Technology Can Ease Need for Oil Imports
The price of oil may be at a seven-year high, but for gasoline consumers here and in other nations, the Persian Gulf crisis so far has been only a minor inconvenience.
Gasoline has been freely available, and its price has risen only 20%--or 20 cents a gallon on average--while the price of crude oil is up 65% to $33 a barrel since the crisis began.
But harder times are coming if the Gulf standoff continues. Not only will prices go higher, oil analysts say, but there will also be shortages in heating oil and gasoline this winter.
No, we won’t freeze--the shortages won’t be severe or catastrophic. The problem is mechanical: The oil that other countries are producing to make up for Iraq and Kuwait’s 4 million barrels a day is of a different grade, or specific gravity. That means that the average barrel of replacement oil yields fewer gallons of gasoline and heating oil and more gallons of asphalt. Refineries along the U.S. Gulf Coast and at the big oil port of Rotterdam in Holland will have difficulty processing it.
So the outlook is for mandatory car-pooling and lowered thermostats.
Remedies will be forthcoming quickly, however. In the United States, more natural gas will be used as a replacement for oil. Also, the U.S. government will draw upon the 600-million-barrel Strategic Petroleum Reserve stored in a Louisiana salt dome.
Still, the shortages will have a profound effect: They will set off a debate about energy policy and revive demands for energy self-sufficiency.
President Bush, a former oilman himself, has already asked Congress to pass new tax incentives for oil drilling and development. They include tax credits for increased recovery from old wells and a revival of tax shelters for wealthy investors in oil drilling. (Such drilling deductions were eliminated in the 1986 tax act because they had become more productive for tax avoidance than for finding oil.) There will be demands for drilling off the East and West coasts and in Alaska.
But before we unleash drilling programs everywhere and spend resources unproductively in search of oil, we should ask what is realistic: How energy independent can we become, and how soon?
The answer from experts, such as William Fisher, head of the Bureau of Economic Geology at the University of Texas, is that a realistic goal for the United States is to produce half its oil needs, roughly the same proportion as now. That would mean sustaining output at 7 million barrels a day, Fisher explains, and that won’t be easy.
U.S. oil output is now 8 million barrels daily, but that total is due to decline, and there are no large sources of new production in sight. In fact, Alaska is the only part of the United States where a new large find is even possible, and new oil would only be available in the late 1990s if major oil companies get the go-ahead to work in Alaska now.
So the big story for the early ‘90s will be increasing oil production in the 48 contiguous states--the so-called Lower 48--and the major effort in that respect will be extracting more oil from existing wells.
It will be a story of technology, of using steam injections and chemical solvents and new techniques to get more from wells that originally yielded 35% of their oil. The gain could be sizable: “There could be 100 billion barrels to recover over three or four decades,” says Fisher.
Thomas Petrie, of Petrie Parkman, an energy investment bank in Denver, agrees. “The ability to drill into reserves in a new way, or to recover more oil and gas from known deposits, will be the hallmark of the early ‘90s,” he says. And the secret of success for even small companies will be technology--supercomputers to read geological charts, angular drilling. “We are entering a very active period,” Petrie says.
It sounds exciting. “But keep in mind that outside of Alaska, no really large oil field has been found in the United States since East Texas in 1930,” says Morris A. Adelman, economics professor at Massachusetts Institute of Technology and author of “World Petroleum Market.” There is no way, Adelman says, that the United States can become energy self-sufficient. “The danger in trying to do it is that we subsidize oil and take away from productivity-increasing investments,” he says. “We can’t afford that today.”
So should we simply surrender to dependence on the unstable Middle East? Not necessarily. We could try to diversify our suppliers, particularly by encouraging new production in Mexico and Latin America.
“Latin America, in terms of oil, is still less explored than other regions,” Petrie notes. And after all, importing oil from Latin American countries would be a two-way street: If they sold us oil, they would be able to buy our goods.
Finally, beyond oil, U.S. long-term thinking and incentives should be on alternative energy. As with Alaska, not much can be done in this decade, but the latest issue of Scientific American gives some idea of the possibilities.
“The solar radiation that strikes the earth’s surface every year is equivalent to 15,000 times the world’s energy supply,” the magazine says. “If society could exploit only a small portion of that solar radiation, our energy problems would be solved.” That’s a goal to think about this winter, when old-fashioned energy may be in short supply.
