When the President Speaks, Everybody Yawns: Crude Oil and the Status Quo

By Dean Peters

August 16, 2008

At the time of President Bush’s energy speech on June 18, 2008 the average national wholesale price of a gallon of regular unleaded gasoline was about $3.49 per gallon. In the thirty days prior the world market price for intermediate crude jumped another 15% from $117 to $139 per barrel.

The President, with Energy Secretary Bodman and Interior Secretary Kempthorne on either side, spoke before the media and laid the blame on the rise on supply and demand. President Bush said there are no quick fixes. He went on to admonish the Democratic congress for failing to work with the Administration on energy many years ago.

The President spoke on four general energy improvement themes:

1. Allow drilling or exploitation of the following:

• Outer continental shelf (OCS);
• Green River Basin oil shale reserves in Colorado, Utah, and Wyoming;
• Arctic National Wildlife Reserve (ANWR) in Alaska.

2. Enhance refining capacity by streamlining the permitting process and ending the need to import processed crude which increases the cost of energy.

3. Invest in alternative energy storage/conversion and renewable energy sources:

• Fuel cells and better battery designs;
• “Twenty in Ten” initiative where 20 percent of U.S. diesel and gasoline comes from renewable bio-fuels (36 billion gallons annually by 2022);
• New mileage standards for vehicles of 35 miles-per-gallon by 2020.

4. Get Congress to do something now:

· “Why is Congress on recess for the 4^th of July when so many Americans suffer?”

· “Why do the Democrats continue to block the only viable options to reducing America’s energy independence?”

· This mess is absolutely not the fault of the Republicans.

In closing, the President assured all Americans that America has faced “similar strains before and we’ve overcome them together - and we can do that again. With faith in the innovative spirit of our people and a commitment to results in Washington, we will meet the energy challenges we face - and keep our economy the strongest, most vibrant, and most hopeful in the world.”

The goals of the President’s energy agenda have some merit. There is undoubtedly oil in the areas cited in his speech. Better technology could help offset America’s demand for unlimited energy. And immediate action is certainly warranted. Yet an examination of the underlying realities paints a somewhat somber outlook for us all. America will have to decide what kind of social changes we are willing to bear to be oil independent. More important than oil, however; the longer this run up lasts the weaker the U.S. gets. Because of foreign debt, America sits on the verge of an economic calamity that could make us all look nostalgically back on the Great Depression for the creature comforts it offered.

Mountains into Molehills

The Green River Basin is a major tributary to the Colorado River. It is a high and dry climate averaging 12 inches of rainfall or less annually. The landscape of plateaus cut by dry canyons is all but treeless excess for short cedars and pinion pines. The canyon walls bear evidence of the earth’s geology as each layer of pink, yellow, gray and brown speaks of oceans long gone, dinosaurs, and once vast forests now exposed as low-grade coal seams.

There is no doubt that this basin, some 13 million acres, is the largest deposit of oil shale in the world. The Basin and the Arctic National Wildlife Reserve share a common history. Both lands were set aside as part of the Strategic Petroleum Reserve Act of 1913 by President Howard Taft (although the USGS survey began several years earlier during the previous administration). President Roosevelt (Teddy for the historically impaired) was a staunch supporter of the progressive movement. The Progressives at the turn of the century believed the mad rush for oil would leave posterity without any resources unless the government stepped in and took the lands away from development. Thank you Mr. President!

Oil shale is a misnomer because the stuff in the shale is not a liquid. Instead the oil exists in the kerogen and must be extracted by pyrolitic means (it has to be cooked and squeezed). The traditional method involves underground room and pillar mining. The oil shale is removed, crushed to a manageable size, heated to 800⁰ F in a retort (think granddad’s corn whiskey still), steamed, and separated. The spent water goes for cleaning. The oil gets refined. And the washed out rubble, well, somewhere there needs to be a great big hole to throw it in. The result is good oil: sweet to smell, high gravity, ready for a thousand uses. With recoverable reserves in excess of 800 billion barrels, there is enough gasoline and diesel in the Green River Basin to make America energy independent for more than 100 years; maybe even 200 years.

With all of this potential, why are American oil companies not there making millions of barrels per day? There are three reasons. At a minimum oil-shale extraction costs $60 per barrel at least three times the cost of producing conventional oil. Secondly, the federal government owns 70% of the land and most of the lucrative geology. Lastly, it takes at least four barrels of water to produce one barrel of oil from oil shale. If fully operational at 3.6 million barrels per day, oil-shale conversion would need 87% of the annual water supply allotted to the State of Wyoming. That leaves just 200 gallons per year for personal consumption. Talk about a need for low flush toilets!

