Big Oil, Big Government, and Big Hypocrisy


Note: I really don’t believe a word of all this. So far as I can tell, there’s plenty of oil and plenty of gas, and plenty of other things that can be burned or manipulated into producing electricity. Ratbag politicians and their corporate and activist friends may stop things. Otherwise, however, we are entering the steeper upward slope of a curve of unlimited improvement. There will be more and more things to enjoy, and more and more time in which to enjoy them. Now is the best time in history to be alive. It will be better still a hundred years from now. SIG

by Kevin Carson

http://c4ss.org/?p=9933

In a speech last week Newt Gingrich exulted that the estimated Bakken shale oil reserves in North Dakota had recently been revised upward to 24 billion barrels. So much, he said in a tone of patronizing dismissal, for the “Peak Oil doomsayers.” These remarks by Gingrich, who also says he’d lower gasoline prices to $2.50 a gallon as president, were just the latest version of Sarah Palin’s “Drill, Baby, Drill” theme of “domestic oil (or natural gas, or coal) production” as the solution for high energy prices.

It’s interesting that politicians who so tirelessly proclaim their opposition to government meddling in the economy, and deny the effectiveness of such meddling, would express such hubris on the ability of activist government to solve an economic problem.

Not only do these people fail to understand the nature of the problem they’re promising to fix, but the promised fix itself is chock full of government intervention.

For example, Professor Gingrich seems to have a poor grasp of what the Peak Oil hypothesis actually says. Maybe they didn’t cover that on The Jetsons. Peak Oil has nothing to do with the total size of oil reserves underground, or how many years of America’s present energy needs they could supply. What Peak Oil is about is the rate at which those reserves can be extracted, the cost in money and energy of extracting it, and the diminishing size of the net energy returns when the energy cost of extraction is accounted for. The Energy Return on Energy Invested (EROEI) of the predominant sources of fossil fuel energy has been declining steadily since they first started distilling petroleum into gasoline.

The EROEI of the light sweet crude extracted in the early 20th century — the kind of black gold that come a-bubblin’ up when Jed Clampett was shootin’ at some food — was a mind-blowing 100. That is, for every barrel of oil consumed in the process of extracting, processing and distributing the fuel, the net return was ninety-nine barrels of oil.

The average EROEI on oil extracted today is about 20. The EROEI from the Canadian tar sands is under ten. Anything with an EROEI under three — like corn ethanol — isn’t economically worth the trouble of extracting unless it’s subsidized by the government. Over the history of fossil fuel consumption, we’ve consumed the low-hanging fruit first, and then moved on to progressively costly and energy-intensive alternatives as the cheaper stuff was exhausted.

Now let’s take a look at those Bakken oil reserves. The seemingly astronomical figure of 24 billion barrels that Gingrich cites is about the same size as the Prudhoe Bay reserves in Alaska. But despite the enormous size of the reserves on paper, the productivity of each well was far lower than the typical light sweet crude well in the older oilfields of the “lower 48″ — for a relatively modest output from a large number of wells.

And compared to the Bakken reserves, Prudhoe Bay was a cake walk. A much lower percentage of the entire reserve is recoverable, and the oil that’s extracted will require extremely costly hydraulic fracturing to remove it from the shale strata in which it is embedded. According Derek Andreoli at The Oil Drum:

Whereas conventional wells like those in the Thunder Horse reservoir produce at a rate of 40,000 bpd, only 14 of the nearly 9,000 wells in the Bakken produce more than 800 barrels per day, and the average well produces only 52 bpd. Even at 800 barrels per day, 50 Bakken wells would need to be drilled for each Liberty/Thunder Horse size well, and nearly 800 of the average size Bakken wells would be required.

In order to arrest North Slope declines, 700 average size Bakken wells will need to be completed each and every year.

The EROEI on Bakken shale oil is a whopping 6.

The simple fact of the matter is, with EROEI and output per well going off a cliff, all these miracle sources of new oil won’t be a patch on the output of the old, high-EROEI fields that are becoming exhausted.

