TCS Daily


The Diversity We Need

By Max Borders - February 7, 2006 12:00 AM

"America is addicted to oil."
- President George W. Bush, State of the Union (SOTU) address

President Bush's oil addiction line is still ruffling feathers. Perhaps for the Bush team it seemed like a way to toss bones to both the environmental left as well as conservatives bent on cutting revenues to Middle Eastern states at all costs. But in the conservative and free-market base, the strategy has largely backfired. And in the wake of the SOTU address, it's still shaking its collective head.

Instead of playing an environmentalist on TV, President Bush would have done well to renew his call for drilling in the Arctic National Wildlife Refuge (ANWR). Like the call for subsidizing ethanol, the reason most often cited in favor of drilling in ANWR is "energy independence," an idea that arose primarily from concerns that too much US oil comes from Middle Eastern states that either fund terrorism or are potential enemies. But critics rightly point out that ANWR drilling would do little to wean the West from the teat of oil-rich terror nations (and still others argue that cutting trade ties of any sort might actually create enemies). So why call for it? Because independence is largely a chimera. The more appropriate strategy going forward is "energy diversification." And ANWR can be a part of that.

Consider your stock portfolio. It's prudent to spread risk around on a number of picks, such as in a mutual fund, in part to reduce volatility. If we want to think of "energy policy" as whatever decisions the government makes to keep energy prices from fluctuating too wildly, then source diversification is one way forward.

And there are (at least) three good reasons America's primary sources of oil just aren't diverse enough -- the Middle East; Venezuela; and Nigeria. According to the American Petroleum Institute (as of 2003) the breakdown for petroleum import sources by country looked something like this:

  • 17.8 percent from Saudi Arabia
  • 12.8 percent from Venezuela
  • 7.5 percent from Nigeria

Relying on illiberal regimes such as these is rather like putting too many of your investments into tech stocks circa Jan 2000. Now, while a lot of our oil comes from the U.S., Mexico, and Canada, when unstable and illiberal governments sit atop a sizable chunk of the world's oil supply, it's time to consider exploiting more domestic sources. ANWR, of course, is a good start.

The case for keeping ANWR is a weak one. Consider this factoid from the National Resources Defense Council, a green group:

"The so-called 2,000-acre limitation would have allowed oil development to take up as much area as the following items, which could be connected by a network of pipelines and roads: 1,500 football fields; 20 Mall of Americas; or 52 airport runways, 50 more than the number at Columbus International Airport."

If you didn't notice the "or" you might think that acreage limitation included all in the above list, but if one imagines just 20 malls (2000 acres) dotted around 1.5 million acres -- the approximate size of ANWR's coastal set-aside -- the impact seems a little less horrifying.

A little perspective might help assuage some fears. Consider highlights from these facts provided by the Department of the Interior:

  • ANWR is a 19-million acre landmass in northern Alaska.
  • The Coastal Plain set aside by President Carter for potential exploration and drilling purposes is a 1.5-million acre area.
  • Based on US Fish and Wildlife Service models, there is a 95 percent chance that impact on Caribou calf survival will be negligible.
  • The 2000 acre area represents only .01 percent of ANWR's total acreage.

One irony in all this is that many of the same people in Congress who opposed drilling in ANWR and want reductions in greenhouse gas emissions have demanded that energy companies stop so-called "price gouging." While we may already be seeing the indirect environmental benefits of higher prices -- as people drive less and car companies produce more fuel efficient cars to meet demand by penny-conscious customers -- many in Congress want to see more industry regulation.

These politicians claim tighter efficiency standards will provide benefits comparable to drilling in ANWR. But is this true? Just because we don't pay for the costs of regulation directly at the pump, doesn't mean we don't pay for them. When auto manufacturers add on extraneous components for greater efficiency, they pass along the costs to you and me.

And some of the costs of regulation are felt directly at the pump. As energy policy analyst Ben Liebermann writes:

"The first is the new ethanol mandate -- part of the massive energy bill passed last August. Under the new law, 4 billion gallons of this corn-derived fuel additive will have to be included in the nation's gasoline supply throughout 2006. [...]

"The second regulatory price boost will come as a result of the latest round of sulfur reductions from gasoline, pursuant to a costly Clinton-era regulation. Similar low-sulfur rules applicable to diesel fuel also take effect in 2006 and will have an even bigger impact on diesel costs."

In 2005 it looked as if many politicians were more interested in oiling the squeakiest wheels (environmentalist lobbies) rather than diversifying our sources of energy. But in 2006, they may no longer be able to hide behind the eco-rhetoric. This year, Congress should act to see to it that ANWR becomes another source in our energy portfolio. Otherwise we'll see more price volatility -- and thus more calls by politicians for windfall taxes, price caps, and other industry burdens that will keep investors away from energy (which can drive prices even higher).

