Whatʼs the Rush?


By: Guest Authors

by: Don Hughes

We are getting a glimpse into the congressional sausage factory as members are
questioned about the current health care reform bill. We are told by one that it is
pointless to read the bill since time is too short and, anyway, it is incomprehensible
without outside legal advice. Another complains, that with bills this long, it is common
practice to divide them among staff members to read because of pressure to make fast
judgments. Given these admissions, it is not surprising that public opposition to the
swift passage of the bill is substantial. This suggests that similar misgivings should
apply to the Cap and Trade Bill recently passed by the House and now being
considered by the Senate. It is twelve hundred pages long, was passed just hours after
completion on a largely partisan vote and it too has the potential for enormous impact
on the way we live. Cap and Trade is not the literal matter of life and death that the
health care bill is, but itʼs close. Neither bill should be passed without careful
consideration no matter what deadlines have been set by the majority in power.

The Cap and Trade bill seeks to control global warming and reduce dependence on
foreign oil through energy taxes. This seems sure to raise consumer prices and is
predicted to cost jobs and reduce economic growth as well. In return, we are told that it
will attack global warming by reducing carbon emissions and provide much-needed
funds for development of renewable energy sources to replace fossil fuels.

The question of manʼs role in the process of global warming is not the settled science
that unqualified politicians maintain it to be. It is argued that since the current rise in
global temperature coincides with a radical increase in the burning of fossil fuels, the
one must be the result of the other. Simple correlation is never sufficient to establish
cause and effect. When our son was small and I would stay home from work with the
flu, I wouldnʼt bother to shave. He concluded that whiskers cause flu.

It is also maintained, and this is arguable, that there is strong consensus among
scientists that man-made greenhouse gases are the culprit. There is, however, good
reason to be skeptical of consensus judgments. Consensus held that Galileo was nuts
to propose that Earth was not the center of the universe. More recently, during the time
of my own university studies, there was overwhelming consensus that the theory of
plate tectonics (the notion that the continents ride on discrete platforms of rock which
are in constant motion and collision with each other) was absurd. Now no such
opposition exists.

Twelve thousand years ago, our northern states were covered by sheets of ice over a
mile thick. During this Ice Age, temperatures are estimated to have been about sixteen
degrees colder than they are now. In the brief recorded portion of the interim, there
have been at least two major climate changes. The Medieval Warm Period, which
ended about one thousand years ago, allowed crops to be grown in Greenland for the
first time and was followed by a mini ice age lasting until about one hundred fifty years
ago. In 1780 New York Harbor froze, making it possible to walk on the ice from
Manhattan to Staten Island. It is fair to say that climate variation is the rule, not the
exception.

Oil was first discovered in this country in 1859 and the automobile first mass-produced
in 1915. Why then should we assume that the single degree of warming that has taken
place over the last hundred years is largely due to the proliferation of the internal
combustion engine when the other fifteen degrees could not have been?

It is interesting to note that, in the late 1970ʼs, it was feared that the global cooling that
had started about 1940 might be the precursor of another Ice Age. It was proposed
then that man-made air pollution was blocking solar energy from reaching the surface of
the earth. Now, that same pollution is blamed for a greenhouse effect which traps heat
in the atmosphere and leads to global warming. One has to admire the flexibility
required to preserve manʼs culpability no matter what.

There are well-studied and documented mechanisms which are fully capable of causing
all the observed warming without any participation by man. These include variation in
solar output, cyclical changes in the earthʼs orbit and axial wobble in its rotation. These
explanations have one major shortcoming; they donʼt allow advocacy groups any
possibility to intervene on our behalf for the common good. Not even Ozymandias
would have asserted dominion over planetary orbits or the energy of the sun. We are
not in charge here, just along for the ride and this seems hard for some to face.
The principle of Occamʼs Razor may also apply. It holds that the simplest explanation
for a given phenomenon is usually the correct one. In this case, the choice for climate
change is between circumstances powerful enough to explain all past changes and a
largely theoretical cause which could not possibly have applied to those previous
variations. Occam seems clearly to favor the former.

