The effect of doubling domestic oil production on oil prices

From the NYTimes (Will $4 ...):

The federal Energy Information Administration estimates that 18 billion barrels of oil are in the area covered by the moratorium, and the White House says that is enough to match current American production for 10 years. But a 2007 analysis by the agency concluded that opening up drilling in the moratorium area “would not have a significant impact on domestic crude oil and natural gas production or prices before 2030.”

Current "U.S. Weekly Crude Oil Field Production (Thousand Barrels per Day)" is about 5 million barrels per day and 35 million barrels per week. 18 billion barrels over 10 years is 1.8 billion barrels annually. Weekly that is about 34.6 million barrels.

So, we could double domestic oil production for 10 years if the moratorium is lifted. It seems like that could make a difference on price since domestic production appears to be about half of imported oil.

Fact checking needed: I've stared at the 2 EIA links above for hours and hours (actually, minutes and minutes) and my last statement seems correct. But  my gut tells me I'm reading the data incorrectly. Could someone with deeper knowledge of these data clue me in?

Note: In 2030 my kids will be in their mid-to-late 20s and ready to enjoy some cheap gas until their mid-to-late 30s!

Comments

[odograph]

Will it be cheap gas John? Or is the administration asking us to forger, for a moment, the global market and the price setting mechanisms they embody?

[odograph]

BTW, (classic double post) I still think we'll need that oil more later.

I think there is a catch-22. We really shouldn’t burn the last of our native oil until we don’t need it anymore … until we have an actual replacement and not an optimistic promise. Electric? Hydrogen? Plug-in hybrids? They are promises at this point … and an SUV fleet is still our reality.

[TM]

According to an editorial in the NYTs today,"The pander to big oil," the oil companies don't use 3/4s of the onshore/offshore land they currently lease for drilling. The speculation is they are trying to secure rights to land before Bush leaves office.

[spencer]

What you are missing is that the comparison is between production today and what production and imports would be in another ten years before the new supply comes on line. They are two very different things, especially the import share of the pie. If current production and consumption trends continue for ten years before the new supply comes on line production will be down some, consumption will be up moderately and imports will be up a lot.

[joshua corning]

The most important take away fact from this whole thing is that if these resources had been open to exploration rather then having a moratorium on them they would be available now and we would have lower prices.

ie prices are high today because of government's inefficient allocation of resources. Prices are high today because of government failure...not market failure.

[odograph]

And when we run out Joshua? Is that a market success?

Heh, I suspect so, because from a strictly economic standpoint we fully consumed the resource.

There are actually two issues here. From a short-term economic standpoint what matters are global supply and demand. They set our prices. From a strategic standpoint what matters is the resources we can rely upon in future "hard times."

Unfortunately "drill now" has a questionable benefit for the first, and a genuine disadvantage for the second.

[odograph]

Shorter: Why is oil we buy and then stick underground a "strategic oil reserve" but oil that we already have underground not?

(Perhaps because the first makes friends of congressmen more money.)

[John Mashey]

Assuming that there is 18B barrels of *recoverable* oil up there, there is no earthly reason to expect that oil production would be flat at 5Mbd over 10 years. There's no reason to expect anything much different from a Hubbert-style curve, say with production starting 2020 (assuming pipeline built), peaking around 2035, and lingering until 2050, i.e., production spread across 30 years. An example of this can be found:

Courtesy of TheOilDrum, see page 9 of Prof. Sam Shelton's talk at GATech symposium. Obviously, Thousands -> Millions.

Good news: when ANWR would *peak*, around 2035 on this chart, it would in fact provide roughly half of the current production, but NOT 5mbd, more like 1.5-2mbd.

Bad news: it seems unlikely that in the declining worldwide oil production, the US can maintain its imports at the same size as today, especially given the tendency of oil exporters making increase use of their oil internally, and China+India bidding for it. hence, our imports can hardly be more than 10m, and they might easily be as low as 5 mbd, so that the total, with ANWR, would be 10-15 mbd.

