The President’s Energy Statements: Myth and Fact

Fact-checking the president’s energy rhetoric: See API’s new point-by-point look at some of the energy assertions the president has made in his State of the Union address and other public statements. For example:

President: “I’m directing my administration to open more than 75 percent of our potential offshore oil and gas reserves.”

Fact: The administration is defining the status quo as progress. The resources identified are restricted to areas in the Gulf of Mexico and the Alaska OCS that have already been leased and where the industry is already active. In fact, the administration’s latest plan for offshore development scales back on the previous plan by removing the Eastern Gulf of Mexico and areas in the Atlantic. The 75 percent number is deceiving because it includes only the areas we have already explored.

More on that, here.

Here’s another one from the myth/fact guide, on U.S. oil reserves:

President: “But with only 2 percent of the world’s oil reserves, oil isn’t enough.”

Fact: This is wrong. The U.S. is home to three times the amount of reserves as Saudi Arabia. The “2 percent” number is misleading at best. “Reserves” is a technical term that refers to oil that drilling has proven to be available. According to a recent report by the Congressional Research Service, our “recoverable” conventional oil resources are nearly six times that. And our unconventional oil resources are close to six times larger than our conventional oil resources.

Nevertheless, the administration and opponents of domestic energy development continued to use the misleading “2 percent” number. Companies believe in the long-term potential of U.S. oil development. That’s why they are willing to invest many billions of dollars in new projects here at home.

More on reserves, here.

Other items in the guide include setting the record straight on current domestic oil and natural gas production, imports, natural gas development, the genesis of hydraulic fracturing and the administration’s energy tax hike proposals. Worth a read.

Energy Myths and Facts

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Crude Prices and the Pump

API Chief Economist John Felmy, discussing gasoline prices and other issues in a conference call with reporters on Tuesday:

“By far, the single biggest factor in today’s higher gasoline prices is the rising cost of crude oil. It has driven virtually all of the rise in gasoline prices. Crude oil prices are up because of supply and demand. World demand for crude is increasing as the economies of the world begin to recover, and the world’s excess oil production capacity is shrinking. Buyers of crude oil also are clearly concerned about the instability of major oil producing nations in North Africa and the Middle East.”

Felmy described how the price of a gallon of gasoline is dominated by two factors: the cost of the crude oil used to make it and taxes levied on each gallon by government:

“The price of crude is the biggest factor behind rising gasoline prices because it is the biggest cost component in making gasoline. When crude is at $100 for a standard 42-gallon barrel – a little below where it is now – a refiner pays almost $2.40 for each gallon of that crude to make a gallon of gasoline. The next biggest component is taxes. They now average almost 49 cents a gallon, including federal, state and local taxes. Together, crude costs and taxes account for over $3.00 – or about 84 percent – of what people are paying at the pump today.”

Felmy called suggestions that refinery production levels and exports of refined products are affecting U.S. pump prices a “misleading distraction.” Felmy:

“U.S. refineries are pulling out all the stops to supply U.S. markets. They produced more gasoline last year than any year in history. …  As for exports of gasoline, this is a red herring. Exports are not causing gasoline prices to rise. Less than one-sixth of product exports have been gasoline, and only a tiny amount of this was the reformulated gasoline used in larger metropolitan areas.”

These exports are good for America, Felmy said:

“U.S. refiners produce fuels primarily for American markets and always have. Moreover, to the extent we export any products, that puts downward pressure on prices of the products we import. Exports also mean jobs for Americans, including good paying U.S. refinery jobs, and a lower trade deficit.”

The challenge is for Washington to adopt energy policies that will benefit consumers. Felmy said the Keystone XL pipeline should be given the go-ahead, and the administration should ease access to U.S. oil and natural gas resources.

“The administration has not stepped up to the plate on any of this. It has consistently held back more oil and natural gas development, especially on federally controlled lands and offshore areas. It has said no to the Keystone XL pipeline. All of this has weakened our energy security and contributed to higher prices. … We think most Americans understand that producing at home more oil and natural gas would create jobs, enhance energy security, increase revenue to government and help consumers.”

On a related note, API President and CEO Jack Gerard talked to Fox Business about energy policy and gasoline prices. Check the video below:

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A Paucity of Scarcity

Steve Maley calls it The Big Energy Lie, the continued use of reserve estimates by those who want to end the use of hydrocarbons in the United States.  Maley explains:

"Reserves have been around 10 years of production ever since I can remember. That’s because energy companies measure their success by their ability to 'replace production' – that is, if they produce a million barrels, they need to replace it with a million barrels of reserves. It’s like a current inventory.  Or like a checking account. Imagine if you had $3,000 in your checking account. If you spend $1,000 per month, does that mean you will run out of money in 3 months? Only if you stop working. And only if you have no other assets."

