Only 8 Years Ago Alarmists Were Sure the U.S. Was Out of Gas

Many environmentalists and anti-business people in the U.S., most centered in the Democrat Socialist Party, were sure that the U.S. production of oil and gas was going to rapidly dwindle.  It was one of their many reasons for attacking U.S. oil companies as dinosaurs of the past.  It was time to make these dinosaurs extinct, at least with a government-controlled and accelerated culling and size-reduction plan.  Oil and gas when burned both produced the fatal gas carbon dioxide, which was claimed to be slowly or not so slowly killing the planet.  We were told that the only energy that made sense was the so-called renewable energy sources of windmills, photovoltaic devices, and all sorts of plants grown for fuel.  These people backed Obama for the presidency in 2008 and were rewarded as he allowed less and less production of oil and gas on the incredible acreage of federal lands and in the many off-shore areas controlled by the federal government.  Meanwhile, windmills and photovoltaic device arrays were offered subsidies and mandates with claims they would replace coal, oil, and gas in large part soon.

Because the renewable sources of energy proved, as I and many others said they would, to be expensive and unreliable, they have effectively proven to be non-renewable.  Investments in these energy sources have often failed and when they did not, it was only because of the subsidies and mandates that they managed a slow growth in energy output capability.  Let us compare the oil dinosaur in vigor:

The production information is from the U.S. Energy Information Administration.  The year at the bottom of the dip is 2008 when production was 1,829,985,000 barrels of oil, well down from the maximum production in 1970 of 3,517,450,000 barrels.  As the fracking revolution in oil production began, Obama was off-setting its initial gains by restricting oil production on federal lands.  In 2011, however, fracking oil production on private lands really took-off.  In 2015, oil production in U.S. fields was back to 3,436,515,000 barrels of oil.  Now, with the blessed end of the Obama Regime and the apparent desire of OPEC to give up its ruinous price war on oil, there is nothing to keep oil production in the U.S. from continuing to increase.  An end to the suppression of U.S. energy production heralded by the Trump administration and a Republican Congress as well, will be a great boon to the U.S. economy.

The story of shale oil production in the U.S. is shown below:

U.S. oil production already appeared certain to soon exceed that at its prior peak of 1970.  But at some point the Bakken and Eagle Ford and other known shale oil fields are likely to see lowered production.  Will other undiscovered oil fields take their place?  Yes!

In September, Apache Corp. announced that it Alpine High field in an area of the Permian Basin in West Texas holds 1.1 - 2.7 billion barrels of recoverable oil at current prices.  This area had been drilled many times by other companies with no finding of economically recoverable oil.

Then comes the blockbuster announcement by the U.S. Geological Survey (USGS) that the Wolfcamp Shale in the Midland Basin portion of the Permian Basin has 20 billion barrels of recoverable oil at current prices and 16 trillion cubic feet of natural gas.  Compare this to the largest oil producing field in North America, the Prudhoe Bay field of the north slope of Alaska with the 12 billion barrels of oil produced over 43 years.  The largest producing field in the Lower 48 is the East Texas oil field, which has produced 7 billion barrels of oil since the early 1930s.  The Wolfcamp Shale is now expected to produce nearly 3 times the oil of the Bakken - Three Forks capacity according to the USGS assessment in 2013.  The Wolfcamp Shale capacity is nearly 19 times that of the Eagle Ford field according to its 2012 assessment by the USGS.

Over time, the USGS estimates prove to be low due to increased knowledge about the oil field geology and to improvements in extraction technology.  How true this is, is clear from the fact that Midland, Texas is well within the Wolfcamp Shale area.  This huge discovery is entirely based on new technology, not on a failure of many an oil company to examine the area for its oil possibilities. Recall that George W. Bush spent his oil years in Midland, which had been an oil center prior to his arrival.

At current prices, the Wolfcamp Shale oil is worth about $900 billion.  Pioneer Natural Resources has drilling rights on 785,000 acres within the large field.  ConocoPhillips has Wolfcamp Shale holdings of 1.8 billion barrels.

I am sure that President Trump will be very happy to claim credit for all the new jobs that will be produced by the production of the Wolfcamp Shale!  Assuming he does not act as Obama has to try to suppress oil production, I suppose we will have to give him a portion of the credit, though in a healthier context we would give all of the credit to the oil field innovators and production experts of our wonderful private sector.

