Monday, April 26, 2010

The return of oil
Janet Whitman, Financial Post
Published: Sunday, April 25, 2010

Natural gas piped over the Canada-U.S. border and into the New York City borough of Queens helps light up about one in four bulbs in Manhattan's shimmery Times Square. Beyond serving a quarter of the Big Apple's base load electricity needs, Canada is the United States' biggest source of imported crude oil. Minnesota, for example, gets about 83% of its oil needs from north of the border. While U.S. President Barack Obama may have made much recently of steps to achieve "energy independence," the country's reliance on imports from Canada - as well as the volatile Middle East and other nations around the globe - won't be changing soon and perhaps not for decades. Mr. Obama's plan to open up huge swaths of long off-limits parts of the U.S. coast to oil and gas exploration isn't expected to yield any significant production for five to 10 years. And that might end up being a bit longer in the wake of this week's oil spill in the Gulf of Mexico following the fiery blast on a drilling rig, which could give momentum to environmental groups opposed to opening up more of the offshore. Ultimately, whether delayed or not, offshore drilling won't be enough to feed the United States' oil habit. As Mr. Obama himself said, the United States consumes more than 20% of the world's oil, but has less than 2% of the world's oil reserves. About 70% of the oil consumed in the United States goes to feed gas-guzzling automobiles. Unless the nation's fleet of cars and trucks switches to electric power or vehicles can somehow be fuelled by much more plentiful natural gas, there is no way the country can get anywhere close to being energy self-sufficient, industry observers say. "With domestic production falling almost everywhere, the best we might hope for is that whatever we find might be enough to stabilize our production for a while," said Charles Ebinger, energy policy specialist at the Brookings Institution, a Washington think-tank.
"Every time we lose a barrel of domestic production we offset it with imports, which upsets the balance of trade," he added. The United States paid roughly US$350-billion last year for 4.9 billion barrels of imported oil. "When you put that in context, anything you can do to keep more money home and give Americans jobs is good," Mr. Ebinger said. The U.S. government estimates that between 39 billion and 63 billion barrels of oil could be recovered from the expanded areas proposed for possible drilling, which include off the Atlantic coast, the eastern Gulf of Mexico and the northern shores of Alaska. That won't stretch far given the thirst for oil in the United States. Last year, even as the economy sputtered, 18.7 million barrels a day were consumed. The recoverable oil estimates could be low. Much of the land hasn't been surveyed for oil for nearly 30 years. If, down the road, the United States does end up with more oil than is needed to replace its current production decline, it could supplant some sources. But Canada probably wouldn't be one of them, said Gary Mar, the Alberta government's top representative in Washington. "I would suggest that oil from a next-door neighbour, friend and ally is the last place the U.S. would be looking at reducing its reliance as an offshore source." Besides the advantage of being able to pipe the oil instead of shipping it on a tanker, Canada's oil sands create a significant number of jobs throughout the United States, Mr. Mar said. The giant Caterpillar trucks used to help recover the oil come from Peoria, Ill., while their 13-foot-high, US$60,000 tires are made in South Carolina.
"If you buy a barrel of oil in Canada, you get it back in a lot of ways," Mr. Mar said. "For every dollar on oil the U.S. spends in Venezuela or Nigeria, the country doesn't get much back." Also in Canada's favour is the fact that recovering crude from the oil sands is less expensive than trying to find new strikes offshore, said Fadel Gheit, managing director of oil-and-gas research with Oppenheimer & Co. in New York. "The low-hanging fruit has already been picked in the United States. It's going to take billions and billions of dollars to develop new sites. In the oil sands, there's no exploration risk." The United States imports about 53% of its crude-oil needs. Many Americans believe, mistakenly, that the country is heavily reliant on the Middle East for oil. In fact, Canada is the biggest source of oil by a long shot. Alberta alone exports about as much to the U.S. market as Saudi Arabia does. Increased production from the U.S. offshore won't have much, if any, impact on energy security. Even if the United States isn't buying from politically volatile states, some other nation will step in to replace U.S. demand. "The big problem with oil and security is the states that are empowered by their oil revenue," said Michael A. Levi, an energy expert at the Council on Foreign Relations, a New York think-tank. "Both Democrats and Republicans have been slow to modernize their thinking on energy security. The expanded offshore drilling is addressing something else. It may have positive political, commercial and economic implications, but it's not going to change the United States' position in the world when it comes to national security." Crude is trading at around US$85 a barrel. (It closed at US$85.12 yesterday, up US$1.42.) "If it reaches US$125-a barrel again, as it did in 2008, then approximately half the wealth in the world - above and below ground - will be controlled by OPEC nations," R. James Woolsey, a foreign-policy specialist and former head of the CIA, wrote in a recent op-ed piece for The Wall Street Journal. The sunken oil rig in the Gulf of Mexico - a disaster some observers worried could rival 1989's Exxon Valdez oil spill in Alaska and taint Louisiana's shores - appears to be contained, according to reports from the U.S. Coast Guard yesterday. The blast isn't altering Mr.Obama's drilling strategy, White House spokesman Robert Gibbs told reporters yesterday.
Allan Pulsipher, executive director of the Centre for Energy Studies at Louisiana State University, said the quick clean-up of the spill could help make a case that offshore drilling isn't the danger to the environment it once was. "They've built up a very good oil-spill response and containment capability on the Gulf Coast," he said. "Those guys showed up within a few hours."
IHS Cambridge Energy Research estimates that the new areas approved to open for possible exploration off the U.S. coasts could lead to the recovery of about 40 billion barrels of oil. Areas kept off limits - the U.S. Northeast, Pacific coast and ecologically rich Bristol Bay in Alaska - could hold three times that much, said Bob Fryklund, a geologist who is now a vice-president with IHS in Texas. "If the offshore was expanded further, it could help, but it's not enough to solve the overall problem. Nor is solar power or wind power or biofuels. Those are all part of the future mix." The biggest game changer will be to break the United States' dependence on oil. In that regard, the expansion of offshore drilling is seen as a crucial bargaining chip to win support from "drill-baby-drill" Republicans for climate-change laws. So-called cap-and-trade legislation, which could diminish the use of fuels by putting a price on carbon emissions, probably won't end up in the final bill, said Mr. Ebinger of Brookings. "But if we can get an energy bill out of Congress, we could see further efficiency goals for home appliances, new standards for automobiles and stricter building codes." For the United States - which has some of the lowest prices at the pump in the world - tighter fuel-economy standards have the same impact as a gas tax, but have the virtue of being politically possible. "A gasoline tax could make people think twice," said Mr. Gheit of Oppenheimer. "But there's no political guts to get Americans off their feeling they have a right to cheap gas. Europeans pay twice as much and they're not complaining." One wildcard that could dramatically alter the landscape for the United States' move toward energy independence is natural gas, which is plentiful in the country and much cleaner and cheaper than many other fuels, industry analysts and policy experts say. "First, we need to figure out a way to make it into a transportation fuel," said Mr. Fryklund of IHS. "Hybrids are definitely working. It's a consumer issue as much as anything. It's about changing the way they think." Financial Post

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