country will not follow its own advice. Defenders of the US coastline and its pristine Alaskan wilderness say domestic drilling threatens ecological catastrophe. But why are the ecosystems of northern Canada, Saudi Arabia, offshore Africa or any other region that exports to the US any less precious?
The Obama-backed proposal to open some of the OCS and promote alternative energy and conservation makes more sense. But it could also run into problems. Which coastal states – and the state capitals and their lobby groups will retain powers to stall or prevent exploration, says Ken Medlock, an academic and expert on the US energy sector at Rice University, Texas – will agree to offshore drilling while it remains banned elsewhere?
|McCain vs Obama on the important energy issues
Take on the speculators: "Where we find abuses, they need to be swiftly punished. We must reform the laws and regulations governing the oil futures market, so that they are just as clear and effective as the rules applied to stocks, bonds, and other financial instruments." No windfall tax on companies.
End the ban on drilling in the Outer Continental Shelf.
"Lead by example": make federal government, "the largest electricity consumer on earth", go green. Promote electricity grid and metering improvements to encourage more efficient energy use.
Mandatory emissions-reduction targets and timetables; market-based cap-and-trade system; policy must "spur the development and deployment of advanced technology; and "involve international efforts". Targets: 2012, return emissions to 2005 levels; 2020, emissions at 1990 levels; 2030, emissions at 22% beneath 1990 levels; 2050, 66% beneath 1990 levels.
$2bn annual subsidy to advance clean coal technology.
Build 45 new nuclear power plants by 2030 – rising to 100 new plants.
"Become a leader in a new international green economy." Tax credits to encourage more research and development (R&D), equal to 10% of wages in R&D. New tax-credit scheme to promote renewables, with "credits that will remain in place until the market transforms sufficiently to the point where renewable energy no longer merits the taxpayers' dollars".
"Clean Car Challenge": $5,000 tax credit for each customer who buys a zero carbon-emissions car. For other vehicles, a graduated tax credit; $300m prize to improve battery technology in plug-in hybrids; "calls on automakers" to develop more flex-fuel vehicles; promote alcohol-based fuels; enforce existing fuel efficiency standards.
"Provide short-term relief to families facing pain at the pump" – $500 rebate to individuals to "offset the entire increase in gas[oline] prices for a working family over the next four months". Swap light oil from the SPR and replace with heavy oil. Reduce the activity of market speculators: close loopholes in CFTC regulations. Windfall tax on oil companies.
"With 3% of the world's oil reserves, the US cannot drill its way to energy security." "Use it or lose it" – force firms to drill on already-leased land. Promote development of shale deposits. Partial opening of OCS. Prioritise construction of Alaska gas pipeline. Promote enhanced oil recovery through CO2 sequestration.
"Within 10 years save more oil than we import from the Middle East and Venezuela combined." $1bn a year subsidies to encourage new, clean, sustainable technologies. Reduce electricity demand by 15% from Department of Energy's 2020 forecast, through annual reduction targets for utilities and more stringent building standards. Invest in "smart" electricity grid and metering. Weatherise 1m homes a year to make more efficient.
"Make the US a leader on climate change"; and "re-engage with the UN FCCC". Cap-and-trade system. Lower emissions by 80% by 2050.
Invest in low-emissions coal-fired power plants; develop and deploy clean-coal technology.
"Before expansion of nuclear power is considered, important issues must be addressed, including: security of nuclear fuel and waste, waste storage and proliferation."
$150bn over 10 years to "build a clean energy future" and create 5 million new green jobs. 10% of electricity from renewables by 2012; 25% by 2025. "Green Vet Initiative": jobs in renewables sector for re-trained Iraq war veterans.
1m plug-in hybrid, US-built cars on the road by 2015. Increase fuel-economy standards by 4% a year. $7,000 tax credit for purchase of advanced-technology cars. Convert White House fleet to plug-ins. Make half of new federal cars electric or hybrid by 2012. $4bn retooling tax credits for US auto-makers producing green cars. Mandate all new vehicles as flexible-fuel. New generation of biofuels and infrastructure. Establish new national law on carbon fuel standard.
Strong local opposition
Florida, where some of the most promising offshore acreage lies, has much to lose, which is why Republicans and Democrats there have historically united in support of the ban. Any plan to open up the state's coastline – like one being debated now that would slash the exclusion and allow rigs to operate 50 miles offshore and beyond – would have to overcome strong local opposition. Even the president's brother, Florida governor Jeb Bush, is hesitant: he has proudly defended existing rules that keep drillers more than 125 miles off his state's coast.
That problem – local political opposition – could be a bigger one for McCain, should he be elected. His energy platform emphasises the kind of supply side solutions that the US has found particularly difficult to put in place (see box). He wants to see the country build 45 new nuclear power plants, or almost a 50% increase in generating capacity. The Bush administration's 2005 Energy Policy Act also called for new nuclear capacity and enacted a host of measures to sweeten the investment regime. But its approach was more modest, offering support for just six new plants. None is yet being built.
Indeed, building new energy infrastructure in the US is notoriously difficult. No greenfield refinery has been brought on stream in over 30 years (although new brownfield capacity is being added now). Despite dozens of proposals to build liquefied natural gas terminals, only a handful are likely – most have been held up by environmental impact studies or local opposition. McCain's drilling programme could easily fall into the same sand trap.
