Myth vs. Reality

It is likely the last year’s oil spill will be repeated.

“Because systemic safety and oversight issues regarding the offshore oil industry persist, if we do not enact reforms, there will likely be repeats of this disaster.”

- Representative Ed Markey

The Macondo well blow-out was an anomaly and new technologies have been developed to contain blowouts.

Over 60,000 wells have been drilled in the Gulf of Mexico since 1947.^[1] If “systematic safety and oversight issues” truly existed, we would have seen far more accidents than the Deepwater Horizon.  The Deepwater Horizon was a tragic and an isolated incident.

This is not to say that there aren’t important lessons to learn from that tragedy. One important lesson is the need for improved containment technology. The administration’s regulator of offshore drilling, the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) has approved two new containment systems to contain a well in the unlikely case of a blowout,^[2] the Marine Well Containment System and the Helix system.

The $1 billion dollar Marine Well Containment System (MWCS) can handle a blowout at depths of 8,000 feet and contain 60,000 barrels of liquid and 120 million cubic feet of gas per day.  It is designed to seal containment so that no liquids escape into the water.  And it enhances operational safety because fewer vessels will be required to operate simultaneously on the surface to contain a spill.^[3]

In addition, Helix Energy Solutions Group has announced that the Helix Producer 1, a floating oil production facility, is ready to deploy in the Gulf.  It can pump 10,000 barrels of oil per day to the surface in 5,600 feet of water, flare gas, and clean up the oil for transfer to a refinery on land.  By the end of March 2011, it should be able to handle 55,000 barrels of liquid per day and 95 million cubic feet of gas in 8,000 feet of water.^[4]

The newly approved containment systems are unsafe.

“It is premature and unwise to issue a new exploration permit without public review of the ability of the Marine Well Control System.”

- Natural Resource Defense Council attorney David Petit

Even the anti-oil Obama administration believes the new containment systems are safe.

After the Deepwater Horizon disaster, the Obama administration reacted by shutting down all drilling in the Gulf, even in shallow water areas that are so safe only 15 barrels were spilled in the previous 15 years.^[5] In an overabundance of caution, the Obama administration kept the moratorium in place even though the moratorium destroyed tens of thousands of jobs. The administration vowed to only allow drilling when it was satisfied that it was safe.

The administration and the industry (which would lose billions of dollars in the case of a Macondo-like blowout) is now satisfied that the containment systems are safe.  BOEMRE Director Michael R. Bromwhich has said that both the Helix system and Marine Well Containment System satisfy their stringent safety criteria. He stated, “Until Feb. 17 there was no containment capacity that existed for deep-water drilling and we’re satisfied that those [Helix and the Marine Well Containment Company] have the capacities that the groups say they would.”^[6]

Speaking about the first permit approved using the Helix system Bromwich stated that, “This permit was issued for one simple reason: the operator successfully demonstrated that it can drill its deepwater well safely and that it is capable of containing a subsea blowout if it were to occur.”^[7] And talking about the first permit used with the Marine Well Containment System he said, “Today’s permit approval is the fourth to be approved in the month since the industry confirmed its capability to contain a deepwater loss of well control and blowout.”

The administration and the oil industry are not the only ones who believe deepwater drilling is safe with the new technology. William Reilly, co-chairman of the President’s oil spill commission and former Administrator of the Environmental Protection Agency stated, “From where I sit, the major obstacles to drilling have been removed.” We added, “The industry has responded in a way that is remarkable and reassuring.”^[8]

Former President Bill Clinton has had some harsh words for the cautious Obama administration. The former President recently said that delays in offshore oil and gas drilling permits are “ridiculous” at a time when the economy is still rebuilding.^[9]

U.S. oil production does not impact oil prices.

“We don’t control the price of oil. This is one of those sounds bites that makes it easy for critics of the administration to latch on to the reality of rising gas prices.”

- Ken Salazar, Secretary of the Department of Interior

The United States is the third largest oil producer^[10] and according to the Congressional Research Service, we have the world’s largest fossil fuel resources.^[11] Of course our production impacts the price of oil.

As the world’s third largest oil producer, the United States plays an important role in global oil production. The federal government, as the largest landowner in the United States, greatly impacts oil production. The Obama administration could increase oil production and decrease oil prices by offering more lands for lease and speeding up the permitting process. Currently only 3 percent of federal lands are offered for lease.^[12]

If the Obama administration credibly announced they were going to open new areas for oil production, oil prices would likely decrease. This is what happened in 2008 when oil prices were near $150 a barrel. The Bush administration announced the end of its OCS moratorium and prices soon fell, in part because oil traders expected more oil to come on the market in the future.^[13]

It’s good policy to tap the Strategic Petroleum Reserve (SPR) to reduce short-term oil prices.

The SPR is, “the only tool we possess which can counter supply disruptions and combat crippling price spikes in the short term.”

- Rep. Ed Markey

The SPR was created for emergencies stemming from a shortage of oil, not as a tool for Presidents to counteract the consequences of their bad policies.

The Strategic Petroleum Reserve was created after the 1973 Arab oil embargo to mitigate temporary supply disruptions. The SPR has been used sparingly, such as during the 1991 Gulf War and natural disasters such as Hurricanes Ivan and Katrina. Currently we do not have a short-term shortage of oil, but increasing demand, coupled with uncertainty in the Middle East.

