Oil policy, the economic impact

[Chuck Moreland]

I’m not an economist, I’m just a simple Engineer.

But what strikes me about all the partisan-based discussion about oil, alternative energies, and domestic drilling is the failure to discuss the economic impact. With the collapse in home values, implosion of the sub-prime lending, failure of Indymac, and escalating oil prices, it seems that economic impact is worth a look.

In fact, economic impact should be leading the discussion.

This simple Engineer has sketched out a back-of-the-napkin estimate of the economic impact of following a logical oil policy.

In a nutshell this is a program to replace all imported oil with a combination of increased domestic oil production and economically viable alternative energies. The result will be an huge economic boom, while simultaneously disempowering enemies, and giving us control over our energy destiny.

The Facts:

Presently we are buying $700B of foreign-produced oil annually (source Pickens Plan). The effects of this are devastating.

- 700B US dollars spent annually stimulating foreign economies instead of our own
- Forfeiture of tax revenue on the profits
- Jobs are exported
- We are enriching countries that hate us and would do us harm
- We are subject to ME political instabilities to supply the oil that fuels our economy

To sum it up, we are shooting ourselves in the economic foot.


The Oil Policy:

This is a short and medium term solution, 2 to 20 years.

Like it or not, we are an oil-based economy. While we work to develop alternative energy sources, our enormous invested infrastructure ensures we will remain predominately oil-based for a long time. Therefore we must replace our current imports with oil of domestic origin.

The economic benefit of allowing expanded domestic drilling are profound.

The rights to drill on this publicly-owned land are leased. In my plan this would be an auction to the highest bidder. Bidding is open to domestic companies only.

The auctions could generate perhaps $200B annually (my estimate, maybe it’s $100B - $400B). This is 10% of our annual tax burden right there.



The Alternative energies Policy:

This is a medium and long term solution 5 to 100 years.

We need to develop alternative energies. The key is finding alternatives that are economically viable.

Nuclear is a proven and cost effective alternative energy today. There are many other promising technologies including wind, solar, synthetic oil, ethanol, biodiesel and more for tomorrow.

Policy cannot find the best alternative technologies. The free market can, in fact it does a fantastic job of sorting this out. Let it work. This country is flush with smart motivated people and companies looking to provide alternatives. As viable alternatives are found, the smart companies are competing to make them available.

Our policy focus needs to be on removing obstacles preventing alternative energy sources from being developed. Today, that means reducing regulations that impede nuclear power development, windmill farms and more. In time, other alternative energies will satisfy an ever increasing share of our energy needs.



Economic impact:

Through domestic oil production and alternative energy development, we can satisfy our domestic energy needs 100%. This is equivalent to injecting $700B into our economy, creating jobs and enormously stimulating the economy.

A large slice of that $700B is then spent back into our economy, creating demand for other goods and services. Which in turn creates demand for more goods and services. This multiplier effect of economic stimulus has been estimated at 1.8 That means the $700B actually expands our economy by 1.8 X $700B = $1,300B, or about 10% of our GDP.

Indeed we would be generating tax revenue on an additional $1.3T. This is in turn should increase tax revenues by 10%, or about $200B.

The net result is a 10% increase in GDP, stimulating the economy and creating jobs. IRS revenues increase by $200B lease rights + $200B taxes = $400B. This is 20% of annual IRS taxes collected. State tax coffers would swell 10%.

The huge increase in oil supply from domestic drilling, and the reduction in demand due to alternative energies will cause the global price of oil to drop.



Net result:

- A whopping 10% increase in GDP and attendant jobs creation
- A whopping $400B in IRS revenues (20% of our annual tax burden) that can be used to provide tax breaks, pay down the national debt, and/or domestic programs
- A whopping 10% increase in state tax revenues
- Elimination of our dependence on ME oil and the inherent political uncertainty
- Cut off wealth transfer to oil producing nations that wish us harm

The beauty is that all these benefits cost us nothing. We are already spending the $700B, the plan just keeps it domestic.

This only requires that we allow development of known domestic oil supplies, using domestic companies, and remove obstacles to alternative energy development.

Have at it.

[dd74]

I like it. How will you sell it to the environmentalists in what might potentially be an Obama administration? The increased drilling will surely be a door-closer.

[Mule]

Great post Chuck.