Regardless of the role of carbon emissions in climate change, however, it just makes
good sense to reduce them as much as possible. We have spent the last one hundred
fifty years (longer for coal) feverishly burning the fossil fuels that took many millions of
years to form and suffering the consequent environmental damage. The substitution of
renewable, non-polluting alternatives is very much to be desired. The Cap and Trade
Bill seeks to accomplish this through a complex arrangement of carbon emission
penalties. It imposes fines for exceeding progressively smaller limits on such
emissions. This will amount to a tax on most present energy production which is sure to
be passed on to the consumer in the form of higher prices. In other words, we will all
indirectly be taxed more under this bill. Part of the proposal is for consumer rebates to
compensate for increased energy costs. But this can only be a partial offset since
otherwise the penalties would be pointless. The idea seems to be to impose everincreasing
fines on the the public for the use of fossil fuels in order to force a gradual
switch to green renewables. It is inevitable that this will place a major burden on both
business and consumer but itʼs clear that, without such financial incentive, the switch
simply wonʼt happen anytime soon. Itʼs also clear that it should work as witness the
interest in hybrid cars resulting from recent increases in gas prices. “Pain at the pump”
can be highly persuasive and it will surely require something as potent as this to free us
from gasoline addiction.

A switch away from oil would, of course, reduce our shocking transfer of wealth to the
Middle East. It would also soften a coming crisis which is not presently much talked
about. We are very near the reality of “peak oil”. This is the point at which world
demand for oil exceeds world supply. Consumption of oil has exceeded discovery rates
for some time, leaving the world in the process of burning up this finite resource at an
ever-increasing and unsustainable rate. Soon the OPEC cartel will no longer be able to
manipulate supply as a means of controlling world price and unrestrained forces of
supply and demand will take over. As world oil demand continues to increase as supply
diminishes, as it will as reserves are used up, any increase in imports for one country
can only be met at the expense of another. The result of this can be expected to be
both obvious and unpleasant. Itʼs hard to say just when this will actually happen, largely
because OPECʼs estimates of its reserves are unreliable. This is comes from the fact
that production volumes allowed by the cartel to member states are directly proportional
to their individual reserve estimates. They are addicted to our dollars in the same way
that we are addicted to their oil. We all complain about high oil prices but we have only
once suffered from a shortage of supply. This was during the Arab oil embargo of
1973-74 when we had to cope with long lines at gas stations all over the country. We
didnʼt deal with this very well, frequently engaging in irrational behavior to secure a
precious fill-up. “Peak Oil” suggests that this may become a chronic problem unless
steps are taken promptly. The financial incentive of Cap and Trade toward reduced oil
consumption could be of great help.

Itʼs plain that we are not going to be able to kick our gasoline addition for a very long
time. Just watching rush hour in our cities and peak travel on our highways makes it
clear that this will be a very big job. Sensible allowance must be made for the realities
associated with transfer from the fossil fuel age to something else. “Freedom from
dependence on foreign oil” is a phrase which goes back to Nixonʼs “Project
Independence” of 1973. It aimed to make us oil-sufficient by 1980. We presently
consume about twenty million barrels of oil per day. We were last self-sufficient in oil in
about 1970 when our own domestic “peak oil” occurred at just under ten million barrels
per day. It is now about half of that and falling. It will take a lot more than vacuous
political pronouncements to change things.

Since oil is sure to remain a major energy source for this country for a long time, it is
important that implementation of the Cap and Trade Bill be carefully managed to avoid
unwanted results. The windfall profits tax enacted under Carter in 1980 reduced
domestic oil industry activity, increased oil imports and fell far short of producing the
expected tax revenues. The Cap and Trade Bill could produce the same, or worse,
result. It imposes tax on the production, importation and refining of crude.
Industry analysts predict that this will curtail exploration and lead to reduced refinery
capacity since importing refined products such as gasoline will avoid the tax on
domestic refinery operations.

Oil exploration activity is extremely sensitive to the price of crude. Oil companies are
public, profit-making organizations which have a duty to provide the best possible
financial return for their shareholders. Exploration budgets are governed by this.
Estimates for the success of any given oil play are very carefully made. Consideration
is given to a wide range of factors such as size of the possible accumulation, its
likelihood of existence, development costs and on and on. Only plays that can support
a reasonable expectation of acceptable return on investment are undertaken. The rest
donʼt make the cut and are kept for reconsideration should circumstances change.
Crude price and taxation are obviously major factors in this determination. If a company
cannot sell its oil, after taxes, for more than it costs to find it, exploration becomes
unprofitable. Despite all this careful evaluation, only about one in eight wildcat wells is
successful.

