American Elephants


Misunderstanding the Oil Markets by The Elephant's Child

In his Friday press conference about oil prices, President Obama, always ready to shift the blame for anything to someone else, was defensive and unwilling to accept the notion that his administration was unfriendly to oil drilling.  He claimed repeatedly that he is not against oil drilling, then said:

There is more we can do, however. For example, right now, the (oil) industry holds leases on tens of millions of acres — both offshore and on land — where they aren’t producing a thing. So I’ve directed the Interior Department to determine just how many of these leases are going undeveloped and report back to me within two weeks so that we can encourage companies to develop the leases they hold and produce American energy. People deserve to know that the energy they depend on is being developed in a timely manner.

So it’s not the administration’s responsibility, has nothing to do with a federal judge holding the administration in contempt of court, and the Interior Department appealing the ruling.  Obama is arguing that it’s the oil companies’ fault that there is not all sorts of drilling going on.  For shame, Mr. President.

This is a tired old point that the left has been using for years.  An oil company has to take out a lease before they are allowed to explore an area.  Nobody knows whether there is oil or gas there, until it is explored.  Over time you narrow down the search, and do geologic work in the most likely sites.  Some look better than others.  In some locations it may not be economically feasible to drill.  Some of these leases may hold no recoverable oil or gas, yet the company has to keep paying for the lease.

All this work is costly, and frankly, when a company has the suspicion that a government opposed to fossil fuels may yank a lease at any moment, I’d guess they are a little more reluctant to invest large sums of money.   Businessmen rely on experience, not just hope.  And their experience with this administration is that they cannot be trusted.  This is simply my observation from common sense, not any inside information from an oil baron.

In January of 2009, President Obama said this in his weekly address:

For more than three decades, we have talked about our dependence on foreign oil.  And for more than three decades, we have seen that dependence grow.  We have seen our reliance on fossil fuels jeopardize our national security.  We have seen it pollute the air we breathe and endanger our planet.  And most of all, we have seen other countries realize a critical truth; the nation that leads in the creation of a clean energy economy will be the nation that leads the 21st century global economy.

This was an earlier example of the president’s lack of understanding of the energy business. We get most of our “foreign oil” from our neighbors Canada and Mexico.  Oil is a commodity on the world market and part of the price is what it costs to transport it.  But oil powers our transportation system.  So called “green energy”— electricity from wind and solar arrays — has nothing to do with transportation.  It does not jeopardize our national security.  If Hugo Chavez decides not to sell oil to us, we’ll just get it elsewhere.  (He won’t, he’s too broke).

Last week, Interior Secretary Ken Salazar said that oil production in the Gulf of Mexico “remained at an all-time high, and we expect that it will continue as we bring new production online.” He claimed that in 2009  there were 116 rigs in the Gulf, and in February 2011, there were 126. This distorts the facts. Just before the BP accident there were 55 rotary rigs working in the Gulf.  On May 28,2010 when the administration announced a 6 month moratorium, there were 46 rotary rigs operating.  Last week, there were 25 rotary rigs operating.  Secretary Salazar seems to be counting rigs, not “working rigs.”  There are a lot of rigs siting idle.

Salazar also claimed that production remains at an all-time high. The Energy Dept. Energy Information Administration (EIA) reports that production is in decline, forecasting a decline of 250,000 barrels a day from Gulf production.  Production peaked in May of 2010 and has declined steadily ever since.

The president also called for a crackdown on “price gouging” at the pump. This reveals ignorance about the free enterprise system. If the government attempts to control prices it risks  disrupting the market system that encourages suppliers and producers to increase supply.  Higher prices normally encourage more supply, which in turn brings the price down.  President Obama would improve everything if he would just abandon his anti-oil agenda, and stop badmouthing the people that produce the  oil.

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