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04 August 2008

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Cieran

Dr. Kiracofe:

But...haven't the radical enviros blocked US exploration and production here at home???

No, actually.

While environmental groups have opposed opening up sensitive areas to drilling (as they ought to in some cases, since the long-term environmental costs to society of such development far outweigh the near-term benefits to oil companies), anyone who believes that environmental organizations control the exploration agendas of energy companies during the Bush/Cheney administration really needs to get out more.

Instead of quoting the American Petroleum Institute's opinions (that's like asking the fox for policy guidance on protecting the henhouse), you might instead examine oil corporate data that can't be as readily massaged for public consumption because its accuracy is required by law, e.g., Exxon-Mobil's most recent quarterly earnings report.

As virtually every major media outlet has reported this week, Exxon-Mobil spent $8B this quarter on stock buy-backs, compared to $7B on exploration and production combined. That tells us pretty clearly where their corporate priorities lie.

And decreasing investments in production are why opening up every square inch of the U.S. to exploration won't do all that much to increase near-term supply, because production infrastructure is already tightly constrained, and often by oil company designs (as I pointed out to you earlier regarding U.S. refinery capacity).

Finally, please note that what radical enviros have been doing lately is firebombing the homes of university professors, e.g., this week's attack on UC Santa Cruz faculty. That's domestic terrorism of a completely different variety than what you assert.

Clifford Kiracofe

Mongoose, All

I am concerned with strategic energy policy and results for the medium and long term.

The White House and Congress have not effectively addressed this issue as we all know. And as we all know there is a lot of volatility right now for a zillion reasons.

Investments in domestic infrastructure which produce, transport, refine, store etc. hydrocarbons and jobs I should think would be most welcome.

I would rather be spending the money on infrastructure and energy development here at home than pouring it down the toilet in the Iraqi sandbox quagmire. Where are we now in Iraq? One trillion or more for what? (I know the Neocons and International Zionism....)

Natural Gas is another area of great promise. See the reports by the National Petroleum Council. We do have one by the way but it doesn't seem to get listened to.
http://www.npc.org/

Clifford Kiracofe

Cieran,

As Col. Lang has observed it is useful to evaluate the source and the data separately.

I noted the map at the API site...would you have any comments about the map? And a definition of "sensitive areas" for us?

Just why have these areas shown on the map been locked down? Off the Atlantic Coast? Off Florida? In the Gulf of Mexico? In the Rockies? Is it not the environmental lobby?

Can you quantify "environmental costs"? How?

My concern is with medium and long term strategic energy policy. I know this thread relates to near term volatility. Our country does not have a serious energy policy thanks to the White House and Congress. The politicians of whatever party have not been able to put one forward and implement it. Yes, this is a problem.

Cieran

Dr. Kiracofe:

Good questions, as always. Here's some hopefully-helpful answers:

I noted the map at the API site...would you have any comments about the map? And a definition of "sensitive areas" for us?

The map looks reasonable, once the fine print is read. The acronyms reflect origins in the Minerals Management Service (MMS) of the Interior Department and the amounts and portions made currently unavailable look right. The treasure trove of such data is found at the DOE's Energy Information Administration site, at www.eia.doe.gov.

The fine print is that the map shows "undiscovered technically recoverable" energy supplies, which means that their existence is inferred from geological efforts, and thus not yet proven as reserves, hence some attendant uncertainties would be a good idea.

But if I remember my petroleum-geologese properly, the "technically" part indicates that current extraction technology can be used to exploit these potential resources, so that at least no deus ex machina extraction efforts are needed once reserves are proven.

This naturally leads to the sensitive areas question, which is a catch-all term to reflect the environmental costs (economic and otherwise) of actually proving and extracting said reserves. These costs may include aesthetic components (e.g., drilling in national parks), economic externalities (e.g., road-building for exploration may damage other local industries, e.g., fisheries and tourism), compromised health and safety for citizens living nearby (e.g., sour gas extraction is notorious for this problem, and wrongful death suits can eat into profit margins quickly), and of course, the prospect of global climate change (for which increased drilling likely makes the long-term problem worse).

Just why have these areas shown on the map been locked down? Off the Atlantic Coast? Off Florida? In the Gulf of Mexico? In the Rockies? Is it not the environmental lobby?