Why Obama Did Not Answer Romney's Oil Drilling Permits on Federal Land Question

When Obama claimed that oil production was up due to his policies, Romney pointed out that the Obama administration has been approving many fewer permits than Bush had.  Obama evaded a direct response to the number of oil drilling permits he was approving.  He was really doing a most obvious bit of squirming to avoid answering the issue.  Romney correctly pointed out that oil production was up only because it had gone up greatly on private land while going down on federal land and offshore. 

Update of Chart originally posted, since the original chart not only was not plotted with a zero baseline, but also had proportionality problems with the length of the bars.  In other words, it was incompetently plotted.  This chart, provided by Dr. Francisco Santiago, is accurate:

[The original bad plot of the permit situation from a CFACT report is shown below:

Note that the baseline in this graph is not zero.]

The failure of the Obama administration to approve more oil drilling permits will cause increasing decreases in oil production from federal lands for some time after permits approved rises under Romney.  It will take awhile for production to catch up with an increase in permits, so this problem will be with us for awhile.  This was a missed opportunity to provide Americans lower gasoline prices, which we know is contrary to the Obama policy that high gasoline prices are desired.

Reynolds - High Oil Prices Caused Worldwide Recession

Alan Reynolds is one of my most favorite economists. He has written another very good and very important article, It Didn't Start Here, which was published in the New York Post on 9 April 2009.

The recent G-20 meeting in London produced a consensus: The United States started and caused the worldwide recession. The United States should be humbled. Obama agreed. The Finance Minister of Germany, Peer Steinbrueck, said the Anglo-Saxon attitude in America and Great Britain had encouraged risky lending and investment practices due to "an exaggerated fixation on returns."

Reynolds says, "Hey, wait a minute folks, let's look at the data." Examine when industrial production first started declining in some countries. It began to decline in Canada in July 2007, in Italy in August 2007, in France in October 2007, and the Euro area as a whole in November 2007. Japan's production reached a peak in October 2007, though it had a one-month uptick in February 2008. The decline in the U.S. was in February 2008.

In January 2008, the OECD leading indicators were down from a year before by 4.1 points in Ireland, 2.8 points in Japan, 2.6 points in Korea, 2.3 points in Sweden, but only 0.8 points in the U.S. Stock prices are another leading indicator. Stock prices peaked in Japan and in the Euro area four months before they peaked in the U.S. and the U.K. in October 2007!

In the 4th quarter of 2008, real GDP was lower around the world than it had been 1 year before, but it had dropped by much less in the U.S. than almost anywhere else. The list is:

Taiwan, -8.4%
Turkey, -6.2%
Sweden, -4.9%
Japan, -4.3%
Singapore, -4.2%
Denmark, -3.7%
South Korea, -3.4%
Italy, -2.9%
Hong Kong, -2.5%
Great Britain, -2.0%
Germany, -1.7%
Mexico, -1.6%
France, -1.1%
U.S., -0.8%
Canada, -0.7%

So, how did the the failures of U.S. and British banks and financial institutions in September and October of 2008 cause the recession which had started in Japan and in Europe in January 2008?

The housing price boom and the low cost of borrowing in the U.S. and in Britain were problems, but they were also problems in a number of other countries. These problems developed later and many countries which went early into recession, such as Japan, Sweden, and Canada had had no housing booms. Reynolds points out that James Hamilton of the University of California at San Diego showed in 1983 that "all but one of the US recessions since World War Two have been preceded, typically with a lag of around three-fourths of a year, by a dramatic increase in the price of crude petroleum." Reynolds says the years 1946 to 2007 saw 10 dramatic spikes in the price of oil -- each soon followed by a recession. He also notes that in January 2008, he wrote that the US economy was likely to slip into recession due to the high energy costs no matter what the Federal Reserve did with respect to monetary policy.

The logical conclusion from this is that the U.S. was probably doing a whale of a job in diminishing the worldwide recession. Indeed, the dollar value of US imports did not start to fall until August 2008 and our purchases of consumer goods did not fall until September 2008. Strange that so many in the rest of the world are so eager to blame the US for this recession, including the very anti-American Barack Obama! It would be more logical to see the U.S. as the hero in these trying times.

