Let’s Not Drill Now

Somehow, the “Drill, Baby, Drill” crowd, which also includes Democratic Senator Mary Landrieu, has responded to the disastrous oil spill in the Gulf by reiterating its stance that we must drill everywhere, starting yesterday. My stance on offshore drilling has basically been that the benefit to U.S. consumers is negligible, but if done safely, it’s a good bargaining chip to extract other concessions on carbon reducing energy policy. Of course, the Obama administration already preemptively conceded the point, but even that fact notwithstanding, is offshore drilling even a net positive at all? Annie Lowery quotes David Kotok of Cumberland Investors on the potential cost of the spill.

In the best case, he thinks:

Containment chambers are put in place and they catch the outflow from the three ruptures that are currently pouring 200,000 gallons of oil into the Gulf every day. If this works, it will take until June to complete. The chambers are 30-foot-high steel configurations that must be placed on the ocean floor at a depth of one mile. This has never been done before. If early containment is successful, the damages from this accident will be in the tens of billions. The cleanup will take years. The economic impact will be in the five states that have frontal coastline on the Gulf of Mexico: Texas, Louisiana, Mississippi, Alabama, and Florida.

And in the worst, he thinks:

This spew stoppage takes longer to reach a full closure; the subsequent cleanup may take a decade. The Gulf becomes a damaged sea for a generation. The oil slick leaks beyond the western Florida coast, enters the Gulfstream and reaches the eastern coast of the United States and beyond. Use your imagination for the rest of the damage. Monetary cost is now measured in the many hundreds of billions of dollars.

Holy shit — and that’s just the economic impact. There’s also environmental impact to consider. Now let’s look at the benefit, shall we? This graph from the EIA always makes the point nicely:

Basically, offshore drilling has almost no ability to reduce the cost of oil for U.S. consumers. What it does have the ability to do though is to continue the criminal (metaphor) growth of oil company profits, and by extension, replenish campaign coffers of politicians in states with offshore oil reserves.

Palin and Inherent Links

Behold, as Sarah Palin takes to the Washington Post to deride cap-and-trade legislation without even once mentioning “climate change,” the more politic and civil cousin of “global warming.” As Kate Sheppard says, “this op-ed is just bad enough to make me wonder if Palin may have written it herself.” Indeed. Palin predictably opens with with the simultaneously ironic and sadly accurate attack on the media, who in her view, spends too much time covering her press conferences and not enough time addressing the policy issues of our day. And true enough! But unfortunately, the wheels fall off shortly thereafter.

At first I was going to do a “quote by quote” rebuttal of the Palin’s assertions, but instead I’ll just post the requisite links so you don’t risk brain damage from reading the op-ed itself.

  1. EPA projected GDP with Waxman-Markey
  2. Cost estimates from the CBO
  3. The minimal effect of expanded off-shore drilling

You’ll note there are only three links, and none of them go to studies showing the costs — both human and economic — that global warming will cause. That, of course, is because Palin doesn’t address the notion that climate change is harming the planet. After all, it’s much easier to win an argument that’s literally one-sided — who can blame her? What’s remarkable though, is Palin’s ability to generate complete nonsense even without conceding climate change is a problem. It’s pretty impressive:

American prosperity has always been driven by the steady supply of abundant, affordable energy. Particularly in Alaska, we understand the inherent link between energy and prosperity, energy and opportunity, and energy and security. Consequently, many of us in this huge, energy-rich state recognize that the president’s cap-and-trade energy tax would adversely affect every aspect of the U.S. economy.

For the sake of argument, let’s allow the first point, that American prosperity has always been driven by a steady supply of abundandt, affordable energy. Anyway, I’d really like to hear Palin explain why there is an “inherent” link between energy and security. Let’s say, for example, that the entire world recevied its energy from the sun. If this were the case, then no nation would have a competitive advantage when it came to powering their societies, and thus would have no need to benefit from another nation’s expense. Thus, the link between energy and security is not “inherent.” What Palin means, however, is that there is an inherent link between limited, valuable resources and security. To Palin, this “consequently” (?) proves that a cap-and-trade plan would adversely affect the economy, but what it actually demonstrates is the need to move away from limited, valuable resources. Palin’s solution to this problem, it seems, is to rely more heavily on limited, valuable resources.