[Chuck Moreland]

Originally Posted by dd74

I like it. How will you sell it to the environmentalists in what might potentially be an Obama administration? The increased drilling will surely be a door-closer.

The environmental impact is important and needs to be delt with responsibly and safely. This is the tail that has been wagging the dog on the Oil policy discussion.

The economy is the greater issue. We have serious, potentially devestating economic issues right now.

What needs to be widely understood is how oil policy and the economy are intertwined. This needs to drive oil policy.

Responsible development of domestic oil and alternative energies will turn our current economic woes into unprecedented prosperity, and independance.

Consider the Oil policy positions of the respective candidates. Consider the economic impact. Factor that into your vote.

It wouldn't even surprise me if Obama flips his position on drilling in the next couple months. Especially if people are educated about the economic impact.


Right now the closest either candidate gets to discussing economic impact of oil policy is how it will/will not effect oil prices short term. Maybe they think that's all Joe sixpack can understand.

I think people are smarter than that. It's time to elevate the economic discussion and educate people on the real impact of these policies.

[Pazuzu]

Originally Posted by Chuck Moreland

The auctions could generate perhaps $200B annually (my estimate, maybe it’s $100B - $400B). This is 10% of our annual tax burden right there.

I'd say that's a factor of 10 too high, even in best-guess scenarios. Current lease sales are closer to $4B per year, and those are in well established, seismically examined regions, where a few international-partner companies lease several blocks at extreme prices to prevent competitor encroachment. No one will pay anywhere near that for a long time for these newly created leaseblocks.

[Chuck Moreland]

Existing leases weren't negotiated in the face of $140/barrel oil. Existing leases don't provide access to oil that will satisfy 70% of our demands (that's how much we import).

While my number is just an estimate, it's not that far off. And even if it is, the impact to GPD remains and the tax revenue stands. It's huge.

The point is most people aren't even aware that opening land to drilling generates lease revenue. They think it's a gift to oil companies. It's not a gift, we the people own the land and the oil. Leases will generate enormous economic benefit for we the people.

The facts have changed, the world has changed. Our oil policy needs to change too.

[Superman]

Good points, Chuck. Important.

Alternative energy strategies are important, long term. I vigorously support their development. In a situation like this, gubmit's role is (arguably, of course) to be a catalyst for technological development ahead of, and to speed up, profitability. Oil companies certainly do not see a profit opportunity associated from decreased petroproduct sales but America has a sharp need for those alternatives ASAP. Again, gubmit can help quicken the day when profitability takes over.

I am very skeptical of certain things. I am not so naive as to believe that what's good for Exxon is good for America. Exxon works hard to impact energy policy. Their agenda does not focus on saving Americans money. From their perspective, Congress should foot the bill for more refining capacity, and also allow more drilling. But I wonder if this will save Americans money........or simply increase Exxon's profits. I suspect the latter. I am open to the possibility that the desires of the oil industry are also in my best interests (lower gasoline prices), but I am unconvinced that would be the net result. I have a strong suspicion that increased American oil drilling will have a negligible impact on prices. A much more powerful impact on profits.

[john70t]

Drill here or drill there-it's still a short-term bandaid in the economy's dependance on oil. It's been rationalized that many of the companies are US drilling companies, and thus it somehow adds to the economy.
The fundamentals of the situation are still not being addressed: urban sprawl, lack of mass transit systems for people and cargo, wasteful practices due to pricing differences, bigger/faster vehicles being sold, inefficient household accessories, etc...
Oil could never be replaced completely with alternative fuels(in our lifetime), but the situation we are in now is forcing the public to change their habits, somewhat.

If you look at Baku and some of the earlier liquid-gold mines around the world which were quickly pumped dry and abandoned, it should be obvious that easily accessable fields are getting scarce.

We should be using what we have to develop the next generation of energy sources. An expotentially-expanding population will require more renewable resouces, or less people.....
"Republicans" seem to be philosophically opposed to any solution to the concept out of pure partisanship, so I will pass the board back to your side.

[Chuck Moreland]

I agree that oil companies have a vested interest in the continued oil consumption. They are not going to bring us the alternative solutions we need. In fact they are likely to influence policy to impede alternatives.

The alternatives will come from start up companies we haven't heard of yet. That's where we find the smart, hungry people that have good ideas and make things happen.