To illustrate Maley’s example let’s look at EIA’s estimates for natural gas reserves and consumption from now till 2035.

You will notice steady consumption, and yet reserves actually grow.  Why?  Because current consumption is drawing from current production, while “reserves” as an industry term of art are drawing from a much larger supply.  From the EIA:

Notice two things, the addition of a zero to y-axis, and the steady growth since 2000, with an adjustment for this year.  In short it doesn’t matter what our “reserves” are, in the long run, because they don’t measure all of the resources available for exploration.  When you take those into account:

"EIA estimates that there are 2,214 trillion cubic feet (Tcf) of natural gas that is technically recoverable in the United States.  Of the total, an estimated 273 Tcf are proved reserves, which includes 60 Tcf of shale gas.  At the rate of U.S. natural gas consumption in 2010 of about 24 Tcf per year, 2,214 Tcf of natural gas is enough to last about 92 years."

So 92 years worth of natural gas is technically recoverable using, and this is the important part, today’s technology.  That’s right, we are sitting on 92 years worth of natural gas even with no new discoveries and no new technologies.  So when you see folks say that we might only have a 10 year supply of natural gas or that we need to raise energy taxes to fund immediate adoption of alternative fuels they are … I almost said lying, but really, it is mostly just ignorance.  Though occasionally, it’s politics.  Though you see that most often with oil, not natural gas, as we saw, again, with President Obama this week:

"As a country that has 2 percent of the world's oil reserves, but uses 20 percent of the world's oil -- I'm going to repeat that -- we've got 2 percent of the world oil reserves; we use 20 percent."

Let’s look at those reserves for a bit, in red, with yearly U.S. production in blue:

Again, yearly production steady, reserves go up.  For more, let’s go to the Congressional Research Service with a handy pyramid form:

So, as of 2010, we had 155 billion barrels of oil that were technically recoverable using 2010 technology. Going back to the previous chart, this equals about 70 years of production in the United States.   Not to mention the fact that we don’t have a very good idea about the resources that  87% of our offshore areas contain, because they are off-limits.

So no, we don’t have to jack up energy taxes to pay for an immediate switch to alternative fuels. The Energy Information Administration projects that in 2035 the U.S. will continue to meet over 56% of its demand through oil and gas. While alternatives fuels are important, moving forward we will need a true all of the above strategy, and the industry is doing its part. In fact 1 of every 5 dollars spent on renewables in 2000-2010 came from the oil and gas industry.

As U.S. government numbers show, the U.S. is an energy rich nation.  The only scarcity we have when it comes to energy is in the honesty hydrocarbon opponents bring to the debate.

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The President’s Energy Tax Hikes: Expensing of Intangible Drilling Costs

Yesterday, we discussed the president’s 2013 budget proposal to repeal the Section 199 manufacturer’s deduction for oil and natural gas companies – showing the disconnect between his call for more domestic oil and natural gas production and boosting U.S. manufacturing. Today, let’s look at another proposed energy tax increase in the president’s spending plan: repealing the expensing of intangible drilling costs (IDC).

Repealing IDC would generate $13.9 billion for the U.S. Treasury over 10 years. But it would eliminate a 99-year-old section of the tax code that has fostered innovation and exploration in the oil and natural gas business – playing a major role in the development of our energy resources for nearly a century.

Here’s what the president said in his State of the Union address:

“We have a huge opportunity, at this moment, to bring manufacturing back. But we have to seize it. Tonight, my message to business leaders is simple: Ask yourselves what you can do to bring jobs back to your country, and your country will do everything we can to help you succeed.”

And:

“We have a supply of natural gas that can last America nearly 100 years. And my administration will take every possible action to safely develop this energy.”

More manufacturing, jobs and energy. We’re for all three. Unfortunately, the president’s energy tax increases, including the IDC repeal, would make all three harder.

Here’s why: When energy companies drill they incur costs that can’t be recovered, such as site preparation and labor, representing 60 to 80 percent of the cost of the well. These costs accrue whether the well produces oil or natural gas or is a dry hole. Take away IDC and you increase the cost of production. Increase production costs and you discourage new energy development, which affects manufacturing and energy supply.

