House Republicans’ Energy Policy Delusions

House Republicans have been lambasting President Obama, asserting that it’s the president’s “all of the above” energy policy for rising gasoline and fuel prices. Nothing could be further from the truth, as the Obama administration has pointed out that US oil and gas production has actually increased during his first term. Apparently, House Republicans don’t know the basics when it comes to how prices are set in a global oil market, or the dynamics and mechanics of oil exploration and production in the 21st century.

Interior Secretary Ken Salazar recently went so far as to say that House Republicans “are deluded if they believe expanded oil and gas drilling will bring lower gas prices or energy independence,” E&E News reported April 24.

How Oil Prices are Determined

The price of a barrel of crude oil published and touted in news and media is set at the margin, what sellers and buyers are willing to pay for the next barrel of oil. It’s a global market, with whatever number of barrels of oil not already contracted for delivery as per longer term contracts being shipped to the highest bidder.

So if crude, or its derivatives, are in relatively short supply in Europe, as has been the case of late, it’s European demand that will effectively set the price of oil globally. Demand for gasoline has actually been decreasing in the US. On top of that, oil in storage has been on the increase. It’s emerging economies like China, India and Brazil where demand for oil is growing. And that’s expected to be the case for decades to come.

Oil traders will buy oil in the US, driving up the price, and arrange to ship it to Europe, or other markets where prices are higher, as long as the price difference makes it profitable to do so. That will occur until the price differences are so small that all, or just about all, the profit is squeezed out.

“Drill, Baby, Drill” is More Than Irresponsible Leadership, It Doesn’t Work

Adding to House Republicans’ delusion is the assertion that we can drill our way out of rising oil prices, again showing how poor is their apparent understanding of the workings of oil and gas exploration and production. Oil and gas exploration is akin to hitting in baseball. If you get a hit one in three times, you’re all but assured a place in the Hall of Fame. The hit-to-miss ratio may be higher in oil and gas exploration, but not by much.

It’s true that US oil production is now on the rise, but that’s due to the growing amount of unconventional oil that’s being produced from sites like the Canadian oil sands in Alberta. That oil is a lot more expensive to extract, and it takes a much greater toll on the environment.

The same can be said, in terms of financial and environmental costs when it comes to offshore oil exploration. Large oil strikes have become increasingly rare, which is driving oil majors to go farther offshore and into harsher, more fragile and shrinking relatively pristine natural environments, such as the Arctic.

Then, of course, finding oil won’t do a thing to alleviate a supply shortage now or for a number of years down the line. It takes years to develop an oilfield once an economic one is found, and doing so comes with numerous and varied risks that could abort the attempt at any time.

Trying to “Get Real” on Energy

Interior Secretary said as much while speaking at the National Press Club in Washington, D.C. last week. “Americans want to cut our reliance on imported oil,” Salazar stated. “They know that a lot of factors affect gas prices, including world markets and international events, and that unfortunately there is simply no silver bullet in the near term.”

Further cutting into House Republicans’ distorted assertions, he added, “It is a place where up is seen as down, where left is seen as right, where oil shale seems to be mistaken every day in the House of Representatives for shale oil, where record profits justify billions of dollars in subsidies,” E&E’s article quoted Salazar, a former Democratic senator from Colorado. “The good news is the imagined energy world is actually very small,” he said. “I think you can actually find its edge, the end of it, when you walk out of the House of Representatives.”

In contrast to House Republicans’ plans to hand over national energy to the oil and gas industry, Salazar urged Congress “to pass measures to codify the reorganization of the former Minerals Management Service and safety reforms implemented following the Deepwater Horizon oil spill. He said Congress should also move to extend renewable energy tax credits and a clean energy standard as proposed by the president,” according to E&E’s report.

He also noted that Congress could easily pass ratify a transboundary agreement with Mexico the Interior Dept. concluded in February that would provide access to as much as 172 million barrels of oil and 304 billion cubic feet of natural gas in the central Gulf of Mexico.

“I want to be realistic about what we can expect from this House of Representatives, but I do believe there are some things they can work on, some low-hanging fruit that could and should be passed this year,” he was quoted as saying.

A transcript of the Interior Secretary’s prepared remarks are available at the DOI’s website.

*Photo courtesy: Dept. of Interior

Andrew Burger
Andrew Burger
A product of the New York City public school system, Andrew Burger went on to study geology at the University of Colorado, Boulder, work in the wholesale money and capital markets for a major Japanese bank and earn an MBA in finance.

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