Saying 'so long' to the petroleum age?
A few oil myths exploded
Date published: 6/28/2008
By HOWARD OWEN
AS THE PRICE of oil cruises in the $140-a- barrel range and a gallon of gasoline costs as much as a cup of Starbucks coffee, everyone seems to have an opinion as to how we got here and what happens next.
Robert K. Kaufmann probably is more qualified than most to weigh in, which he did in a tele-seminar Tuesday.
Kaufmann, a professor at Boston University, is an expert on gas prices and world oil supply. He spoke at the behest of the Foundation for American Communications a nonprofit group "dedicated to improving the quality of information reaching the public through the news." It claims to have no political agenda. Its journalism programs are funded by grants from newspaper and broadcast news organizations.
Here's what Kaufmann had to say about some of our oil and gasoline conceptions:
Kaufmann said, basically, that it doesn't matter who produces the oil:
"Would producers in the United States sell to the U.S. for one penny less than the rest of the world?" The answer: No.
The downside of reducing dependence on foreign oil, he said, is that "the U.S. imports oil because it's ultimately less expensive than producing it here at home."
He advocates instead concentrating on "things you can do more efficiently." He thinks we were especially foolish in the late 1970s and early '80s, reacting to the second oil crisis in a decade:
"The U.S. offered all kinds of incentives to increase domestic drilling. [We] squandered a big chunk of capital trying to reduce dependence by producing domestically. We spent a lot of money drilling dry holes." He says we could have spent the money on, for instance, trying to keep the American auto industry healthy.
As for the fear that someone, like Iran, will cut off the tap, he says we'd have to find new sources and the Iranians would have to find new buyers.
"All the lines would get rearranged, but on net, nothing would happen except the price of oil would have to go up a little bit."
He also said, "There is clear statistical evidence that there is one oil price, and all the prices move together. The world is one big pool when it comes to oil."
About offshore drilling, Kaufmann says, "Even if we found stuff, you wouldn't see it for five to 10 years, even at a time when onshore drilling is declining steadily." He points to a much-anticipated well in the Gulf of Mexico, Jack No. 2, where exploration began amid great hopes several years ago, but from which no oil has been retrieved yet.
As for Arctic drilling, Kauffman points out that the most optimistic scenario for drilling near the Arctic National Wildlife Reserve (which has met strong opposition) projects one million barrels a day. The U.S. at present uses about 21 million barrels a day.
"Would it make any difference in world supply? The answer is probably no. It wouldn't really lower U.S. imports of oil significantly."
The ANWR drilling would require a spur pipeline connecting to the Trans-Alaska line. Since oil from Prudhoe Bay, using the Trans-Alaska line, is down from two million gallons a day at its peak to 700,000 a day, a new source is needed.
"The pipeline will produce tremendous profits for 20 years. That's what this argument is about. it's not about reducing dependence or increasing supplies. Companies stand to make a tremendous amount of money."
Are governmental environmental regulations the reason growth of new U.S. refineries slowed?
Kaufmann thinks not.
He points out that when oil demand fell in the late 1970s, at the time of the Iran hostage crisis, it didn't return to that peak until the late 1990s, causing production to slow.
"Oil refineries cost billions to construct," he says, "and the only way to make money is to run them seven days a week, 365 days a year. After demand dropped [in the late '70s], the U.S. closed lots of refineries. We were very reluctant to expand capacity.
"Throughout the world, refinery capacity and demand leveled out. It's hard to find any evidence that environmental regulations are responsible" for holding back U.S. refining capacity.
Does the relative weakness of the U.S. dollar play a role in the rise in oil prices?
Kaufmann notes that Clive Granger, the Nobel laureate in economics for 2003, has shown that the dollar is the effect, not the cause:
As the price of oil goes up, the dollar gets weaker, but there's no evidence that as the dollar gets weaker, the price of oil goes up.
"There's little reason to believe that if the U.S. did something to strengthen the dollar, it would have any effect on oil prices. But if oil prices came down, the dollar would strengthen some."
Kaufmann says oil speculation could well be a culprit in driving prices higher:
"I think there is some significant speculative component to oil prices. In late 2007 and 2008, the model is not capturing something that's driving oil prices. What I think is there's a significant speculative component to oil prices right now."
He estimates that $30-$40 of that per-barrel price is speculation-driven.
"Over the shorter time, the speculative bubble will eventually burst, like the housing and tech bubbles."
Short of colonizing Mars or developing hydrogen cars, what can we do?
Kaufmann says prices may well come back down, short term, but it'll be harder this time.
When we cut consumption in the late 1970s and early '80s, we weren't using such a large percentage of oil for transportation and commercial purposes.
"It's going to be hard to replace oil use in transportation," he says. "In non-energy use [plastics, for instance], those uses are very difficult to substitute.
"Reducing oil demand like in the 1980s will be a much more difficult and drawn-out process."
Kaufmann says experts predict production will peak sometime between 2014 and 2035. It is essential that we have some kind of alternative plan, whether it involves coal, oil shale, nuclear, electric, solar or some combination, in the works before then.
Reducing consumption helps, but "we're not alone." China according to one source, is expected to expand its car use 30-fold.
"If we wait until after the peak," he says, "then energy gets squeezed, and it will be incredibly destructive" because we'll need energy to develop new sources at a time when energy's already stressed.
"We have to plan for what's coming next, invest long before or we're in for a tough transition."
"Our future is written," he says, adding that it's up to us to decide how we're going to deal with it.
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