Meanwhile, we can only wonder what was going through the President's mind on the night he told us we are addicted to oil. In any case, in addition to letting ethanol and other alternatives emerge as the market dictates, let's also denationalize ANWR and allow it to steer us towards "energy diversification."

(Editor's Note: Since the publication of this article, reader Steve Fox found more up-to-date information.  Seems energy diversification may be working.)

Max Borders is Managing Editor of TCSDaily.com and adjunct scholar for the National Center for Policy Analysis.

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14 Comments

ANWR
The acronim ANWR is used 9 times in the article. Does the author know, and would he share with his auduence, what is the oil resource of ANWR? How much independence and for how long would it grant? My educated guess is that within 10 or 15 years we will be back in the same position with ANWR exhausted. Or if we want to extend this period to, say, 30 years it will not make a big difference in the balance.

ANWR will come online someday - now or later. The question is when is the right time. Maybe waiting for the price of oil to get well into the 3-digit realm is prudent. Maybe even this would be premature.

Just thoughts.

A hypothetical for you
If fossil fuels are the right strategy, then ANWR makes complete sense, although it's small enough that it's more symbolic than sufficient. Oil sands and oil shale hold vastly greater promise.

However, there's a significantly greater than 0 possibility that climate change is real and that greenhouse gases are contributing or even driving the change.

If true, what is a rational response? Obviously, we need non-greenhouse gas-generating energy sources to replace today's supplies. There are many changes in that direction, particularly nuclear, that are techically and economically available. But don't we have to start reducing, rather than merely slowing the growth of atmospheric greenhouse gases if we are to stop warming? If so, is there any way to do it without destroying the world economy? If not, is it time to assume that climate change is unavoidable and that we need to find ways to cope with it? Even if it includes significant sea-level rises?

signifigance
I guess in a mathematical sense 0.01% is significantly greater than 0%.

Anything divided by zero is infinite.

A reality for you
You posit several assumptions as fact about global warming and then by the end of your post, you want meaningful changes based on assumptions that have not been proven. I continue to wonder why people believe they can predict the temperature of the earth one hundreds from now, even though we can't predict the temperature tomorrow. I wonder even more given that the "hockey stick" model that supposedly proves global warming was proven fatally flawed last year by a Canadian mathematician.

Secondly, a frequent criticism I hear about drilling in ANWR is that it would only meet six months of U.S. energy independence. If that logic was the deciding factor, we would never drill another well anywhere. The reality is that no single well anywhere will meet much of any demand, but if we don't test the most promising prospects, we better all buy horses and use the corn for feed, not ethanol.

Lastly, the 1002 area of ANWR's coastal plain is a flat, all but lifeless, surface-of-the-moon plain that is inhospitable to human life, not the holy grail of the environmentalists pr.

Nickel and Dime Diversification
Bush budget triples money from Alaska oil drilling
Reuters, Feb 6, 2006

...In its proposed budget for the 2007 spending year, the White House said it assumed the initial tracts in the refuge could be leased in 2008 and bring in $7 billion in new revenues, half of which would be shared with the state of Alaska. That is almost triple the $2.4 billion the administration said in last year's budget it thought could be raised from the first round of ANWR leasing. The administration did not explain what was behind its higher estimate for leasing fees, but it presumably reflects the jump in oil prices.

The Interior Department estimates the refuge could hold between 5.7 billion and 16 billion barrels of recoverable oil. If the refuge was opened to drilling, it would take about eight years before the area reached full production of around 800,000 to 1 million barrels per day**, according to the Energy Department's analytical arm.

Crude Oil and Total Petroleum Imports Top 15 Countries
Energy Information Administration, January 23, 2006

YTD 2005 (Thousand Barrels per Day)
_1,619 Canada
_1,536 Mexico
_1,438 Saudi Arabia
_1,049 Nigeria
_1,009 Venezuela
__452 Angola
__532 Iraq
__270 Ecuador
__230 Algeria
__210 Kuwait
__158 Columbia
__156 United Kingdom
__124 Norway
___71 Equatorial Guinea
___62 Trinidad & Tobago
===================
_8,916 TOTAL, Top 15 Imports

_1,000 ANWR max. estimate of full production**

Open Letter to Sealaska Shareholders
February 06, 2006
Monday

Dear Shareholders,

...Congress will be deciding in the next two weeks whether all Alaska Native people will benefit financially from ANWR. We must act now! Whatever your position on ANWR, we hope you will show your support for all Alaska Natives by asking for revenue sharing...