My point about alternatives is that policy needs to let the smart hungry people make it happen. Politicians and policy aren't going to create winning technologies. They can only impede progress by creating regulatory and other obstacles (possibly with big oil influence). The policy needs to be one of getting out of the way, let the smart hungry people work.

While oil prices should drop precipitously, my points are less about oil prices and more about economic stimulus. When the economic tide comes in, all boats rise.

We need to move the discussion past short term oil prices. There is much more at stake.

[widebody911]

Originally Posted by Chuck Moreland

The point is most people aren't even aware that opening land to drilling generates lease revenue.

And sometimes it doesn't...

http://cleantechnica.com/2008/06/08/mistake-by-interior-department-may-cost-taxpayers-billions-in-lost-royalty-payments/
http://www.nytimes.com/2007/01/17/washington/17royalty.html
http://www.nytimes.com/2006/09/12/business/12oil.html

[Superman]

Thank you, Chuck. I agree.

Also, you didn't mention the trade imbalance again. I thought I was teeing up the ball for you a bit. Besides the relationship between drilling and international crude prices, there is another reason to drill/produce. Trade imbalance. As you pointed out.

I think this discussion is terribly important for a variety of reasons, but I'd like to especially focus on one of those reasons. The time is ripe. Timing. Sure, those technologies are undeveloped. But I think many are well within reach. I believe that a coordinated American focus on conservation and techological development will bring fairly MASSIVE benefits, if we act now. I want America to be at the point of this spear.

[dd74]

Originally Posted by Superman

Thank you, Chuck. I agree.

Also, you didn't mention the trade imbalance again. I thought I was teeing up the ball for you a bit. Besides the relationship between drilling and international crude prices, there is another reason to drill/produce. Trade imbalance. As you pointed out.

I think this discussion is terribly important for a variety of reasons, but I'd like to especially focus on one of those reasons. The time is ripe. Timing. Sure, those technologies are undeveloped. But I think many are well within reach. I believe that a coordinated American focus on conservation and techological development will bring fairly MASSIVE benefits, if we act now. I want America to be at the point of this spear.

I agree with you, Supes, but who is taking on the task you outline? The Big Three have played with alternative energies and uses, but I imagine can't see the economic viability, so their efforts are token at best. The only real player seems to be Toyota with their hybrids. But they're a Japanese company. So who will be at the point of the spear in the U.S.? Your guess is as good as mine. Perhaps the back yard mechanic? Some little company in Silicon Valley? I've often wondered this.

Bill Clinton once said he envisions over $500 billion in revenue for whomever creates a viable alternate fuel source or product to use alternate fuel. I don't doubt his words.

As to increased drilling, it's important to do so if at least from the psychological standpoint that America protect itself against an unsettled Middle East, and other factors that might upset our supply. Also, increased drilling in the U.S. will help stave off speculators who live and breathe for a volatile oil market.

However, if the ultimate goal here is to take ourselves away from oil dependence, I agree increased drilling will not be the answer. But then, one has to ask, how long will it take to get America off oil? Ten years, twenty, fifty or longer?

[john70t]

Chuck, several years back I was more "smart and hungry" when I attempted to patent my efficiency electric motor design(crappy picture).
Excepting bearing-drag, I believe it is an almost loss-free electrical-to-kinect energy transmision at low rpm's as there is no reaction point.

-Basically, #26 is a variable-mass rotor/flywheel that can be spun up to retain energy, locked to the case, or used to drive a PTO#54.
-#26 can act independantly and/or simultaneously as either a motor or alternator against rotors #24 or #28 which are reverse-geared to each other.

This would have been the perfect application for all hybrid technowology in Europe, Japan, and even right here in the good 'ol USA. My problems right now would include which color to paint the other GT1.
To the dismay of my wallet, I found out that a Tai-Her Yang in Taiwan had filed something very similar shortly after I had consulted with a (Chinese) patent attorney in a "free patent review" at the San Francisco public library. I considered theft by him, and I considered patent interception by someone within the USPTO, but I finally considered it "that is life".
Several other ideas I had at the time such as the split bicycle seat, the Tweel, the Issac helmet restraint, gauge valve-stem caps, and an interactive keyboard for the blind had also been filed around that time. That's life, I'm not the only one with ideas.


The point to this lengthy post is that new efficiency ideas happen all the time, but will never be put into general use as long as the influence of the Texas oil barons run this country. Their public power is reinforced by public opinion.

[Pazuzu]

Originally Posted by john70t

of the Texas oil barons run this country.