The American Southwest (Phoenix, Las Vegas, Los Angeles, Tuscon, San Diego and all parts in between) must be willing to part with 430 million gallons of water a day for one million barrels of oil-shale production. That is a lot of swimming pools and golf courses to be repurposed. For those readers who have not lived in the Southwest, water is more precious than oil. On a side note, oil shale extraction is like making a mountain into a molehill. All that used up slag must be buried somewhere (Death Valley is a fairly deep hole that needs filling – let us start there). There is no guarantee that the slag will not contain high concentrations of unsavory minerals and metals that result from retortation.

Oil-shale mining will definitely create tens of thousands of high-paying jobs but a prospective job seeker must live out in the middle of nowhere. Towns, usually less than 2,000 in population, are few and far between. There is no infrastructure yet and not even enough electricity to support a large exploitation activity. To make matters worse, Utah is a dry state. What in the name of the Mormon’s God are all those thirsty miners going to do after work? Read the bible and drink lemonade like the locals? There will be a 24-7, bumper-to-bumper traffic jam 75 miles long into Evanston, Wyoming where they actually let people drive up to the bar window and order whiskey and beer (no one drinks wine in the Wild West).

A Template, a Platform, a Drill, a Big Pump, a Pipeline, and That is all I Need

Okay, forget oil-shale for now, what about those other places the President mentioned? Let leave the dry Southwest and go where there is no dry land at all. The outer continental shelf (OCS) is geologically beautiful for oil developers. The possible oil reserves are numerous. The Florida Straight is the most lucrative because its attractive geology consists of limestone formations laid down by 300 million years of coral growth. The largest and most prolific oil fields have historically come from limestone formations. If oil, and not seawater, does exist within the matrix of the limestone, it will be plenty – maybe even a giant field (very large area of oil under high pressure that flows of its own accord in amounts greater than 1 million barrels per day). A giant field is usually good for about 50 years before it starts to decline. But wait. There may be more than one giant out there.

The edge of the Atlantic continental shelf lies about 50 to 100 miles off the Eastern Seaboard. Neither the rich people in the Hamptons nor the poor people at Coney Island will be able to see any drilling operations. In water from 450 to 650 feet deep are a number of canyons formed by deltas that make up America’s Appalachian watershed. The Hudson River canyon stretches for a hundred miles out into the Atlantic Ocean where it spills into the main ocean. At the edge of the shelf the sea is a very manageable 600 feet deep; but travel two miles further east and the ocean depth suddenly plunges to 9,000 feet deep. Similar features are repeated all along the Eastern seaboard at the Wilmington Canyon, Baltimore Canyon and so on. The canyons have become repository of clays, sand, and limestone formations since the Appalachians first rose out of the ocean. Domes formed that allow oil to be trapped under high pressure. It is the same geology that allows America’s Gulf of Mexico fields to produce 25% of the Nation’s domestic oil – and these are old oil fields.

Offshore drilling is never cheaper than drilling on dry land. Opening up the Outer Continental Shelf will take many years of planning and construction of drilling and production handling platforms. An oil company will likely invest $1 billion dollars in such preliminary activity before the first drill bit even gets wet. What is sad is that America is not in the platform building business. If America has to move fast on this we will need to contract South Korea, Japan and China to build the stuff for us. UPS does not deliver to addresses where sharks live.

From an environmental standpoint there is the risk of a major spill either from a hurricane or because of an attack on oil platforms by a hostile government (think invisible Iranian submarines). Yet hurricanes come with a warning and oil technology makes it possible to seal wells at the ocean floor so that even if a platform capsizes no oil will be spilled. As for an attack by a foreign nation, if that happens, an oil spill will be the least of our worries. Even so, America is doing something worse than spilling oil now. New Jersey and New York have been dumping 36,000 tons of wet garbage at the edge of the OCS every year for 40 years. Let us face facts. If the Atlantic OCS is good enough for America’s garbage it is good enough for America’s drillers.