The notion that the environmental lobby has that much influence over energy policy is closer to a canard than a real reason for U.S. energy woes. As in the case of refining, the reasons for not exploring are generally more about corporate bottom lines and less about birdwatchers.

For example, there is plenty of good geological evidence supporting the existence of large oil and gas reserves off the California coast, but there are also very large earthquake faults in this same area, so extraction can be a risky business, as profits can quickly turn to losses in the case of a large oil spill, because the costs of litigation and cleanup can be substantial. As in building refinery capacity, the energy industry must weigh likely costs against the potential profits of extraction, and if those costs are both feasible and large enough, then energy supplies will be sought elsewhere.

As far as Gulf Coast offshore resources, these are some of the best venues for exploration and production in the U.S., and while hurricanes can damage these rigs, such risks are much easier to mitigate than those of earthquakes (and the Gulf is seismically inactive, especially compared to the Pacific Coast).

But the moratorium on Gulf drilling isn't the work of "radical enviros" as much as it's the work of radical Bushes. Don't forget that it was Bush 41 who signed the executive order restraining offshore energy development, and that Bush 43 was against Gulf drilling before he was for it (and he was likely against it in large part because his brother Jeb opposed it for purely political reasons).

But we like our scapegoats to be obvious and preferably latte-sipping, so we blame the Sierra Club for such decisions.

My concern is with medium and long term strategic energy policy. I know this thread relates to near term volatility. Our country does not have a serious energy policy thanks to the White House and Congress.

That's my concern, too, but I wouldn't blame the White House or Congress or even environmental organizations for the lack of an energy policy. The American people don't want an effective energy policy: they want to drive their cars and if their energy consumption habits risk the quality of life for their children, then that's just tough.

No politician can survive by telling Americans the simple truths about our own energy use, and IMO, that's the biggest reason why we don't have a federal policy.

And in the interest of full disclosure, I don't belong to any environmental organizations (never have), and my first real professional consulting work was in the design of ice-resistant offshore oil platforms for Arctic explorations, funded by a coalition of major oil companies. But I do have kids I love dearly, and I wonder what kind of messes we are leaving for our children to clean up, both environmentally and economically.

Clifford Kiracofe

Cieran, thanks for your comments.

Yes, we have noted the DOE and BP and other useful data bases in our past discussions. I would again point to the various studies of the National Petroleum Council particularly per natural gas. And of course we have vast coal resources.

Petroleum geology was an interest of mine in college but I didn't pursue the field outside some basic courses in geology. A cousin of mine is active in the oilfield service industry.

My point about the White House and Congress is that the elected officials are responsible and accountable. I agree with you that the public has apparently not suffered enough pain (if that is what it takes) as if the Iraq War is not enough. I also agree with you per our past exchanges that we need to work on efficiency and conservation and all the rest.

My view is that the Iraq war had hydrocarbons as ONE central driving factor...President Bush43 himself said so in public for the record. I take the President at his word on this one, it was for oil and strategic position and etc. On the other hand, I thought the US should have engaged Iran during the Clinton years and expanded American participation in those energy resources. Our policy of "Dual Containment" was due to the Zionist Lobby which dominates BOTH parties. The Lobby got its war with Iraq and now wants one with Iran.

The Russians, Chinese, Indians, Japanese, and EU are quite focused on energy policy and energy security issues. We are not and whether the American people like it or not IMO there is a lot more pain to come. I am persuaded at this time that our energy policy will not change substantially as neither political party is really serious. The blood and treasure meter is going to run for a while, quite a while possibly.

shepherd

Mr. House,

Actually, I did the research on this and found out that we're a little off. We were assuming that the futures market operates independently of spot markets--which is the classic definition. In fact, since 80s, spot markets have been taking their cue directly from futures markets. Spot markets, by agreement, simply make a local adjustment to the futures price. In other words, money poured into the buy side of the futures market directly affects the price of oil in an upward direction.

There's a pretty good explanation of how it works here:

http://energycommerce.house.gov/cmte_mtgs/110-oi-hrg.062308.Masters-testimony.pdf

As for Col. Lang's point that "markets are exercises in mass psychology," this is true in the short term, especially in commodities markets. But isn't there a good deal of truth as well to the rising demand side of the question, which is a long term problem? All of our ideas here are not mutually exclusive.