Reynolds points out that Jagadeesh Gokhale, his colleague at the Cato Institute, noted that "the prolonged decline in exurban housing construction that began in early 2006 was a logical response to rising prices of oil and gasoline at that time. So was the equally prolonged decline in sales of gas-guzzling vehicles. And the US/UK financial crises in the fall of 2008 were likewise as much a consequence of recession as the cause: Recessions turn good loans into bad."

So, it would appear that part of the reason that existing home prices were shooting up was because new home building was becoming more expensive and few homes were being built, due to the energy crisis. The energy crisis certainly weakened the U.S. auto industry, which was making all of its profits and most of its income from SUVs, trucks, and large cars. When people were paying more than twice what they had been paying to fill their gas tanks, they became less likely to be able to pay more for home mortgages or to make payments on such new cars as they did buy. The banks came under increased pressure and the many high-risk loans that government had pushed them into became a real liability, albeit one exaggerated by the Sarbanes-Oxley mark-to-market asset evaluation requirement. Another gift from government.

So, what would a rational response be to minimizing such a future spike in energy costs, given that such spikes are the chief cause of recessions? For the U.S., it would be to allow oil and gas drilling in the Eastern Gulf of Mexico, as was approved by George Bush, but then immediately killed by Obama. It would be to open ANWR to drilling. A non-starter with our very foolish Obama. A rational response would be to sell off much of the excessive federal holdings of land in the western US and encourage companies to drill for oil and gas using modern good practices. When OPEC, which did cause the present worldwide recession, spikes prices upward, the US production facilities could run production at full output and hold down the price increases a bit in the U.S. This would help to moderate our future recessions.

What very irrational, shall we say, even insane policy are we following? First, the media and the government are blaming American banks and financial institutions for this recession, while claiming that this means they need to be be managed by our ever-perspicuous government. Second, they are using this to broadly blame Capitalism. Note that OPEC is a cabal of nationalized oil companies, which have nothing to do with Capitalism. Furthermore, Obama and his cut-throat gang are using this crisis as a means to cripple the fossil fuel energy industries in the U.S. One of the reasons the U.S. weathers the oil price spike caused recessions better than many other countries is because we have the world's greatest reserve of coal. We still use it to produce half of our electricity. Without it, we will be even more subject to the whims of OPEC and to the subsequent OPEC-caused recessions.

Do you suppose it is possible that the same impulse that causes Obama to bow to the King of Saudi Arabia, who is an important Islamic leader, is also causing him to make the U.S. itself more subservient to the Islamic Middle East for its energy supplies? Do not argue that Obama is going to replace our fossil fuel use with alternative energy sources. First, if it is done, it will be done by the free market far more than by government or any amount of community organizing and rabble rousing. Second, he is keen on destroying the American fossil fuel industries to the point that he is already doing this with no viable alternative energy replacements in sight. This man is a destroyer, not a creator.

Instead of characterizing this crisis as a financial crisis, let us remember to call it the oil crisis. We must also recognize that while OPEC has been primarily responsible for our post-WWII recessions, we can easily be the cause of future recessions by following policies designed to increase the cost of energy!

What Company Pays More Taxes than 50% of the People Combined?

The 27 October 2008 issue of Forbes has a quote of an Investor's Business Daily article which answers this astounding question. We hear Obama and his supporters constantly claiming that McCain is offering a tax break to the oil companies and we are supposed to assume that this is an evil act on McCain's part. Well, actually, he is not planning any special tax break for oil companies as seems to be implied by the Democrat claim. What he is planning to try to do is to reduce our corporate tax rate which is essentially tied with Japan's corporate tax rate as the highest in the world. He knows that our super high tax rate is causing American companies to expand more of their operations abroad at the expense of expanding operations in the U.S. Of course, it is also allowing companies based in Ireland and the many other low corporate tax countries to take business away from American companies.

Many Democrats have called for a windfall profits tax on American oil companies. According to the Investor's Business Daily article, economist Mark Perry has observed that ExxonMobil will pay more taxes to the Federal government this year than the combined total of taxes paid by 50% of all taxpayers. ExxonMobil paid $61.7 billion in taxes in the first half of the year, while having an aftertax income of $22.6 billion. The government makes much more from ExxonMobil's operations than ExxonMobil does!