Then there is the Pacific OCS. Long Beach, California has been producing oil offshore for 50 years. But people do not see the pumping units because those mechanical rocking horses are hiding behind painted facades of ocean scenes, clouds and palm trees. The Pacific plates that make up the Western OCS are an oil making machine. As they slide westward thousands of feet of biomass (dead stuff) is sub-ducted, literally run over, by the plates. Because the geology is literally folded in half by this process, crude oil can become trapped in the overt thrust, like money in the fold of couch. These formations then rise again to form volcanoes and the coastal mountain ranges. However, no one in California wants drilling. The State is $15 billion in debt, the Governor recently ordered pay cuts for all State employees. An oil boom is just what California needs. Instead the movie stars quite illiterate that California is the second largest producer of domestic crude oil, will go holding progress hostage. If only California could harness the power of ego and forest fires America would not need oil.

What Alaska Needs Is a Good Mosquito Control Plan

Now let us think wet and dry (well, muddy at least) and cold. The final gem in America’s crown of oil independence is the Arctic National Wildlife Reserve. Remember, this land, part of the Naval Petroleum Reserve Number 5 was originally set aside for energy reserves 95 years ago. The NPR-5 was the size of Ohio. ANWR was carved out of the NPR-5 and made into a National Reserve in 1960 and actually expanded in size during the Reagan Administration. Now we need it.

Consider that the nearby North Slope of Alaska was producing 1.2 million barrels of oil per day just 12 short years ago (it is down to 700 thousand barrels and declining now). ANWR is potentially three times as significant and the infrastructure is all there to begin test drilling of the size of the structure. Drilling for oil in ANWR is not going to kill any caribou. In fact, there are too many caribou and the herds have quadrupled in size since 1970 (after all the wolves were killed). Naturalists should worry about wolves not derricks. Secondly, ANWR is the most god-awful mosquito infested place on earth. The clouds of the blood sucking monsters are so thick in the summer that herds of caribou have been known to flee hysterically from an attack plunging headfirst into deep water and drowning. A little film of oil in the swamps would take care of the mosquitoes and the caribou will love America for the relief that brings. Besides, ANWR is 19.6 million acres. Surely the park can spare 10,000 acres for oil exploration.

But seriously, the North Pole is actually surrounded by oil reserves that stretch in almost a complete circle around it. The Russians (yes those sneaky Red Devils) actually sent a submarine to the bottom of the Arctic Ocean claiming these oil bearing structures. If other countries start drilling the ANWR will be drained. There is fear that Canadian development just across the border is already draining ANWR. Use it or lose it people!

Let Us All Go Green

Having run out of gems we now turn to America’s breadbasket. America has bio fuels. The President’s energy agenda has focused on replacing 20 percent of America’s transportation fuels with bio-fuels by the year 2020. The US consumes about 18 million barrels of oil daily. Of this, forty percent is used by transportation, or, 7 million barrels per day. By 2020, American farmers will need to grow enough corn and soy beans to produce 1.5 million barrels of bio fuel daily. Today ethanol fuels (biodiesel and ethanol enriched gasoline) make up less than one-tenth of one percent of the total transportation fuel consumed in America (2006 statistics). Even if that consumption has since doubled, America has a long way to go to reach a 20% goal in just 12 years. Since bio-fuels only reduce energy consumption by 15% (cost of processing), the net energy savings of a “20 by 20” policy is negligible. And what about the cost of converting from growing crops for energy versus crops for food? Will the price of a loaf of bread go up twenty-fold just to fill our gas tank in 2020? It is too bad that salmonella and e.-coli infected foods like tomatoes, spinach and jalapeno peppers cannot be used for bio-fuels!

In reality, the bio-fuels of the future will come from alga grown in ponds. Algae are a great way to reduce CO₂ in the atmosphere and the green slime is an excellent source of bio-fuels. But where is America going to put theses ponds, especially one large enough to meet the 20 percent goal? Remember, algae left unchecked kills all the life in the water. We must think creatively. Since Lake Erie has history of serving this Nation’s industrial aspirations with sacrifice and courage perhaps the lake can be converted back into a giant algae pond that it was in the 1960’s?

What about other energy sources? Electric cars are a moot point – the energy that goes into the batteries must come from a power plant that might run on fuel oil, coal, or natural gas. There is no trade off. While the gasoline bill goes down the home electric bill goes up (unless you steal the juice from your neighbor or from work). Electric cars are simply a quid-pro-quo. Worse, it takes 15 seconds to get up to 60 miles-per-hour and no red-blooded American should stand for that.