Thomas Friedman’s Good Column

I’ve got to admit I’ve been looking for something major to disagree with about the thrust of this Thomas Friedman column, but I’m having a lot of trouble. Friedman argues the best thing that Americans can do for the Iranian opposition is reduce consumption of foreign oil. Without the oil revenues on which the Iranian regime relies, social unrest will continue to foment until it can be contained no longer and without the considerable leverage oil profits provide, Iran will be forced into bargaining from lower ground on other issues like the nuclear program. The only part where I think Friedman deviates a bit is when he offers this as a possible policy response:

Mr. Obama has already started some excellent energy-saving initiatives. But we need more. Imposing an immediate “Freedom Tax” of $1 a gallon on gasoline — with rebates to the poor and elderly — would be a triple positive: It would stimulate more investment in renewable energy now; it would stimulate more consumer demand for the energy-efficient vehicles that the reborn General Motors and Chrysler are supposed to make; and, it would reduce our oil imports in a way that would surely affect the global price and weaken every petro-dictator.

An interesting idea, but similarly, a Waxman-Markey bill that isn’t considerably watered down would have a similar effect and also have the benefit of correctly situating the oil problem within the broader context of staving catastrophic climate change. I’m generally not a huge fan of the “energy security” argument for preventing climate change as it sort of misses the point, but I suppose the results of any such legislation matter more than how they are sold. As such, it seems now would be a good time to call out the bombastic Right on their bellicose rhetoric towards Iran and try and build support for climate legislation with teeth while the opportunity exists.


A lot of people have watched this interview with Sarah Palin where something uncomfortable looking is happening to a turkey in the background.

Frankly, I was pretty underwhelmed. Anyway, what I thought was interesting was the part of the interview where Palin talks about how Alaska state budgets will have to adjusted to account for the declining price of oil. One of Alaska’s oddities is that shares more in common with Iran, Russia, Venezuala, and Saudi Arabia than most people realize.

One Size Fits All

Matt Yglesias has a pretty hilarious demonstration of the financial press in action:

Yesterday I read: “Oil prices posted their biggest one-day gain on Monday, jumping more than $25 a barrel as investors dashed into commodities on concerns about the government’s plan to bail out the financial system.”

Then I wrote:

But of course if crude oil prices had gone down, we’d be “explaining” this as “concerns about the government’s plan to bail out the financial system” driving pessimism about growth. The truth is, none of the people writing this stuff have any real idea of why things are happening.

And now today:

Crude oil futures prices fell Tuesday as declining stock prices and the soft dollar signaled some investor concern over the United States government bailout of Wall Street and the market moved on after technical factors provoked a surge on Monday.

I find it amazing that this stuff gets published.

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On Export Bans

In my last post, I infer from Sarah Palin’s blathering that she does in fact support an export ban on domestically drilled oil. Hilzoy does some analysis here, noting that all of our crude exports in 2007 went to Canada, who incidentally sells us 70 times as much as crude as we export up north. This begs the question, if we stop selling oil to Canada, will Canadians be so willing to sell to us? Of course, Canadian oil is pumped by private companies, just as it is in America, so it’s sort of irrelevant what the Canadian government thinks unless they decide to impose an export ban of their own. I have no idea of the likelihood of such a scenario (and I doubt Sarah Palin does either), but it seems that the ratio of trade provides the Canadians with far more leverage. It goes without saying that were this scenario manifest, we’d be even more dependent on oil from Russia, Latin America, and the Middle East than we currently are now. 

This sort of hypothesizing relies heavily on speculation, so of more pertinence perhaps, would be to consider the consequences if reflective export bans weren’t placed on shipments to U.S. This paper, published in 2001 in The Energy Journal, examined the impact of lifting the Alaskan Oil Ban in 1996 on oil prices on the West Coast. The result, it would seem, was nothing.