One may compare with Argonne's oil use in transportation, whose out-years clearly aren't going to happen [i.e., 19 mbd by 2020 seems rather unlikely]. Of the categories, which seem likely to get squeezed? Businesses who can pass costs along? Or personal use?

SUMMARY:
A friend's 13-year-old daughter asked him "Daddy, are you adults going to leave any oil for us?"
A: not much, and almost none for your kids.
(honest guy)

I won't be around to see it, but I'd bet that ANWR and coasts will get drilled sooner or later - oil is just too useful. BUT, one might treat them as piggy banks for later generations to decide for themselves.

[I grew up on a (hilly) farm that had been in the family 120 years. It still had topsoil and trees, because ancestors did contour plowing, kept cover on the soil, and didn't cut all the trees for firewood. maybe this is a strange idea these days.]

[John Mashey]

Assuming that there is 18B barrels of *recoverable* oil up there, there is no earthly reason to expect that oil production would be flat at 5Mbd over 10 years. There's no reason to expect anything much different from a Hubbert-style curve, say with production starting 2020 (assuming pipeline built), peaking around 2035, and lingering until 2050, i.e., production spread across 30 years. An example of this can be found:

Courtesy of TheOilDrum, see page 9 of Prof. Sam Shelton's talk at GATech symposium. Obviously, Thousands -> Millions.

Good news: when ANWR would *peak*, around 2035 on this chart, it would in fact provide roughly half of the current production, but NOT 5mbd, more like 1.5-2mbd.

Bad news: it seems unlikely that in the declining worldwide oil production, the US can maintain its imports at the same size as today, especially given the tendency of oil exporters making increase use of their oil internally, and China+India bidding for it. hence, our imports can hardly be more than 10m, and they might easily be as low as 5 mbd, so that the total, with ANWR, would be 10-15 mbd.

One may compare with Argonne's oil use in transportation, whose out-years clearly aren't going to happen [i.e., 19 mbd by 2020 seems rather unlikely]. Of the categories, which seem likely to get squeezed? Businesses who can pass costs along? Or personal use?

SUMMARY:
A friend's 13-year-old daughter asked him "Daddy, are you adults going to leave any oil for us?"
A: not much, and almost none for your kids.
(honest guy)

I won't be around to see it, but I'd bet that ANWR and coasts will get drilled sooner or later - oil is just too useful. BUT, one might treat them as piggy banks for later generations to decide for themselves.

[I grew up on a (hilly) farm that had been in the family 120 years. It still had topsoil and trees, because ancestors did contour plowing, kept cover on the soil, and didn't cut all the trees for firewood. maybe this is a strange idea these days.]

[Dave]

Why are so many people on an economics blog talking about using up all the oil?! We will never "run out" of oil.

[Dano]

Why are so many people on an economics blog talking about using up all the oil?! We will never "run out" of oil.

Right. But it will get to a point where it will be too expensive to extract, hence effectively not available, i.e. we will have "run out" or "used up" "all" of the economically recoverable oil.

But that takes too long to say, so instead we shorthand it and say "run out".

And Mashey, my family too. They didn't get big or get out.

Best,

D

[Bob Murphy]

I realize I am one of the more extreme pro-capitalist ideologues who posts here, but I really think some people are downplaying the ability of market prices to allocate a finite resource among different time periods. Obviously the market outcome isn't perfect, but it is certainly able to deal with the concept of nonrenewable resources.

Oil companies wouldn't sell all the oil anytime soon, because they could get higher prices by selling some in future years when it was scarcer. Expected future prices and interest rates regulate the allocation decisions. (Of course, people clamoring for windfall profits taxes during good years mess things up and could lead to a higher than optimal rate of extraction, but that's not the fault of the market.)

If anyone wants to pursue this train of thought, I explained it here on EconLib.