Hydrogen fuel cells are already powering cars. Shell Oil recently demonstrated a converted GM Saturn. The car possessed reasonable power and did not pollute. But it did not run on water - it required pure hydrogen gas. Hydrogen – very explosive, highly flammable – requires special handling and storage. The auto’s fuel tank would have to be absolutely puncture proof. If gasoline leaks an application of foam fire retardant renders it harmless. Hydrogen cannot be contained. In a significant collision where the gas is released there will be an explosion, or, at the very least, a ball of fiery gas hot enough to melt steel. Imagine a car wreck in the city where a cloud of hydrogen escapes and floats up four stories where old lady Raggatulli is having her morning cigarette - KA BLOOEY. Remember the Hindenberg?

Secondly, the fuel cell is incredibly dangerous and too misunderstood to be released to the general public. For example; the capacitor stores 480 volts of electricity at 60 amperes – enough to literally explode the chest cavity of any human who feels it necessary to go poking around the motor with a screw driver. America would still need to develop ways of extracting hydrogen gas for fuel, most likely through electrolysis or from, you guessed it, crude oil.

Other Miscellaneous Cures and Space Aliens

In terms of energy independence, a real short term relief to high gasoline prices is going to come from increasing America’s refining and storage capacity so that developers can increase production of natural gas distillates as a source of gasoline. The greatest reserves of distillates exist, where else, at the OCS where vast amounts of methane distillates lie trapped as ice in the ocean floor. Occasionally these are released by natural forces causing underwater landslides (think 200 foot tall tsunami headed right for the Chesapeake Bay) and, some scientists theorize, climatic disasters resulting in an ice age. One popular theory is that ships and airplanes that suddenly go missing in the Bermuda Triangle are the result of being caught up in small releases of methane distillates. The water on which the ship floats is suddenly turned in champagne bubbles and the ship sinks instantly to the bottom of the sea. The gas that rises forces oxygen out of the air and pilots and passengers in aircraft suffocate and crash. If the OCS is developed, the pursuit and mediation of these methane pockets must be high on the list.

Though not mentioned by the President let us to throw these alternative fuels into the mix: foot power; bicycles; wind generators; a solar panel on every baseball cap; the tides; convection zones in the ocean; H3 fuel from the moon; energy crystals from Planet Zorp in the Pleiades; and, hot air from Fox News and MSNBC.

And Now for the Obligatory Conspiracy Theory

So, there are the alternatives to reduced American reliance on foreign oil. In a nutshell, the United States produces five percent of the world’s oil supply and consumes 25 percent of the world’s production of crude oil. We Americans are a bunch of gluttons joined at the hip and bucket seat to our automobiles. Life without an automobile is unthinkable, unimaginable, un-American. Even the President says we are a nation of “oil junkies.” Like drug users there is a dark side of the cost paid for this hydrocarbon habit.

In one of the most insidious and ironic aspects of the crude oil market is what happens to excess petro-dollars that foreign countries earn during boom cycles in the price of oil. All crude oil is traded in US Dollars. Generally, profits made by oil exporting countries are used up internally. When oil prices suddenly rise, oil exporting countries reap windfall profits and excess petro dollars. In the past, these petro-dollars were reinvested in industrial countries by the oil exporters. While Saudi Arabia continues to treat its excess petro dollars in this way, a growing number of other OPEC members and non-OPEC exporters are taking a different investment strategy. Since the 1970’s excess petro dollars began to be invested into emerging markets in Asia, Latin America and now Europe. These are dollars lost. This is one explanation why the value of the US Dollar has shrunk to the equivalent of $0.70 to the Euro when just ten years ago the US Dollar was $1.10 to the Euro. Why is this important?

The US buys oil and the countries we buy from reinvest those dollars back into America. Even countries we do not buy from invest their petro dollars here. Because America is an efficient economy we were able to turn those loans into increased GDP of sufficient return to offset the effects of devaluation. It was a zero-sum game. Now many petro dollars are going elsewhere. Investment during this current boom time is not returning to America. This causes negative GDP and dollar devaluation. The Federal Reserve, in response, continues to print money. Like a hammer and the anvil, these pressure points will push the US into a crisis like that faced by our Latin American neighbors in the 1980’s. Rampant inflation, negative growth, loan defaults on our international debt; these are the symptoms of the economic death spiral.

The only chip America has in the oil game is our power as consumers to alter the market forces of crude oil pricing. We must reduce the exodus of our weak dollar and stop the economic death spiral by reducing personal energy consumption in intelligent ways. In short, all Americans must end their gluttonous ways.