Kudlow's drilling argument proposes fixing a short term problem (speculative price hike) with a long term solution (drilling). The problem is that this will only work once (if it works at all). The next time you have a speculative price spike--and there's no reason why you shouldn't, given the way these markets work--you don't have the drilling card to play. And then you're stuck with a bunch of worthless oil pumps fouling a pristine environment. And then you look back in 2050 and say, why did we do this to this beautiful place, and the answer is that in the summer of 2008, we thought gas was too high and this was the way we chose to fix that problem.

I agree that Kudlow is an intelligent man. But he is also an idealist, and I think it makes sense to take his ideology into account when assessing how he comes up with drilling as a cure for speculation. The long term cure for speculation would be to increase margin requirements. But Kudlow can't come to that conclusion because it amounts to interference in markets. Heaven forbid!

Cieran

Dr. Kiracofe:

I agree completely with your summary observations here, and especially on how other nations are paying attention to energy policy when we are not.

One important question remains for me, however, and that is "so how and when can we purchase your new book??!!".

Inquiring minds want to know!

Clifford Kiracofe

Cieran, thanks for your kind words.

The book "Dark Crusade: Christian Zionism and US Foreign Policy" is in the early production phase and my editor at IB Tauris (London) believes we can have it out in December 08 or January 09. Palgrave Macmillan will handle distribution in Europe and US and elsewhere. Cover and blurb in the IB Tauris catalog on page one of catalog (page 3 of pdf):
http://www.ibtauris.com/acrobat/07-08_Religion.pdf

shepherd

Mr. House,

Actually, I did the research on this and found out that we're a little off. We were assuming that the futures market operates independently of spot markets--which is the classic definition. In fact, since 80s, spot markets have been taking their cue directly from futures markets. Spot markets, by agreement, simply make a local adjustment to the futures price. In other words, money poured into the buy side of the futures market directly affects the price of oil in an upward direction.

There's a pretty good explanation of how it works here:

http://energycommerce.house.gov/cmte_mtgs/110-oi-hrg.062308.Masters-testimony.pdf

As for Col. Lang's point that "markets are exercises in mass psychology," this is true in the short term, especially in commodities markets. But isn't there a good deal of truth as well to the rising demand side of the question, which is a long term problem? All of our ideas here are not mutually exclusive.

Kudlow's drilling argument proposes fixing a short term problem (speculative price hike) with a long term solution (drilling). The problem is that this will only work once (if it works at all). The next time you have a speculative price spike--and there's no reason why you shouldn't, given the way these markets work--you don't have the drilling card to play. And then you're stuck with a bunch of worthless oil pumps fouling a pristine environment. And then you look back in 2050 and say, why did we do this to this beautiful place, and the answer is that in the summer of 2008, we thought gas was too high and this was the way we chose to fix that problem.

I agree that Kudlow is an intelligent man. But he is also an idealist, and I think it makes sense to take his ideology into account when assessing how he comes up with drilling as a cure for speculation. The long term cure for speculation would be to increase margin requirements. But Kudlow can't come to that conclusion because it amounts to interference in markets. Heaven forbid!

Ingolf

Shepherd, I don't think speculation needs a long term cure. In the slightly bigger picture, the impact will be close to nil.

To the extent that speculation manages to move a market well away from its fundamentals, reality will in due course right the balance and those who pushed it higher through their buying will become sellers, quite possibly at a loss. It's the perennial story of markets. The only difference this time around is that our dysfunctional financial system enables more spectacular short term distortions.

zanzibar

Backwardation. Are we there yet?

fnord

It will be interesting to see how the Georgian war will affect prices.

At least to me, this sudden conflict came out of the blue. I wonder what the Georgians were thinking? How in ****s name does this reflect the georgian state as a US client? Did Bush give the go-ahead for this? If so, it is yet another miscalculation. Since the presedence of Kosovo, the russians have a bloody good cause. Why did the Georgians feel this was doable?

shepherd

Ingolf,

"In the slightly bigger picture, the impact is close to nil."

In the slightly smaller picture, unfortunately, the impact is financial distress and food riots. Which one you experience depends on geography.

Of course, speculation is an inherent and necessary feature of futures markets. But allowing too many players into the market seems to have led to excessive volatility. Markets already have mechanisms to restrict (but not eliminate) speculation. Perhaps by deploying them a little more agressively, we could make the pendulum swing a little less wildly.

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