Since 1913 companies have been able to expense drilling costs – much like the Research & Development deduction enjoyed by other industries. Repealing IDC would discourage the very things the president wants: innovation, risk-taking, investment and new drilling activity – which helps the manufacturing sector as well as overall economic growth. We’re seeing that right now in states like North Dakota, Pennsylvania and Texas.

The president is right: There’s huge opportunity to help spur U.S. manufacturing and to capitalize on America’s vast energy riches – including the second-largest natural gas reserves in the world that are being unlocked through hydraulic fracturing.

With the right policies in place, America’s oil and natural gas companies can be a catalyst for both. Greater access to our resources could generate 1 million new U.S. jobs by 2016 while making our energy future more secure. Raising taxes on America’s oil and natural gas companies, which already are paying $86 million a day to the U.S. Treasury, will squander the opportunities the president mentioned. It’s the wrong policy for the jobs, energy and economic growth everyone wants.

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In Ohio, the Sounds of the Shale Revolution

In Carrollton, Ohio, it’s all business – the businesses around town and across Carroll County that are experiencing a renaissance because energy-rich deposits of shale that have brought oil and natural gas development to eastern Ohio.

Donna Saur, restaurant owner:

“I moved back home after 16 years of being gone. I needed a job. People starting coming into town, and we started hearing about shale.  I would say we’ve seen a 30 percent increase in business over the last year, which 30 percent is – big.”

Bill Newell, owner of a realty and auction business:

“We’ve seen an increase in our business here through this past year with the oil and gas workers coming.”

Tom Wheaton, Carroll County commissioner:

“It’s the first time we’ve been under 10 percent unemployment in, gosh, several years.”

Check out this video, from the folks at Energy Nation, for the sights and sounds of economic opportunity and growth, spurred by energy from shale:

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‘Markets Moved By Expectations’

Opponents of increased domestic production of oil and natural gas like to point out that oil is a world-wide market – which it is – then immediately try to support their case by looking only at U.S. production.  These folks jumped on an AP report this week that sought to prove that U.S. production has no bearing on prices.  Here’s the key paragraph:

"Politicians can’t do much to affect gasoline prices the market for oil is global. Allowing increased drilling in the U.S. would contribute only small amounts of oil to world supply, not nearly enough to affect prices. The Associated Press conducted a statistical analysis of 36 years of monthly inflation-adjusted gasoline prices and U.S. domestic oil production and found no statistical correlation between oil that comes out of U.S. wells and the price at the pump."

Again:

“… no statistical correlation between how much oil comes out of U.S. wells and the price at the pump.”

Let’s take this from the top.  The U.S. is the world’s third-largest producer of crude oil, providing 11.16 percent of the supply in 2010. Now ask yourself, if zero barrels came out of U.S. wells, would that affect the price of crude oil? Even the most determined anti-oil advocate would have a hard time saying that the loss of 11.16 percent of the world’s oil production wouldn’t mean anything to the global market. Is this an absurd example?  Yes.  But sometimes an absurd premise requires a little absurdity in response, and the idea that the U.S. has no impact on oil prices is an absurd premise. 

So now that we’ve determined there is a correlation “between oil that comes out of U.S. wells and the price at the pump,” the question becomes amounts.  Earlier in the same AP piece the reporter acknowledges that:

"Oil prices have been high in recent months because global oil demand is expected to reach a record this year as the developing nations of Asia, Latin America and the Middle East increase their need for oil. There have also been minor supply disruptions in South Sudan, Syria and Nigeria. And oil prices have been pushed higher by traders worried that nuclear tensions with Iran could lead to more dramatic supply disruptions."

The Washington Post adds all this up:

"The international oil market has tightened … because a series of crises has shaved oil production or boosted demand worldwide. Together they add up to a difference of about 1 million barrels a day in the global oil balance."

The Wall Street Journal’s take [subscription required]: 

"Global spare oil production capacity is running 'ridiculously thin' at less than 2% of demand, potentially offsetting the impact on overheating oil prices of any further increases in supplies, said Paul Horsnell, head of commodities research at Barclays. Perceptions in the market that the volume of spare capacity, or the amount of production that can be brought onstream within 30 days, has almost completely dwindled could even push oil prices higher if additional supplies are released on to the market, he added. The 2% figure represents around 1.6 million barrels a day to 1.7 million barrels a day. 'Below 5% it starts getting a little tight because there's no slack for anything to go wrong. I think the general theme right across the oil industry is that it is running very hot indeed at the moment,' Horsnell said."