There are very few to no Texas oil barons...just because they have an office here doesn't mean they're Texan.

Unless you meant that in a more sweeping, generalized way...I would consider "the oil barons of Texas" in that case

[Porsche_monkey]

Current production is about 8,000,000 barrels per day, consumption is about 22,000,000?

Are those numbers correct for 2008?

[Pazuzu]

Originally Posted by Porsche_monkey

Current production is about 8,000,000 barrels per day, consumption is about 22,000,000?

Are those numbers correct for 2008?

Closer to 5.14 million per day production, 18 million per day consumption.

http://tonto.eia.doe.gov/cfapps/STEO_Query/steotables.cfm?periodType=Annual&startYear=2005&startMonth=1&endYear=2009&endMonth=12&tableNumber=9

[Porsche_monkey]

So, a reasonable time frame for more than tripling oil production would be, what? Five years, ignoring envronmental concerns?

And is current refining capacity adequate?

[Pazuzu]

Originally Posted by Porsche_monkey

So, a reasonable time frame for more than tripling oil production would be, what? Five years, ignoring envronmental concerns?

And is current refining capacity adequate?

Tripling production??? Well, when it takes closer to 8 years to get an optimal 250K per day rig up and running...and that costs several hundred million dollars total...

Not to mention that there would have to be 3-5 years of seismic work done out there before anyone will even drop a drillrig in the water...3 years for the tiny shallow reservoirs, 5+ years for the BIG STUFF that's much deeper...


I'd say that we could triple production in about 47 days (old physicist joke...)

[mikester]

Originally Posted by Chuck Moreland

The environmental impact is important and needs to be delt with responsibly and safely. This is the tail that has been wagging the dog on the Oil policy discussion.

The economy is the greater issue. We have serious, potentially devestating economic issues right now.

What needs to be widely understood is how oil policy and the economy are intertwined. This needs to drive oil policy.

Responsible development of domestic oil and alternative energies will turn our current economic woes into unprecedented prosperity, and independance.

Consider the Oil policy positions of the respective candidates. Consider the economic impact. Factor that into your vote.

It wouldn't even surprise me if Obama flips his position on drilling in the next couple months. Especially if people are educated about the economic impact.


Right now the closest either candidate gets to discussing economic impact of oil policy is how it will/will not effect oil prices short term. Maybe they think that's all Joe sixpack can understand.

I think people are smarter than that. It's time to elevate the economic discussion and educate people on the real impact of these policies.

Chuck, please run for Governor of California - it will set you up nicely for the Presidential election.

[CRH911S]

Chuck, good post.
You do know that American gets most of its imported oil from Canada? Furthermore, Victoria, where the oil sands are contain enough oil for us, them and China for years to come. Now here's the problem as I see it and it's not necessarily the environmentalists fault either.
Why are American producers obsessed with owning a gas line from the north slope of Alaska to Chicago? Two things come to mind.
The State of Alaska is suing the Conoco for failure to produce. How many years are we talking about here? 20 years and something like 16 failed plans. This fall they submitted another plan and finally started work on Pt. Thompson. Not a Prudhoe Bay but would put west Texas to shame. We all know why Conoco finally decided to produce....140/bbl is plenty persuation.
And finally, there isn't a major oil producer in the country who owns their own gas line and the reason why I think it's about to change is because they're not too crazy about having to compete with the already established and producing oil sands in Victoria. Doing so would only drive down the value of the commodity.
And finally, TransCanada was the only qualified company willing to apply and meet the terms of Alaska's Gas Line Inducement Act to transport gas off the north slope. The producers don't want anything to do with firms like Anadarko, a small independent, trebbling gas into their line thus increasing the supply. Only TransCanada would allow independents such as Anadarko which is a requirement for the state license.
With respect to the enviromentalist, when was the last time year heard of a major oil company complain that they've run out of leases? Of course not, they haven't and they're sitting on quite a lot of leased realestate for obvious reasons. It wasn't until this year that the State of Alaska told Conco to produce or give it back. I think the state will back off once its convinced Conoco's activity is moving in a positive direction.
There needs to be political backbone on both sides to get domestic oil supplies to market. Is ANWR and off-shore needed? Maybe at sometime in the future but not now. The problem is the producers holding off exploring and producing.
FWIW, the US exports 1.5mil/bbl daily. Interesting isn't it.