It is not accurate to say that the SPR is the only tool we possess to combat crippling price spikes. As noted above, President Obama could open many more areas for oil production, as President Bush did in 2008. When President Bush announced he would open more lands, oil prices soon fell, easing the price spike.^[14]

Generating electricity from wind will reduce oil use and protect us from oil price shocks.

“As long as we continue to rely on increasingly scarce fossil fuels, we will continue to see prices rise and fall.  The only way to protect ourselves from future oil shocks is to kick the oil habit.  The way to guarantee a steady, reliable stream of domestic energy is to invest in clean energy like offshore wind.”

- Dr. Michael Hirshfield, Oceana

Wind generates electricity. Our cars and trucks run on oil, not electricity.  More wind will not impact our use of oil.

A commonly stated myth from environmental pressure groups is that building wind installations will somehow reduce our use of oil. This makes little sense because our cars and trucks run on oil, while oil produced less than 1 percent of our electricity in 2010.^[15] Electric cars exist, but they are currently sold in such small numbers that even with dramatic growth, they will not impact oil use. For example, in March Nissan only sold 298 of its all-electric Leafs while Chevy only sold 608 of its plug-in Volt hybrids.^[16]

If Michael Hirshfield and other environmental activists are concerned about oil prices, then they should support increased domestic production of oil and natural gas. After all, the United States has more fossil fuel resources than any country on earth. According to the Congressional Research Service (CRS), America is endowed with 163 billion barrels of recoverable oil. That’s enough to maintain current rates of production and replace Persian Gulf Imports for over 50 years. And that number does not include the 1 trillion barrels of recoverable shale oil that the United States has in Colorado, Utah, and Wyoming. CRS places America’s natural gas potential at 2,047 trillion cubic feet; this is enough to meet demand for 90 years at current rates of consumption.^[17]

High oil prices mean that we need to increase the costs of oil drilling in America.

“I’m supporting legislation that would roll back those tax breaks for the big companies, protect the small players in the industry and charge companies that are drilling on federal land when oil prices are too high.”

- Senator Dick Durbin

It’s fashionable to increase taxes on oil companies when oil prices are high, but that will just lead to even higher oil prices. If people are concerned about high oil prices, it time to allow greater access to domestic energy resources.

When oil prices are high, it’s fashionable to propose taxes on oil companies. But increasing taxes on oil companies just leads to higher gasoline prices. Furthermore, what Sen. Durbin refers to as “tax breaks” for oil companies are the same tax credits other industries receive. The Institute for Energy Research does not support subsidies for any type of energy and we also support treating all forms of energy the same. Penalizing oil companies because they sell a product people all over the world want is foolish.

If people like Sen. Durbin believe oil prices are too high, then they should support allowing access to more of American’s vast fossil fuel resources. The federal government only offers 3 percent of federal lands for lease.^[18] The Obama administration has halted leasing of oil shale, even though America’s oil shale deposits hold over 1 trillion barrels of recoverable oil—nearly four times as much oil as Saudi Arabia’s proven reserves.^[19] Access to these domestic energy resources can drive down prices.

Oil companies just sit on the leases instead of actively working to produce oil.

“We don’t know why these oil companies sit on their leases—maybe they prefer to inflate their oil reserve numbers and therefore their stock prices, maybe they horde the leases because they want to keep competitors from producing on their land—whatever their motive, it’s clear one of the quickest ways to increase domestic fuel production is to push these companies to use or lose these leases.”

– Sen. Chuck Schumer

Oil companies want to produce oil and make money, but it takes time and large investments to produce oil and natural gas. Not every piece of land contains oil resources.

It seems the lawmakers would have us believe that obtaining a lease was a virtual guarantee that the leaseholder would strike oil and natural gas, or both. In reality, not every acre of federal land contains oil and natural gas. There are no guarantees—oil and natural gas might be found during the exploration phase of the lease, or it might not. The exploratory process involves, satisfying all of the government requirements, defending against frivolous environmental lawsuits, and preparing to drill if energy is found. It can take a long as a decade.

Energy companies cannot “stockpile” leases (even the ones that are found to contain no oil or gas) in order to drive up prices:

• The Mineral Leasing Act (for onshore production): Section 17(e) stipulates that an oil company must have a producing well within 10 years or surrender the leases. Source: 30 U.S.C. 226(e)
• The Outer Continental Shelf Lands Act: (for offshore production): Stipulates that an oil company must produce energy between 5 to 10 years (in the government’s discretion) or surrender the lease. Source: 43 U.S.C. 1337(b)

Further, not all federal areas are available for leasing. Only 3 percent federal offshore areas are leased and 6 percent of Federal onshore areas are leased.^[20]

After the offshore drilling moratorium was implemented in 1982 the Department of Interior could only issue leases for areas that had already been offered/leased before, or those areas with little or no economic energy potential. The exception was when Congress provided incentives to invest in Ultra Deep Waters in 1995 to stimulate production in areas that were previously too deep for our technology to reach.

As the chart below indicates, interest in American energy leasing declined after the moratorium. It remains low for the same reasons. If Congress were to open new areas to production, leasing would increase and so would domestic supplies of energy. Until then, the U.S. will simply be continuing its attempt to squeeze blood from a turnip.