Another debate and again no direct questions about energy policy.
The only candidate that tried to address energy policy at all was Newt Gingrich. Of course Former Speaker Gingrich has somewhat of a fantastical view of the “oil” reserves of the United States and the ability to exploit those resources in a manner that would make the United States “energy independent,” especially from the Middle East. There are three broad issues with this idea:
1. Amount of the Shale Kerogen Oil Reserves
2. Timeliness of Exploitation
3. Myth of energy independence
Amount of Kerogen Oil
When Gingrich references massive reserves in the United States he is refereeing to the shale kerogen oil that is found largely in Utah and Colorado. This is a product like the oil sands in Canada that requires massive amounts of processing to refine into gasoline. While there is clearly a massive amount of these shales in the west, the fact of the matter is that aside from a few test sites there is little to no exploitation of this source. This is largely because these are unconventional sources that until now have been deemed too difficult and exotic to extract when there were more easily available conventional oil plays and a lower oil price. As the price of oil has remained high these resources become more attractive. The problem is that to extract the kerogen oil from these shales requires an enormous amount of energy inputs to heat the shale facilitating in situ extraction. These are technologies that are largely experimental, hence the models predicting the massive trillion barrel reserves should be seen as experimental as well.
This brings us to the timeliness argument. To listen to Gingrich one imagines that we remove governmental controls and within weeks wells will be dug and oil will flow into refineries like water down the Mississippi River and gas prices will fall through the floor. Nothing could be further from the truth. Given the technical difficulties and the current inexperience with extraction a very bullish estimate would be for a minimum of five more years of $100/barrel oil for the oil companies to continue to develop the technology and methods to recover this kerogen oil. We are then looking at another 5 to 10 years (again in a bullish forecast with minimal regulation) for the companies to ramp up production and to install the infrastructure (and frankly find the skilled workers) to fully exploit this resource and offset the roughly 1/3rd of the oil we import from OPEC countries. So if everything goes perfect, and oil remains over $100 a barrel, we are facing a lead time of at least 10 years to offset our OPEC imports. Of course none of this fosters energy independence or shields the US from Middle East shocks.
Energy Independence Myth
Energy independence and not being reliant on OPEC oil feels good and right. It is of course a pipe dream in a world where oil supplies are constrained and US companies remain private entities. Oil is a globally traded commodity. Thus, disruption or threat of disruption in one area affects the price in every area. This is how disruptions in Lybia, the origin of 0.5% of US imports, cause gasoline prices here to rise. Thus, while an additional supply of millions of barrels per day would certainly depress the price of oil (perhaps much like the current cratering of the natural gas price, paradoxically making the new supply unprofitable) but the price would still be subject to extreme shocks out of the Middle East. The only way that you could mitigate a shock would be through the ability to quickly ramp production as the Saudis are uniquely able to do. The very nature of the kerogen oil shales in the US West do not allow for such quick ramping of production. And the fact of the matter is that as China, India, Brazil, Nigeria and many others continue to develop, drive more miles and demand more fertilizer oil supplies will remain constrained and prices high, not to mention loose Fed policy and subsequent loss in the value of the dollar also contributes to $100+ oil.
“Energy independence” from global oil markets comes only from reducing consumption of oil. Period.