Also, regarding ANWR's effects on current prices: Higher expected future supplies will lower the expected future oil price, which (through arbitrage etc.) will lead to lower spot prices. What happens is that producers (like Saudi Arabia) with current excess capacity will increase output before the new competing source comes online.

It's true that empirically that effect might be tiny for the next few years, because everybody but Saudi Arabia (and even them if you believe the conspiracy theorists) is already at full tilt. But any new field that comes into operation over the next 10 years will produce at higher rates than it otherwise would have, if ANWR were still off-limits.

So to sum up, if new supplies became available 20 years in the future--and we all know about it today--then market prices adjust to best take advantage of this new development. To the extent it is technologically possible, producers have an incentive to shift production away from future barrels and into current barrels.

[odograph]

"Why are so many people on an economics blog talking about using up all the oil?! We will never "run out" of oil."

When I use it, it's slang, for "no more vast quantities."

[odograph]

Bob, I think the Behavioral Economics crowd could scare up some experiments pretty easily to show that humans don't really make rational economic decisions across decades.

They might frame it as discount rate or whatever ... but pizza now is pizza now, so to speak.

[Bob Murphy]

Odograph wrote:

Bob, I think the Behavioral Economics crowd could scare up some experiments pretty easily to show that humans don't really make rational economic decisions across decades.

They might frame it as discount rate or whatever ... but pizza now is pizza now, so to speak.

Right, and so this shows just another example of how market prices weed out "irrational" behavior. :)

If people were selling pieces of pizza, and could choose between a production profile that had a present discounted value of $100, versus a different intertemporal production plan that had, right now, a PDV of $130, I think a lot of subjects would take the $130 right now, rather than the $100 right now.

Market prices allow businesspeople to boil down a huge complex of decisions into much narrower estimates of profitability (maybe with risk profiles thrown in too). With a "yield curve" for the price of a barrel of oil--i.e. the price for a barrel at various dates into the future--the type of irrationality that you describe would jump off the ledger and so be avoided.

Again, the caveat: Market prices don't guarantee perfection. But they are surprisingly good at fostering large scale cooperation that is "rational" in many respects.

[Bob]

No one has yet offered the position that perhaps, due to global warming, it is not desireable to tap our researves. Perhaps we should allow prices to rise to stimulate other technologies and conservation efforts. Your models all neglect the trend toward apartment living (the single family home is fading into history - noone will be able to afford it.) Concentrated living conditions require much less energy. Personally, I don't like the sardine model of life but I am affraid it is coming upon us. Also, you all are too pesemistic about wind and solar being able to satisfy our needs. It can if the price of energy goes high enough. And so what if it does? Will we really be worse off? You guys all know everything is relative. People can be happy living as sardines (not me - but I'm different).

[Eric H]

Joshua, I don't think things are nearly that cut & dried. If we had been pumping much cheaper domestic oil before now, we would have less of it to pump today. The fact is that foreign oil has been cheaper (one of the EIA tables shows the delivery price at the refinery) even after the shipping costs. If domestic crude had been cheaper, we'd have just used it up faster. Given that Saudi Arabia's reserves are much, much larger, the domestic gambit only means putting off our dependence a little longer. We can and should call this policy, "Drain America First!"

odo, Dano, Bob, No, we're not going to run out. It's going to get more expensive until we switch to something else. By "something else", I mean anything from alternative energy (I'd bet that most people today have never heard of whatever the second most dominant energy source/storage will be in 20 years) to conservation and beyond (EarthFirst!ers would shout "Back to the Pleistocene" at this point). A look at the number of passenger miles traveled in the past 2 years speaks volumes about the corrective nature of price.

People are roughly rational, but I wouldn't go overboard on that assumption, especially when many of us think (a) "the gubmint needs to solve the problem" (and that thought's cousin, "the gubmint is keeping us back from the bestest and only possible solution"), (b) as long as (a) is true (or perceived to be), then there's no need to change one's own choices because Big Nanny or Big Business will bail us out, and (c) the gubmint is comprised of people of similar levels of rationality, but they don't really have to face the full consequences of their decisions. That's how 2 of 3 candidates can claim to be both anti-carbon and pro-gas tax holiday with a straight face and without intending irony.