Jimmy Carter went the windfall profits tax route on oil companies. There was a resulting 6% drop in domestic oil output and an increase in oil imports of 15%. If ExxonMobil were not being taxed so heavily, it would undoubtedly spend more on oil exploration, drilling, and oil field development. The result is already that less oil is coming to market and this means that oil prices are higher.

But Obama wants to milk even more money out of all of America's producers and it is especially easy to convince the simple-minded that oil companies are prime targets to be milked for all they are worth. Expect less oil and other goods and expect America's standing in a global economy to worsen when Obama puts his policies into effect. Expect American energy dependence to greatly increase despite all of Obama's foolish claims that his subsidies for alternative, sustainable energy sources will bring us to energy independence. Actually, I do not believe that he believes what he is saying. He is simply using the power of government subsidies, regulations, and mandates to gain control of the energy industries in order to advance his socialist agenda. This is as much a route to power as is giving tax rebates to people who do not pay taxes! It is all about power gained by promising some ill-gotten gains at the expense of some others chosen to be sacrificed.

68 million acres of non-producing oil leases

One of the most common arguments tossed at voters as the reason why Congress should continue to disallow the production and exploration of oil and gas on federal lands and off-shore areas is that the oil companies already have 68 million acres of non-producing oil leases. This number seems to present implications to the uninformed similar to the statement that 47 million Americans are uninsured. It begs an examination by anyone of intelligence or mental diligence.

I was particularly suspicious of the implications because I worked on two seismic exploration crews, in a Red River oilfield, and for a pipeline company during my summers in college. I had retained an interest in the oil industry and read about it in business magazines and other publications over the years since.

Congress does not allow drilling in 60% of onshore federal oil and gas prospects or in 85% of the Outer Continental Shelf prospects, according to a commentary by Newt Gingrich and Roy Innis that appeared on 13 August 2008 in the Washington Times. Some Democrats have pointed out that the oil companies are drilling record numbers of holes and more and more of them are coming up dry, so why let them drill in these off-limits areas? We are supposed to think that the oil companies would then just drill dry holes in all of the opened new areas also. In fact, a wee bit of thought might suggest that the oil companies have been working very hard against uphill odds to find every little bucket of oil they can in highly explored areas, when they should be allowed to find and develop larger and more economical oil and gas in those areas that have been kept off-limits. In some cases, we actually know that there is probably a great deal of oil in some of those now off-limit locations. They certainly should be thoroughly explored.

Now, if oil companies have been scouring those other areas they can drill in so hard, why wouldn't they do the same in the 68 million acres of non-productive oil leases? First, when an oil company is offered a chance to bid for an oil lease, the lands are very often not even close to adequately explored for oil. Companies have to make educated guesses on less than adequate information. If they win the oil lease, they have to use seismic, magnetic, and other techniques to map out the geological formations underground. Then they will drill a $1 to $5 million well if the land is on-shore or a $25 to $100 million well if in deep water, which they will only do if the geological formations look really favorable. Gingrich and Innis note that one in three on-shore and one in 5 deep water exploratory wells give promising results. For those few which are promising, more work is required before oil is produced. The extent of the field has to be determined with more wells being drilled. Production facilities must be built, brought to the site, and installed. While all of this is going on, the seismic and drilling operations are protested and legal actions launched to stop the work. While these obstructionist tactics continue, the oil company is paying leasing fees and commonly incurring many other expenses owing to the delays.

Is it any wonder that 86 million acres of oil leases are non-producing. Much of that land has no economically recoverable oil. Some of it is still in the long process of exploration and development. The oil companies who hope to develop an oil field face many inscrutable risks. There may be oil, but there may not be enough of it. The oil may be loaded with sulfur, rather than the more valuable sweet crude oil. Huge storms may damage the facilities they are building in off-shore sites. A court may order them to stop working, causing them to lose everything already invested. A field that is judged economical when oil is selling at over $100 per barrel may not be if the future price of oil falls below that. If Saudi Arabia ramps up its production for a few years, the oil company developing the new field might lose tons of money. Or, Congress might choose to slap a so-called windfall profits tax on the oil companies. If so, the money invested in the field may be lost or at least become a bad investment. Congress can also change the tax laws in other respects at any time and that may upset the oil companies' calculations on what oil fields can justify their investment. Prudence dictates that they do a thorough job of exploring any oil field before committing huge sums of further money to bring the field to production.