The results indicate that Alaskan crude oil prices increased between $0.98 and $1.30 on the West Coast spot market relative to prices of comparable crude oils as a result of removing the export ban. However, we find no evidence that West Coast prices for refined oil products–regular unleaded gasoline, diesel fuel, and jet fuel–increased as a result of lifting the ban.

It’s sort of complicted, but the result has a lot to do with the specifics of the oil market. You see, it’s cheapest for oil drilled in Alaska to be shipped to Asian countries, with the next cheapest option being the West Coast. The problem, during the time of the ban, was that California refineries largely used California crude, and thus there was less California demand for Alaskan oil than there was supply. Because of this, much of the Alaskan oil was sold to the Gulf Coast despite transportation costs that increased price of $2.00 to $4.50 per barrel (GAO,1999). Anyway, as Sarah Palin points out, oil is a “fungible” commodity, and given the availablity of world oil in Gulf Coast markets, Alaskan sellers were able to set price equal to world oil price in Gulf Coast markets, and accoringly, oil’s marginal cost was commensurate with world price. I’m not sure how relevant the diversion of Alaskan oil to Gulf Coast refineries would be to a current ban in light of the increased price of world oil, but it highlights an important point that would still be relevant today.

The reason that prices at the pump were not affected by the removal of the ban was because consumer prices are based on the highest cost of inputs (i.e., world oil prices). Because enhanced domestic drilling will not significantly reduce the amount of imported oil, the highest input cost will still be set according to oil’s world price. An export ban then, would have three primary impacts:

  1. Americans would have the satisfaction of pumping American oil, but the cost would be the same. Far be it for me to speak for everyone, but I don’t particularly care where my oil is pumped.
  2. By banning export markets, profits of oil companies would decrease due to extra transportation costs.
  3. Unilateral export bans, might, as Hilzoy points out, result in retaliatory trade barriers by other countries, increase reliance on “unstable” markets, and further frost relationships with allies.

Ask yourself, is the satisfaction of pumping Alaskan oil worth the consequences? Is this solution that an “energy expert” might propose?

Sarah Palin, Ph. D.

One of the chief idiots at Political Derby often likes to argue that Barack Obama has made a habit of making inartful statements when speaking extemporaneously. I wonder if he will have any venom leftover for Sarah Palin’s feckless oratory on drilling for domestic oil. 

Let’s go through this statment by statement.

Of course, it’s a fungible commodity and they don’t flag, you know, the molecules, where it’s going and where it’s not.

Correct, oil is a fungible commodity, and indeed, nobody flags individual molecules for use in certain regions. I take this to mean she understands oil is globally traded, and that oil unearthed in one region will not necessarily, or even likely, go to market in the same region. As one of the preeminent energy experts in the US, I’m glad she has a grasp on this.

But in the sense of the Congress today, they know that there are very, very hungry domestic markets that need that oil first.

Sorry, I’m not familiar with the Congress in the “today” sense, but I’ll assume she means “as far as Congress is concerned.” Assuming she doesn’t mean Congress in any future or past sense, she does acknowledge that legislators recognizes that people want more oil. This is exactly why the “drill here, drill now” argument is politically tenable, even though it makes absolutely no sense, in the “makes sense” sense of the word sense. 

So, I believe that what Congress is going to do also, is not to allow the export bans to such a degree that it’s Americans who get stuck holding the bag without the energy source that is produced here, pumped here.

Complete nonsense notwithstanding, I believe Sarah Palin is actually suggesting that Congress allow (do also is not allow…to such a degree) export bans on domesticly drilled oil, so that Americans are not abondened, bag in hand. Whatever that means.

It’s got to flow into our domestic markets first.

Yep, she must be calling for an export ban.

Posted in Politics. Tags: , . 2 Comments »

Drill, Baby, Drill

I’ve written previously about the neglible impact that enhanced domestic drilling would have, but as Republicans chant “drill, baby, drill”, I thought it would be wise, but probably fruitless, to mention that arguing that expanded domestic drilling will reduce dependence on “foreign oil” is about as daft as believing it will lower prices at the pump. Let’s follow the illogic all the way through.