Former President Calvin Coolidge was wont to say that the “business of America is business.” These words are often cited as being typical of American attitude about the economy leading up to the Great Depression. The President Bush energy speech resounds like an echo of that era’s Normalcy, a hands-off, laissez fare attitude about the real dangers of greed and power and shenanigans played out by people we are supposed to trust. We have a Ship of State that is trying to sail on an ocean that no longer exists. Those whom the Captain of State rely on are unreliable.

It is tragic that this Administration’s energy policy does not ask Americans to do anything: no promise to open up the Strategic Petroleum Reserve (not much a cure anyway), no request to turn down the air conditioner, tune up the car, join car pools, use mass transportation, turn off lights and electrical appliances (including computers) when not in use – not even an admonishment to reduce energy consumption by a meager five percent. Apparently the Administration does not want to unleash force of America’s power not to consume. The President said this is a problem of supply and demand. Well, let us all quit demanding so much and see what happens!

Instead, American consumers are supposed to just keep on doing what we are doing and wait on business to solve the problem, (and if business cannot solve the problem then the Democrats are the problem). We are to, like the good Americans that have come before us, simply grin and bear the situation and believe that all will be fine. We must trust in Washington and Yankee know-how. The translation is we can all trust that big oil, the Federal Reserve, Senators, Representatives, OPEC and other not-so-friendly exporting countries know how to make the most of an oil bubble at the expense of the American consumer.

In the two months since the President’s speech, crude oil prices have moderated somewhat falling back from $148 to $117 per barrel (coincidentally the same price that oil sold for on June 18, the day of the speech). Gasoline has come down $0.25 per gallon but still rests at an unbearable price of $3.85 a gallon. This is no time for exuberance and this is not a trend. The Energy Information Agency, America’s energy think tank, projects that oil will continue to remain at around $120 per barrel throughout 2009. In other words, when energy demand peaks this winter, the price of oil will shoot up again and just in time to swear in the next Captain of State. All America needs now is one of these candidates to promise “a chicken in every pot, and a car in every garage (Herbert Hoover, 1928).” If that happens, America will be situated perfectly for a repeat of the Great Depression. As for the fate of President Bush, he has nothing to fear but fear itself. Why? He probably owns an oil well or two in Texas.

References

Bartis, J. T., Cecchine, G., Dixon, L., LaTourrette, T., Peterson, D. J., (2005). Oil Shale Development in the United States Prospects and Policy Issues. RAND Corporation ( MG-414-NETL). Retrieved on August 7, 2008 from the Oil Shale and Tar Sands Environmental Impact Statement database at http://ostseis.anl.gov/guide/oilshale/index.cfm

Bush, George W. (2008). President Bush discusses energy. Speech in the Rose Garden (June 18, 2008). The White House, President George W. Bush (Washington, DC). Retrieved on August 7, 2008 from the White House database at http://www.whitehouse.gov/news/releases/2008

Energy Information Agency (2008). Alternatives to traditional transportation fuels 2006. US Department of Energy (Washington, DC). Retrieved from the EIA database on August 8, 2008 at http://www.eia.doe.gov/cneaf/alternate/page/atftables/afvtransfuel_II.html#consumption

Editors (2007). Which president said “A chicken in every pot and a car in every garage?” Pearson Education, Inc. Retrieved on August 7, 2008 from the Information Please database at

http://www.infoplease.com/askeds/promising-chicken-every-pot.html

Hirsch, E. D. Jr., Kett, Joseph F., and Trefil, James (Eds.) (2002). The New Dictionary of Cultural Literacy, Third Edition . Houghton Mifflin Company. Retrieved on August 7, 2008 from the Bartlesby database at http://www.bartleby.com/59/12/businessofam.html

Pasek, Michael (2008). Beware! The crude oil bubble has not popped. Energy Market Newsletter (July 30, 2008). Ira Epstein & Company Futures (Chicago, IL).

Rona, Peter (2005). What lies beneath…The sea floor. National Oceanic and Atmospheric Administration, U. S. Department of Commerce. Ocean Explorer Webmaster (July 12, 2005). Retrieved on August 8, 2008 from the NOAA database at http://oceanexplorer.noaa.gov/explorations/deepeast01/background/beneath/beneath.html

Wiegland, Johannes (2008). Bank recycling of petro dollars to emerging markets economies during the current oil price boom. International Monetary Fund (WP/08/180). Retrieved on August 8, 2008 from the IDEAS database at http://ideas.repec.org/p/imf/imfwpa/08-180.html

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