OK, so the current spare global capacity, which Horsnell indicates is key to crude’s global price, is something like 1 million to 1.7 million barrels per day. The question: Can the U.S. do anything with North Americans sources to increase that?

Yes, we can:

Gulf of Mexico – We can restore exploration and development in the Gulf to pre-2010 levels. Right now the Energy Information Administration projects federal Gulf production will be down 21 percent this year from 2010. Production dropped from 1.55 million barrels per day in 2010 to 1.32 mb/d in 2011 and is estimated to be 1.23 mb/d this year. If Gulf production reached the 1.76 mb/d that EIA in 2010 projected for this year, that would be an additional 400,000 barrels per day over 2011.Keystone XL pipeline – Construction of the full Keystone XL would bring upwards of 800,000 additional barrels of oil per day from neighbor and ally Canada.Federal Lands – We can reverse the current downward trajectory in production on federal lands while opening up new areas in Alaska and offshore. The Arctic National Wildlife Refuge alone is estimated to hold 1 million barrels per day – domestic supply that would be affecting global markets right now if it hadn’t been blocked for more than a decade by opponents who dismissed ANWR because it would take seven to 10 years to come online. In all, the U.S. is believed to have 200 billion barrels of oil that’s technically recoverable but not counted with our “proven reserves.”

The point is supply matters. “Markets are moved by expectations,” correctly says API Executive Vice President Marty Durbin. The White House says otherwise, but the United States has ample resources of its own and stable resources from Canada to affect that global oil balance mentioned above. But it will take political leadership that’s both honest and bold, that you can affect global markets in more ways than just cutting demand, as the president seems to believe.  It will take more than simply saying, as the president did Thursday in Cushing, Okla., that “we’re drilling all over the place,” when the facts say otherwise. API President and CEO Jack Gerard, from earlier this week:

“Sending a clear message to people who buy and sell crude oil that the United States is committed to reasserting itself as one of the world’s major oil producers would immediately put downward pressure on gasoline and other fuel prices.”

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Study: EPA’s Tier III Proposal Would Increase Fuel-Making Costs

At a time when just everyone is understandably concerned about fuel prices, EPA apparently didn’t get the memo. Its latest thinking on a Tier III refinery rulemaking would add significant costs to the making of gasoline, according to a new analysis by Baker & O’Brien, Inc.

During a recent conference call with reporters, API’s Bob Greco, group director for downstream and industry operations, talked about the impacts on refiners of the proposed rule to further reduce sulfur levels in gasoline:

Nearly $10 billion in new capital costs to industry.Increase of between 6 cents and 9 cents per gallon to the cost of manufacturing gasoline, according to Baker & O’Brien.Increase of as much as 25 cents per gallon if a vapor pressure reduction requirement, which EPA considered, is included.

Greco:

“With the pump price of gasoline already above $4 a gallon in some parts of the country, this added burden clearly makes Tier III the wrong regulation at the wrong time. More importantly, EPA has yet to demonstrate any air quality benefits from reducing sulfur in the amount proposed. And, as the Baker & O’Brien analysis also shows, implementing the new requirements would increase refinery greenhouse gas emissions because of the use of energy-intensive hydrotreating equipment to remove sulfur from the gasoline.”

EPA claims the new rule wouldn’t be a hardship. But Greco said the agency cites a “low-ball cost estimate” that uses flawed modeling about what U.S. refineries would have to do to be in compliance. Although EPA has dropped the gasoline vapor pressure requirement, industry doesn’t believe the provision is off the table.

The Baker & O’Brien analysis found that while the sulfur requirement alone probably wouldn’t lead to refinery closures, Tier III in tandem with other potential EPA requirements could cause some refineries to close, resulting in diminished fuel manufacturing capacity and increased reliance on imported fuels – all for what Baker & O’Brien said would be modest environmental benefits. Greco:

“Refinery regulations clearly contribute to a cleaner environment and safer workplace, but, unnecessary, inefficient, and excessively costly requirements hamper our ability to provide and distribute fuels to America, while also employing hundreds of thousands of people and enhancing our national security. We have already seen some refineries close, at least in part due to the cumulative impact of environmental controls. We urge the administration to take a step back on Tier III and its other proposed rules. We must be sure that new regulatory proposals are necessary, properly crafted, practical, and fair to allow US refiners to remain competitive, preserve good paying refinery jobs, and ensure our energy security.”

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