How You Can Help
Contact Senator Ted Stevens, Senator Lisa Murkowski and Representative Don Young to require that any legislation authorizing oil and gas development include an amendment requiring revenue sharing. Be respectful but firm and mention the following points:

1) ANCSA was created with the intent to support all Alaska Natives. Revenue sharing is a key part of ANCSA.
2) Over the years, revenue sharing has led Sealaska alone to contribute over $300 million, benefiting 80,000 Native shareholders of all regional corporations.
3) Please ensure any legislation authorizing oil and gas development in ANWR includes an amendment requiring revenue sharing.


Martha J. Gallagher
Sealaska Shareholder
[born and raised in Alaska, as were her parents, grandparents, and great-grandparents]

http://www.sitnews.us/0206Viewpoints/020606_martha_gallagher.html

It's about time

I read your article and it's about time I found someone who can make sense of the situation we are in and speak up about it. I wish there were more like you in our government which sadely there aren't.


Sam.......Mass

A reality for you
Nobody sais ANWR must not be exploited (see my post). The #1 problem I have is to wave ANWR as a solution, even partial, to the problem (appears 9 times in an article about enrgy resources in general!!!). The #2 problem is timing. Is now the right time to use up this resource when we still can buy Middle Eastern oil at the bargain price of 60-ish $/b?

I am afraid that there are people who have a vested interest to force the utilization of ANWR now only to be able to reap bennefits which they may not be around to reap later. Any responsible leader should be mindful of that and rather view the long-term and strategic needs of the nation.

You write: "we better all buy horses and use the corn for feed, not ethanol". We may actually be forced to do exactly that one day, with, or without ANWR. Or nearly so: change our commute habits, live in more compact cities, etc., no matter how much we will hate it - me not less than you.

No Subject
A little misleading for our president to paint a picture of us as being beholden to the swarthy Middle Easterners for our oil. In fact, our largest foreign suppliers by a considerable margin are Canada and Mexico. Neither are prime sources of the kinds of dire political threats implied in the SOTU speech.

http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/company_level_imports/current/import.html

By the most recent figures we have, Saudi Arabia only supplies 13% of our foreign oil. Canada and Mexico together provide some 35%. The more important issue is that oil is a major loss of capital, contributing to our structural trade imbalance. Plus, of course, the emissions thing.

Who are you arguing with?
I'm fine with ANWR, given the right set of assumptions. It's just that ANWR won't change anything either in regards to energy supply independence/diversity or climate change. Again, North American oil sands and oil shale represent north of recoverable 1 trillion barrels of oil. We won't be running out of oil or oil substitutes anytime soon.

It seems clear to me that warming is happening. That's something that we can measure, and have. It's happened before, and so may have nothing to do with human action. We can't "measure" that, because we don't have good enough data, and we have no real idea whether we're causing the change. That's why I posed my questions as hypotheticals, rather than as revealed truth.

problems
The problem with your logic, is that by following it, we will never drill ANWR. No matter what the price of oil today, is gaurenteed, that someday in the future, oil will get more expensive.

You are also forgetting the future value of money. Put another way, money saved today is worth more than the same amount of money saved in the future.

The Time is Now
There is something called a potential supply overhang that will exist in just about all commodities. Oil had a huge potential supply overhang in the tar sands of Canada until one day technology turned that potential into an actual increase in supply a couple of years back. If water requirements weren't so high for the tar sands extraction process, it would actually solve our supply problems. Now there's other supply overhangs regarding oil, some of them that come in at way under triple digit prices. Fischer-Tropsch processing of coal to liquid petroleum distillate equivalents is old technology (WW I vintage) and governors in three states are working to attract investors for these sorts of plants.

The only thing holding back F-T is the memory of the '70s oil crisis and the crash in oil prices that killed the last round of F-T investments. F-T creates clean diesel but the process to get there is pretty dirty. I'd rather tap ANWAR and let the lab boys work on cleaning up F-T rather than hit a crisis and have F-T kick in at its present state of pollution production.

Significantly greater than 0 on climate change in either direction
There are predictions out there that solar output is peaking now and we're going to have another Little Ice Age by mid-century. That makes climate change in either direction a greater than zero probability. Things aren't as simple as you might think.

We are addicted to oil
We are addicted to oil. The only question is whether the addiction is like an addiction to heroin or an addiction to chocolate. I suspect it's the latter. If President Bush was saying it in that sense, the phrase becomes entirely unobjectionable to conservatives and is really a call to diversification. The modest goal of reducing ME oil imports and the emphasis on technology to create new sources of energy makes a "chocolate addiction" a reasonable way to interpret his words.

Has anybody asked?

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