So let’s say God’s way is implemented and expanded drilling offshore and in ANWR is opened. Next, private oil companees like ExxonMobil set up shop (this doesn’t happen overnight, by the way) and begin extracting oil. This is where Republicans seem to begin entering know-nothing mode.

John McCain would have you believe that this oil is magically refined and dumped from the heavens, and through divine osmosis, fuels America’s cars and reduces prices at the pump. The desirability of this scenario notwithstanding, that’s not quite how it works.

In reality, crude oil is a commodity, which means that because it’s essentially the same anywhere, it’s price is based on global demand. This means that when oil companies extract crude oil, they essentially put it on eBay, only the bidders aren’t people looking for knock off Armani, but multinational oil companies who refine the oil, foreign governments (as recent lessons in Iraq teach us), or worse, the much dreaded oil speculators. This oil is sold and in turn refined to be finally sold as gasoline at the pump (among other things). The process is obviously more intricate than this, but the basic truth to be distilled is that oil drilled in America goes to the highest bidder, not necessarily Americans.

Now, some Republicans when faced with this salient truth will suggest that increasing world supply by tapping more geopolitically stable areas will help reduce the price of oil. There is some basic truth to this (though, as mentioned before, its impact would be quite limited), but the larger problem is that because oil is traded globally, so long as there is instability anywhere where oil is extracted, the increase in price will be felt everywhere. The long and short of this is that so long as we import roughly two-thirds of our oil, enhanced domestic drilling will do little to insulate Americans from the problems of foreign instability.

Alternatively, the oil could always be nationalized, but somehow I doubt Republicans are interested in that.


Palin: “We just put the government back on the side of the people.”

Given that Alaska receives $1.87 from the Federal government for every $1 it gives in taxes, I’m not sure the Alaskan government hasn’t always been on the side of the people. Also, what about that bridge to nowhere? Oh yeah, she a) took the money anyway and b) had previously campaigned on behalf of the bridge to nowhere.

And since she’s mentioning the windfall oil tax she fought hard for, that’s been part of Obama’s plan.

Just saying.

George Shill

In a histrionic fit of hatred against liberalism, George Will decries the unfair state of affairs for Exxon Mobil.

Obama thinks government is not getting a “reasonable share” of oil companies’ profits, which in 2007 were, as a percentage of revenue (8.3 percent), below those of U.S. manufacturing generally (8.9 percent). Exxon Mobil pays almost as much in corporate taxes to various governments as the bottom 50 percent of American earners pay in income taxes. Exxon Mobil does make $1,400 a second in profits — hear the sharp intakes of breath from liberals with pursed lips — but pays $4,000 a second in taxes and $15,000 a second in operating costs.

Look, I’m don’t support a “windfall” profits tax on oil companies, but trying to paint Exxon Mobil as a victim is pretty weak. Yes, it’s true Exxon Mobil pays roughly $4,000 a second in taxes, but what Will doesn’t point out is that roughly 70% of these taxes are paid outside of the United States. What’s more, these taxes are in turn paid for at the pump by consumers. As Will points out, they still do pull in $1,400 per second in profit, and it’s unlikely to see this change because again, these are factored into the cost of gas at the pump.

Will, who also apparently takes issue with paying teachers more, has this to say about the missile defense system.

Russia, a Third World nation with First World missiles, is rampant; Iran is developing a missile inventory capable of delivering nuclear weapons the development of which will not be halted by Obama’s promised “aggressive personal diplomacy.” Yet Obama has vowed to “cut investments in unproven missile defense systems.” Steamboats, railroads, airplanes and vaccines were “unproven” until farsighted people made investments. Furthermore, as Reuel Marc Gerecht of the American Enterprise Institute notes, Democrats will eventually embrace missile defense in Europe because they “will have nowhere else to go short of pre-emptive strikes against Iran’s nuclear facilities.”

Well, actually, the problem with the missile defense system isn’t so much that it’s “unproven”, it’s that it doesn’t work. And as credible a source as a think tank who receives funding from arms manufacturers is on this sort of thing, I sincerely hope AEI is wrong. Anyway, it seems Will and AEI have forgotten diplomacy, even though the Bush administration recently revived efforts along these lines which General Patraeus has himself advocated.