A bigger question is how much difference drilling would make anyway. With lead times for development projects at around eight years, any new production would not affect domestic prices as quickly as most politicians would like, although that fact has not stopped some drilling fans from claiming that the campaign to open the OCS triggered the recent price slide in the oil market. That is nonsense.
But nor would the domestic market have to wait until 2016 before the opening up of new areas affected prices, says Medlock: the closer new supply comes to being available, the softer the gasoline price. Acreage in the eastern Gulf of Mexico and southern Pacific sections of the OCS look the most promising, he says.
The Department of Energy's Energy Information Administration (EIA) suggested in a 2007 study that the effect of opening the OCS would be limited. "The projections in the OCS access case indicate that access to the Pacific, Atlantic, and eastern Gulf regions would not have a significant impact on domestic crude oil and natural gas production or prices before 2030." Any leasing would begin no sooner than 2012, and production would not be expected to start before 2017, according to the EIA. And it would add just 7% to the lower 48 states' production by 2030. "Because oil prices are determined on the international market, however, any impact on average wellhead prices is expected to be insignificant," said the EIA. Meanwhile, US oil demand will have risen by about 10% by 2030.
But that does not mean something should not be done now – and it is also an argument that applies to green projects, such as the wind farms envisaged in a plan proposed by T Boone Pickens (see box). At the very least, argues Medlock, the MMS and the federal authorities should legislate to generate a clearer picture of how much oil really lies in the prohibited parts of the US offshore. The MMS' 18bn barrel estimate is based only on studies of the geological data already available; no seismic surveying has been allowed to find a more precise number – meaning there could be much less, or much more, than the MMS has estimated. And no-one knows what the quality of the oil is or how much it would cost to produce.
That leaves the OSC as a "known unknown", to use Donald Rumsfeld's phrase. It also hampers the debate about whether the drilling should be allowed. Chevron's chief executive David O'Reilly said last year that the lack of information about how much oil sits offshore has left policy in a "Gordian knot", with "debate confined by fixed positions and fuzzy data".
A better answer?
Meanwhile, US consumers might have found a better solution to high energy prices without the politicians' help. Forget the rhetoric, Americans are voting with their feet – and their cars. High gasoline prices have hit consumption hard. Gasoline and diesel sales are down this year, for the first time since the early 1990s.
The International Energy Agency (IEA) says total US products demand fell by 2.7% in July, the seventh monthly fall in a row. Sales of SUVs and other thirsty vehicles are also sliding. GM, Ford and the other beefy manufacturers are likely to sell about 1m fewer gas-guzzlers this year than last and SUVs' share of total vehicle sales will fall to beneath 50% for the first time since the early 2000s. In all, it means the US consumed almost 1m fewer barrels a day of oil in the first six months of this year than last.
"Demand in the US may be poised for a more permanent, rather than transient, downward trend" following this year's record-breaking oil prices, the IEA said last month. The anecdotal evidence supports this view. Americans are changing behaviour and embracing energy efficiency. After the last oil-price shock in 1980, US consumption also dropped. The administration of Ronald Reagan came to power with the promise to end fuel rationing and drill more domestic oil. This time, voters ought to be more wary, because the promise of the US' upstream is now much weaker.
The groundswell movement to consume less oil might not have a catchy country ditty behind it, but it could make a lot more difference to the US' energy prospects than drilling here and drilling now.
|Boone for renewables and "energy independence"
T BOONE Pickens made his name as a corporate raider in the 1980s. He has softened since then, giving away large swathes of his estimated $3bn fortune. Now he wants to solve the US' "addiction" to foreign oil.
The problem has reached a crisis point, Pickens says, not least because he subscribes to peak-oil theories suggesting world oil output peaked in 2005. His solution? Renewable energy. "The US is the Saudi Arabia of wind power," states the Pickens Plan, a project to install wind farms on the American plains. The winds that rage across North Dakota could alone provide power to supply 25% of the US' needs.
So the Pickens Plan proposes spending $1 trillion to build wind farms from the Texas panhandle to North Dakota, with another $200bn to build the transmission lines to deliver to consumers. A bargain, says Pickens, compared with the $0.7 trillion the US spends on foreign oil every year. The plan would also create jobs and rescue moribund towns in the countryside.
Another part of the plan is to get the country to switch from diesel and gasoline cars to natural gas vehicles (NGVs). "Natural gas is our country's second largest energy resource and a vital component of our energy supply," says Pickens. And 98% of the natural gas used in the US is produced in the country. Replace some of the natural gas used to make electricity (its share is about 22%) with wind power and free up yet more fuel for the NGVs, proposes Pickens.
The plan is a "bridge to the future – a blueprint to reduce foreign oil dependence by harnessing domestic energy alternatives, and buy us time to develop even greater new technologies". Pickens says it will take "leadership" to make it work and has called on citizens to sign up to the project, hoping to put pressure on the two presidential candidates to endorse it.
Its simplicity suggests either genius or madness. Critics are airing the usual worries about wind power – its intermittence and unreliability as a source of baseload power, and the fear of state subsidies. And Pickens owns his own natural gas fuelling firm, prompting accusations that his plan will bring him even greater wealth.
Whether it comes off or not remains to be seen, but the attention the plan is receiving in the US is more evidence of foment in the minds of energy consumers. And it makes a marked difference from the approach of other countries, such as those in the EU, where bureaucracies are mandating renewable targets to an apathetic public. In the world's can-do country, who will bet against Pickens pulling it off?n