WebLog 3-11-05

Oily Dreams

March 11, 2005

Last weekend, a group of senators visited Alaska's North Slope, a trip designed to show that planting an industrial energy extraction facility in the Arctic National Wildlife Refuge will have no effect on the refuge's wildlife or the unusual mix of northern ecosystems that support them.

Set aside for now the trip's questionable premise. On the trip, Senator Peter Domenici, R-NM, who chairs the Senate Energy & Natural Resources Committee and is a fervent advocate of opening the refuge to drilling, came up with a spectacular non sequitur that, unfortunately, went unchallenged.

Domenici said that rising demand in China and India is pushing up crude oil prices, which closed at nearly $55 per barrel on the New York Mercantile Exchange on March 11.

Domenici is correct about the influence of surging demand on prices. But then he said that the cure for rising prices is to ... drum roll, please ... open the Arctic refuge to oil drilling.

How would oil production in the Arctic refuge moderate global demand? It wouldn't. Furthermore, Arctic refuge oil would have little influence on prices because prices are set in a global market. The market has become extremely tight as a result of rising demand and market reaction to signs that the Organization of Petroleum Exporting Countries (OPEC) cartel has taken a fancy to keeping prices high. Result: stubbornly high prices

By the way, OPEC's 11 member nations produce around 31 million barrels of crude oil per day. The U.S. produces around 5.4 million barrels of crude daily. Throw in an Arctic refuge field and you bring it up to 6.4 million barrels daily. Who has greater pricing power in the global oil market? Do the math.

Last year, the Department of Energy released a study examining how Arctic refuge oil would affect world oil prices. The answer: Not much. The study assumed that the refuge would account for up to 1.3 percent of global oil production by 2025. The resulting per-barrel price reduction would amount to less than 2 percent.

No one can predict where prices will be in 2025. But for argument's sake, if the study is right and if the price of gasoline is, say, $3.50 per gallon that year, the Arctic refuge would create windfall savings of 7 cents per gallon. Don't spend it all in one place.

Now, here's the kicker. Assuming that oil markets work in 2025 as they do today and that OPEC is still in the price-gouging business, the cartel "could countermand any potential price impact of ANWR coastal plain production by reducing its exports by an equal amount." And don't think OPEC wouldn't try it.

Which Senator Domenici didn't mention.

The same study estimated that U.S. oil imports will be higher in 2025 than they are today -- even if an Arctic refuge oil field is in full production. That's because, absent any serious effort to improve fuel efficiency or expand the availability of non-petroleum fuels, projected domestic oil production won't keep up with projected domestic oil demand.

Which Senator Domenici didn't mention.

In fairness, Senator Domenici did mention that he would be open to including a tougher motor vehicle fuel efficiency standard in the energy bill his committee is putting together. But instead of really pushing the issue, he's leaving it up to the feckless Democrats to come up with a proposal. Three guesses how well a Democratic fuel efficiency proposal will play in a House of Representatives dominated by anti-conservation "conservatives."

The ugly truth is that the U.S. cannot reduce its exposure to energy price shock and supply disruption dangers as long as politicians insist that the answer to the risks of oil dependence is to produce more oil.

Opening the Arctic refuge to oil production would feed the dependence that is keeping us entangled with unsavory regimes, weakening the dollar, financing extremists who would do us harm, dirtying up the air in our cities, and conducting an uncontrolled science experiment on the only atmosphere we have.

Which Senator Domenici also didn't mention.

Contact: Jim DiPeso, (253) 740-2066

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