Monday, October 10, 2011

The Missing US Energy Policy

I remember teaching high school social studies classes from materials stating that "the end of oil" was at hand. I had to tell them that they would have to give up the idea of owning cars and heating their homes.

Needless to say, that doom-and-gloom scenario never came true. Instead I discovered that my father in the 1930s had been told about "the end of oil" while he was in school. Oh, and over the last 20 or 30 years the idea of "peak oil" has been very popular.

Here is a bit from an article in the Wall Street Journal pointing out that the Bakken formation in North Dakota and Montana puts America back into the same league as Saudia Arabia with oil reserves:
Harold Hamm, the Oklahoma-based founder and CEO of Continental Resources, the 14th-largest oil company in America, is a man who thinks big. He came to Washington last month to spread a needed message of economic optimism: With the right set of national energy policies, the United States could be "completely energy independent by the end of the decade. We can be the Saudi Arabia of oil and natural gas in the 21st century."

"President Obama is riding the wrong horse on energy," he adds. We can't come anywhere near the scale of energy production to achieve energy independence by pouring tax dollars into "green energy" sources like wind and solar, he argues. It has to come from oil and gas.

You'd expect an oilman to make the "drill, baby, drill" pitch. But since 2005 America truly has been in the midst of a revolution in oil and natural gas, which is the nation's fastest-growing manufacturing sector. No one is more responsible for that resurgence than Mr. Hamm. He was the original discoverer of the gigantic and prolific Bakken oil fields of Montana and North Dakota that have already helped move the U.S. into third place among world oil producers.

How much oil does Bakken have? The official estimate of the U.S. Geological Survey a few years ago was between four and five billion barrels. Mr. Hamm disagrees: "No way. We estimate that the entire field, fully developed, in Bakken is 24 billion barrels."

If he's right, that'll double America's proven oil reserves. "Bakken is almost twice as big as the oil reserve in Prudhoe Bay, Alaska," he continues. According to Department of Energy data, North Dakota is on pace to surpass California in oil production in the next few years. Mr. Hamm explains over lunch in Washington, D.C., that the more his company drills, the more oil it finds. Continental Resources has seen its "proved reserves" of oil and natural gas (mostly in North Dakota) skyrocket to 421 million barrels this summer from 118 million barrels in 2006.

"We expect our reserves and production to triple over the next five years." And for those who think this oil find is only making Mr. Hamm rich, he notes that today in America "there are 10 million royalty owners across the country" who receive payments for the oil drilled on their land. "The wealth is being widely shared."
The actual estimating of "reserves" is tricky. The lesson I learned is that governments don't estimate oil reserves. They rely on oil companies. And oil companies have no incentive to find oil for more than a 20 year window into the future, so they will always be predicting the "coming end of oil". Here's the Wikipedia estimate of oil reserves.

Another fundamental lesson to learn from the ridiculous history of decade after decade "end of oil" proclamations: modeling is hard. The conclusions follow very closely from your assumptions. The infamous Club of Rome made ridiculous assumption that "most of the exploitable oil has already been found" and that "energy use will rise exponentially". Both of these are wrong. The amount of reserves is a function of need and ingenuity. The use of energy is tied to technological innovation. Cars today normally get three times and could easily get five times the mileage of cars 50 years ago. As a society matures, infrastructure expenditures fall relative to other consumption, so energy use falls. Oil use has been declining for over a decade in the US. It isn't growing exponentially.

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