[John Mashey]

Sigh.

1) While I certainly dislike windfall taxes, I dislike oil depletion allowances the the other subsidies for the use of oil as much.

2) At least according to the search, nowhere in this blog appears the terms EROEI (or just EROI), i.e., Energy Return on (Energy) Invested. This is the ratio of (energy returned:energy expended. A good discussion can be found in Charlie Hall's Balloon Graph at the front of that discussion. For domestic US oil:

Oil: 1930s: ~100 : good times in Texas
Oil: 1970s: ~30
Oil: now: ~10

Notice the trendline (down), since people get the easy stuff first. You do Texas before you go out in the Gulf. At some point, *economics actually doesn't matter much* (horrors): if you need to burn the barrel of oil you get to get it (EROI = 1) you might as well not bother, even if oil is $10,000/bbl.

There are a few odd cases where EROI ~1 happens for various reasons (German CTL during WW II, Athabasca tar sands using stranded gas, current corn ethanol), but it's not a good long-term proposition. Even ignoring environmental concerns, all that shale oil is really low-EROI, as are the tar sands - see little dot in lower corner of Charlie's chart.

Notice how much of the US' energy is oil+gas, both of which will be small by 2100. Coal won't be small; but if we use it without sequestration, people like Kharecha and Hansen and Ron Oxburgh again are really worried about climate tipping points.

3) With all due respect to Hotelling' Rule, it really helps to actually visit senior petroleum geologists and oil executives and spend time with them. [I used to help sell supercomputers worldwide to these folks, including in Dhahran, where you need to get invited.] Cheap oil was already hard to find in the 1990s. There were no more Al Ghawars just lying around.

It also helps to have knowledgable friends in the oil business, like ex-Vice-Chairman of Chevron, J. Dennis Bonney and ex-Chairman of Shell, Lord Ron Oxburgh,, neither of whom harbor illusions about the reality of peak oil and the desperate necessity to get much more energy efficient as fast as possible.

You can see what Ron has said publicly, although I think he was being conservative. Dennis and I talked about this for half an hour when we last had dinner, and mostly about focus on efficiency to give us time to *invest* the oil+gas that's left to reengineer the world's energy supply, since there is no magic high-EROI solution that obsoletes oil.

Hmmm. A geoscientist who ran Shell and and a guy who spent 23 years at Chevron, and ran all their exploration and production. Maybe these guys actually know something about this topic.

4) It is not so easy to just turn wells off and on. Except under fairly rare circumstances, people don't spend a lot of money exploring, drilling wells, building pipelines, i.e., investing in serious capital assets, and not turn them on, because the carrying cost is substantial. Yes, Aramco has done it some for strategic reasons, but of course, they have a lot of the best EROI-oil left.

An oil company doesn't just say some quarter "hey, oil will be more expensive next quarter, let's all take a vacation and ship no oil this quarter." Even national oil companies don't do that.

What they do is plan to develop fields incorporating ROI projections, reservoir simulation, scheduling of drill rigs [for example, the deep-water ones are scarce items], engineering resources, etc, etc. But once everything is built, they've effectively incurred debt that needs to be paid off, so they pump.

On the "turn-up-the-tap side", many oil fields have flow limits above which they actually *damage* the fields, lowering he eventual yield.
Google: oil overproduction rate sensitivity

Since petroleum engineers aren't dumb, they try to figure out the limits, and size the infrastructure accordingly. I makes no sense to build pipes 2X bigger than need be, just as it makes no sense to drill *too many* wells in a field.

5) Finally, although by default one expects Hubbert-like production curves, with modern directional drilling, they can get the oil faster, which tends to make for steeper dropoffs than the traditional curves.