Even if Professor Gingrich doesn’t believe in Peak Oil, the oil companies do — and what’s more, they actually understand it. The “Drill, Baby, Drill” peanut gallery is fond of pointing to offshore drilling as some sort of panacea. But the fact is that, even before the BP oil spill, the oil companies sat on enormous reserves of offshore oil they didn’t bother to develop.

The reason is that oil production is increasingly governed by the same laws Henry George observed in real estate. Because the supply of land is for all intents and purposes fixed, the supply cannot increase in response to demand; its price is governed entirely by the fluctuating rate of competition for the fixed supply at any given time. So the rate of real estate development is governed by the land owners’ estimate at any given time of the relative payoff of selling the land now, versus sitting on it and selling it when the price appreciates.

That’s exactly what the oil companies were doing with their offshore reserves. You can open up every square mile of offshore waters up to unlimited drilling, and the oil companies will still sit on it and wait to develop it when the price is right.

Back in the early ’80s, before oil production peaked, Reagan’s deregulation and the subsequent steep price rise resulted in a significant increase in oil output. So when gasoline hit $4.50/gallon in summer 2008, why didn’t oil exploration and production go through the roof? Why did production levels remain essentially flat?

Contrary to the promises made by these apostles of the activist state, the government simply can’t do much to affect the energy supply. Promises like Gingrich’s are pure snake oil.

Now for the second point: The proposed energy policies of Gingrich, Palin and the rest of the “drill baby drill” crowd require enormous levels of government intervention in the economy. You can hardly turn on your TV without seeing examples. The Keystone XL natural gas pipeline couldn’t be built without condemning land through eminent domain in order to acquire the right of way. Oil company trucks serving the Alberta tar sand fields are driving through Lakota land in violation of Lakota law, in order to avoid South Dakota’s per truck fees on heavy-hauling trucks.

Besides that, the more costly and intensive the methods required for fossil fuel extraction, the more harm is typically imposed on the people of surrounding areas. Hydraulic fracturing simply wouldn’t be economically cost-effective if oil companies were fully subject to tort action before local juries for the damage to groundwater caused by the toxic chemical cocktail used in fracking. The same goes for the economic and health damage caused by mountaintop removal, for the people living in the surrounding countryside.

The state provides enormous benefit to extractive industries by giving them privileged access to land originally preempted by the state, and by subsidizing their operations. But perhaps the single biggest subsidy government provides to the fossil fuel industry is regulatory preemption. The regulatory state’s environmental standards preempt more stringent common law liability standards, and create a safe harbor for corporate bad actors engaged in creating what is clearly a public or private nuisance. The liability cap for offshore oil spills is just the best-known example of the phenomenon.

Let there be no mistake about this: Newt Gingrich and the “Drill, Baby, Drill” people are not pro-market. They are pro-business. Palin and Gingrich may mock Solyndra, but they have no problem at all with fossil fuel subsidies and otherwise greasing the skids to make low-EROEI operations like Bakken profitable.

Gingrich has professed admiration for Henry Clay and the Whig policy of federal development of the economy through blockbuster infrastructure projects. Gingrich & Co. say they just want big, intrusive government to get out of the way of a fossil fuel economic boom. But despite their framing of the issue it’s actually about big, intrusive government intervening — right now — on the side of the fossil fuels industry. Like Dick Cheney and his hunting buddies, Gingrich just wants the government to be even bigger and more intrusive — on behalf of the right people.

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3 responses to “Big Oil, Big Government, and Big Hypocrisy

  1. Peak Oil is a very interesting subject for me, being a young person, I am slightly worried about the future of energy within the next 50 years

  2. We managed a very long time without the benefits of oil.Humans will always come up with something new in desire of a more comfortable and profitable life. Listening to politicians and energy experts there seems to be an all round energy crisis on the way. For some of our energy needs the only realistic solution I can see at present is to develop the nuclear option. Learning lessons from Russia and Japan to make it as safe and cost effective a possible.

    I still can’t get in wordpress using daisy-so daisy has been ‘demised’.Long live Patricia

  3. A rose by any other name….