Gingrich and Innis give an example. Shell Oil and partners leased an area 200 miles off the Texas coast with 7,800 feet of water over it. For 5 years they evaluated the area and then drilled several dry holes, before hitting an oil pool in 2002. At a cost of $100,000,000 each, three appraisal wells were drilled and confirmed that the field was a major find. In 2006, a huge floating platform and drilling system was ordered and production is expected in 2010. This lease is classified as non-producing, despite the fact the oil companies have spent more than $3 billion on it. The Democrats make them appear to be inactive on this oil lease. Now, is that disgusting or what?

The Democrats who oppose Americans having reasonably priced and available energy are masters of demagoguery. They play fast and furious upon people's ignorance and they are very good at planting false suggestions. They do this with the 47 million Americans uninsured and they are doing this with the 68 million acres of non-producing oil leases. We must not let them play us for fools! Fight back and demand that they respect your intelligence. Tell them that you expect them to stop lying games and get out of the way and off the backs of the producers in America!

Alan Reynolds: Get Ready for the Oil-Price Drop

Alan Reynolds, senior fellow of the Cato Institute, wrote an article called "Get Ready for the Oil-Price Drop" which is very interesting reading. It was published in the New York Post on 6 June 2008. He points out that the United States is using no more oil now than it did in 2004, which one would hardly guess given all the accusations that Americans addiction to oil is causing the high oil prices or is causing the imminent death of the planet. In addition, he points out that passenger cars are not the primary user of oil, so politicians and socialists trying to make us feel guilty about driving to work are giving evidence that they do not understand how oil is used.

Only 44% of oil becomes gasoline and much of that is used by industry, not just individuals who are being enjoined to walk a mile to a bus stop and wait 15 minutes for it to show up, if it does, then switch to a second bus, then get on a Metro train, and then walk the remaining several blocks to their place of work. Two-thirds of US petroleum use is for transportation, but half of it fuels commercial trucks, trains, airplanes, and ships. Most crude oil is used to produce diesel fuel, heavy oil for industry, aviation fuel, asphalt, home heating oil, propane, wax, plastics, detergents, drugs, and fabrics.

Since such a large fraction of oil is used for industrial production and the delivery of goods and services, the price of oil is very cyclical. That is, its price increases with economic activity and falls when economic activity slackens. Historically, the price of oil fell 44% in the Nov 2000 to Nov 2001 recession, 48% from Oct 1990 to Jan 1992, and 71% from July 1980 to July 1986. Because fuel costs have a huge impact on business profit and loss, when the price of fuel goes up greatly, then production will decrease shortly afterward. In nine out of 10 postwar recessions, the recession began shortly after the price of oil rose greatly. This time around, US manufacturing was proven very resistant to production decreases due to the high price of oil and has been one of the reasons for the sustained oil price increases.

In the US and Britain, industrial production is nearly flat, being only 0.2% higher than it was a year ago. But, in many other countries, production dropped over that period. Japan is down 0.7%, Austria 1.1%, Italy and Denmark 2.5%, Canada 2.9%, Greece 5.4%, Singapore 5.7%, and Spain 13.3%. In April, industrial production in India and China fell. This worldwide production decrease is going to bring down the cost of oil substantially.

Well, maybe it was a good thing it has recently been high. It made it impossible for the Democrats and some very foolish Republican allies to pass the incredibly wrongheaded Warner-Lieberman Energy Security Act which was to tax our use of fuels heavily and grab control of much of our lives. Of course, I also like seeing the US proving to be one of the countries most resistant to industrial output decreases in the world. Those of us who work hard to make the US so productive have much to be proud of. We also give the socialists and the earth goddess worshipers so much to complain about with our use of resources! Let us continue to give them much to be unhappy and bitter about! Heck, they would not know what to do with themselves if they could not complain about those of us who create and produce. They need us, as do all the human parasites. But why should we allow these angry leaches to suck our blood? Why don't we use this high gasoline price episode to keep up a drumbeat campaign for increased oil production in the US and in Iraq?