6) Oil+gas businesses take economics seriously, but they know perfectly well that EROIs and geophysics set real limits, and the Petroleum Age is effectively ending this century, although there will still be some left, with some valiant stripper wells cranking away, presumably surrounded by armed guards. Most of the offshore platforms will have been shut down, as they're a lot more expensive to keep running.

====
This, by the way, has interesting implications of GDP growth, i.e., if neoclassical{Solow Residual |Technology progress | Total Factor Productivity | whatever it's called} does *not* depend on energy, then maybe we'll continue GDP growth at (for example) 2% or so indefinitely, which gives 2100AD a world GDP about 6X larger in real terms,a nice outcome, given that 1.5X bigger population would mean 4X higher GDP/person.

IF instead the biophysical economists like Hall and Ayres&Warr have better models, and most of TFP comes from: work = energy*efficiency

THEN maybe world GDP might be higher in 2100, and MAYBE NOT. Many countries really aren't very well geared for negative growth.

But all that's another topic.

[odograph]

Bob Murphy, can give me an example of any depleting resource that is priced today for future shortage?

If the market can do it, with anything other than hypothetical pizzas, there should be examples wall to wall ... gold prices for instance should be based not on production and demand ... but on unmined global reserves.

(It's "behavioral" economics because it does not rely on hypothetical arguments, and perhaps even disdains them.)

[odograph]

odo, Dano, Bob, No, we're not going to run out. It's going to get more expensive until we switch to something else. By "something else", I mean anything from alternative energy (I'd bet that most people today have never heard of whatever the second most dominant energy source/storage will be in 20 years) to conservation and beyond (EarthFirst!ers would shout "Back to the Pleistocene" at this point). A look at the number of passenger miles traveled in the past 2 years speaks volumes about the corrective nature of price.

Economic theory does not, actually, guarantee that substitutes will appear when needed, does it?

Where is the economic substitute for the collapsed Atlantic cod population? (Industrial chicken is both more expensive and less healthy)

[odograph]

BTW, a sudden thought: If markets to effectively price depleting resources for future shortage, then it is a contradiction to say that using our last native oil reserves will lower the price.

By your logic, surely the market will see the future shortage and price for it.

(That's probably partially true and does mitigate some of my concerns, but not all of them. The major problem we have with leases in 2008 is that people are worrying about leases in 2008, rather than lining up a true post-carbon (or "expensive oil") plan.)

[Eric H]

John Mashey, if directional drilling (or anything else) leads to steeper dropoffs than traditional Hubbert-style curves, how come US production curves have gotten *less* steep since the 1970s peak? Not trying to be argumentative, it's just a puzzle about which I've been curious.

[Eric H]

"Economic theory does not, actually, guarantee that substitutes will appear when needed, does it?"

No, but those are your words, not mine. If you read carefully what I actually wrote, you would see that I noted that the "something else" we might do would be to use less, not alternative, energy. An uncomfortable proposition, to be sure, but certainly an open path.

[odograph]

I agree with that latest Eric, but I think it undermines the argument for "drill now."

FWIW, my summary position on peakish oil

[John Mashey]

Eric H (June 20, 10:36AM)

By happy coincidence, a good discussion of horizontal drilling appeared this AM at The Oil Drum, and you can find many more articles that mention horizontal drilling there.

But, I think the simple answer is:

the US has >510,000 oil wells, almost all of which are normal verticals, and average 10-11 barrels/day :-). According to Geotimes, 2004, the number of horizontal wells in the US rose from 1,000 in 1990 to 20,000 in 2000.

Hence, widespread horizontal drilling is relatively new, and in the US, a fairly small fraction of the total wells [of course, not all wells are equal]. In the right places, horizontal drilling is a really good thing, both economically and environmentally. One simply can't get misled into using the old curves to estimate the amount of oil left.

Note: using horizontal drilling well means getting the oil out faster [ROI], and sometimes getting more oil out in total, especially in shallow fields, so it is different from overproduction that damages a field. Of course, somebody can overproduce a horizontal well also.

Does all that make sense?