Drilling rig count is an accurate measure of oil company activity. The domestic rig count
was about two thousand in 2008 when oil was at one hundred thirty dollars a barrel.
Now, with oil at about half that price, rig count is down to only around nine hundred. It
could be expected that rig count would sharply rise again should the government open
to exploration promising areas which are presently off limits. Such areas include
coastal waters of the Pacific, Atlantic and eastern Gulf of Mexico and the ANWR (Arctic
National Wildlife Refuge) of Alaskaʼs North Slope. Estimates of the total reserves that
may be present in these areas vary widely but tend to average about twenty billion
barrels and, if accurate, could add as much as two million barrels a day to domestic
production. Itʼs true that this is only ten percent of our present consumption but, at one
hundred dollars per barrel, that would represent over seventy billion dollars per year that
we would not have to send to Riyadh.

The principle objections to expansion of drilling in these sensitive areas are
environmental and their pros and cons are well known. There are two separate
additional points which are also frequently mentioned; that it will take too long to realize
production of any new reserves and that oil companies are sitting on a great deal of
already leased acreage that they should drill first. While itʼs quite true that it was nine
years after discovery before production from the North Slopeʼs giant Prudhoe Bay Field
began, this was because it took that long to construct the Alaska Pipeline. Production
from the North Slope reached two million barrels per day about ten years ago and is
now down to under half that, providing spare pipeline capacity to move any newly
discovered reserves without excessive delay. In my own experience, as founding
member of an independent exploration company, it took us exactly one year to begin
producing our first oil. This was from a standing start and included renting offices, hiring
staff, developing plays, shooting seismic surveys, getting permits, leasing land,
promotion to outside investors and drilling a discovery well all in one year. Independent
operators, which produce nearly seventy percent of our oil, tend necessarily to be
nimble but the majors can also move quickly if the opportunities are there. In any case,
is it logical to believe that this country will have no need for its own oil in say ten or
twenty years? As to the idea that companies should drill their presently leased land
first, the reason that such acreage hasnʼt been tested is that itʼs not presently felt to
contain economically viable prospects. In other words, any exploration plays located
there do not now make the financial cut.

The development of renewable energy sources to replace fossil fuels is crucial. Recent
advances in plug-in electric automobile technology suggest that this has great promise
for weaning ourselves off of much of our gasoline and diesel fuel addiction although
some applications are apt to be tougher to replace (electric airliners are hard to
imagine). Solar, wind and geothermal sources have been specifically mentioned by the
administration as holding special promise for the polution-free generation of electricity.
None of these, however, is free of drawbacks; solar and wind facilities must be located
in sunny and windy locations which are not usually where the power is most needed nor
can they be relied on when the wind isnʼt blowing or the sun shining. They also donʼt
improve the appearance of the landscape. Meaningful geothermal power generation
appears to be limited to the area around Geyserville north of San Francisco and has
been already largely exploited for many years.

Nuclear power is not currently mentioned much although it presently supplies around
twenty percent of our total electrical output from about one hundred plants scattered
across the country and, despite being a mature and reliable energy source, does
present concerns as to accident potential and radioactive waste disposal. Biofuels
represent another category worthy of investigation but one also not free of problems.
There is a commonly expressed sentiment of “letʼs try them all” which could turn out to
greatly delay identification of the most preferable choice or choices. Government
subsidies, such as those presently supporting many different options, are quite
necessary to permit investigation of ultimate potential and economies of scale but
inevitably create constituencies and lobbies dedicated to their perpetuation. Whatʼs
needed is the earliest possible evaluation of competing energy alternatives on the
simple basis of dollars per kilowatt versus environmental impact. Absent this, there is a
danger of massive waste of time and money.

Our recent experience with the health care reform bill has demonstrated that much can
be gained from a thorough investigation of the details of a kilo-page proposal presented
for hasty passage by law-makers who havenʼt even read it. This sort of examination of
the Cap and Trade Bill may well be more than worthwhile.


The writer has a degree in earth physics from UCLA and thirty years experience in
applied and research exploration geophysics here and abroad. He was the Manager of
Geophysics for Amoco and also worked for Shell and helped found an independent oil
exploration company.

No Comments

No comments yet.

RSS feed for comments on this post. TrackBack URI

Sorry, the comment form is closed at this time.