Oil, once perceived to be the boundless lifeblood of the planet, powering everything from plastic to Hummers, has reached an all-time high of nearly $140 a barrel (as of press time). With gas prices topping $4 a gallon, Americans’ hunger for the juice that powers our lifestyles has turned into a panic that the well is going dry. With a hotly contested presidential election fast approaching, the fuel crisis has turned political and all eyes are focused on Florida and its juicy 25 electoral votes. Potential lawmakers have descended on the state like so many circling sharks, with the Republicans feeding into the fear that all our gas dollars are going to fund terrorism and the Democrats claiming that drilling off of our shores will result in environmental disaster. For an assignment for The Sand Paper this week, I decided to cut through all the rhetoric and find the facts: What actually sets the price of oil?; Will the lifting of the drilling moratorium lower fuel prices or have any effect at all?; How safe are our shores with today’s drilling technology? By speaking with people on both sides of this controversial issue, I set out to find the truth.
The Beginning of OPEC
Petroleum or crude oil is an oily, flammable liquid that occurs naturally in deposits, most often found beneath the surface of the earth. Over millions of years, plant and animal remains fall to the floor of shallow seas. As the seas recede, sediment layers, such as silt, sand, clay, & other plant material, cover the plant material. Buried deep beneath layers of rock, the organic material partially decomposes, under an absence of oxygen, into petroleum that eventually seeps into the spaces between rock layers. As the earth’s tectonic plates move, the rock is bent or warped into folds or it “breaks” along fault lines, allowing the petroleum to collect in pools. Man was not unfamiliar with crude oil. In the Middle East, seepages and escaping petroleum gases burned continuously, giving rise to fire worship. It was also used for building mortar, waterproofing boats, baskets and clothes, roads, in a limited way for lighting, but was primarily used for healing everything from headaches to deafness. It was also used in war, for obvious reasons.
As time went on the demand for oil soon became far higher than the supply. Many companies and individuals were looking for an alternative and longer lasting source of what would later become known as ‘black gold’. Apart from a brief period of coal oil, the answer came with the development of drilling for crude oil.
As the demand for crude oil grew, some oil producing countries began to look at ways to protect their interests. In 1949, Venezuela moved toward establishing OPEC (Organization of the Petroleum Exporting Countries) by approaching -suggesting that they exchange views and explore avenues for regular and closer communications between them. In 1960, citing national security and land access to energy supplies, American President Dwight Eisenhower began enforcing quotas on Venezuelan oil in favor of the Canadian and Mexican oil industries. Venezuela’s president reacted seeking an alliance with oil producing Arab nations as a pre-emptive strategy to protect the continuous autonomy and profitability of Venezuela’s natural resource: oil. As a result, the OPEC cartel was founded to unify and coordinate members’ petroleum policies.
It wasn’t until the Arab-Israeli conflict that OPEC became a political force. In 1967, they formed a separate, overlapping group, the Organization of Arab Petroleum Exporting Countries, for the purpose of centering policy and exerting pressure on the West over its support of Israel. The threat and use of embargo as a weapon, however, triggered a decline in OPEC’s power. Western nations developed closer ties to the Soviet Union and rapidly built up their offshore drilling in the North Sea and the Gulf of Mexico, greatly lessening the potential impact of future price shocks induced by OPEC. Since currently worldwide oil sales are denominated in U.S. dollars, changes in the value of the dollar against other world currencies affect OPEC’s decisions on how much oil to produce. For example, when the dollar falls relative to the other currencies, OPEC-member states receive smaller revenues in other currencies for their oil, causing substantial cuts in their purchasing power.
OPEC currently has 13 member states: Angola, Libya, Nigeria, Algeria, Iran, iraq, Kuwait, Qatar, Saudi Arabia, United Arab Emirates, Ecuador, Venezuela, Gabon and Indonesia. Bolivia, Sudan, Syria and Brazil are prospective members.
Oil Drilling in the Gulf of Mexico
The Gulf of Mexico offshore oil and gas industry was born off the coasts of Texas and Louisiana in the 1930’s and ‘40’s, producing generations of workers and oil explorers. Consequently, the prospect of increasing offshore production has wide acceptance among state political leaders and rank-and-file citizens.
At least 120 companies are operating off the four Gulf Coast States that permit offshore drilling, producing roughly 1.3 million barrels of oil a day, about 25 percent of the U.S. domestic production. More than 3,900 platforms are scattered across Gulf Coast waters.
Some swear that the rigs are not harmful to the environment, and that the debate is centered around 30-year-old technology that is now safe. In June of 2005, The Sand Paper interviewed Bill McDermott, a local with 28 years of experience in the industry, who explained how safe oilrigs are. “It costs $200,000 a day to run an oil rig,” he said. “There are so many safety precautions that go into its operation, not to mention the continual threat of surprise inspections and the concern of the workers – whose very lives depend on the safety precautions – that nobody is sloppy or careless.” He told us that there is a BOP, or Blow Out Preventer, that someone mans at a sub-sea level 24/7. It is activated in several stages the minute there is any sign of danger.
He said that when the largest rig in the world collapsed in Brazil, that destruction was created by human error, and cost 11 people their lives. But the safety devices were operational and prevented any environmental catastrophe from adding to the devastation of the loss of life. “Spills come from tankers and pipelines,” he said, “not oil rigs.” (See Sand Paper Issue 226, June 10, 2005, for the entire interview).
Others say that the rigs add to the abundance of critters in the Gulf, by serving as artificial reefs. Conservative columnist and Louisiana resident Humberto Fontova says that marine life has virtually exploded around these ‘reefs’.
“Louisiana produces one third of America’s seafood,” he said. “In fact a study by Louisiana State University shows that 85 percent of Louisiana offshore fishing trips involve fishing around these structures and that there’s 50 times more marine life around an oil production platform than in the surrounding Gulf bottoms. Louisiana produces one-third of America’s commercial fisheries – because of, not in spite of, these platforms.”
He went on to tell us that, “In 1986 Louisiana started the Rigs to Reef program, a cooperative effort by oil companies, the feds and the state. This program literally pays the oil companies to keep the platforms in the Gulf. Now they just cut them off at the bottom and topple them over as artificial reefs; more than 60 have been toppled thus far.” He told me what he thought of the debate raging a few states away.
“Today’s drilling technology compares to the one used only 20 years ago about like the Kitty Hawk compares to a jumbo jet.”
David Mica, (whose brother John, Republican, has represented the 7th district of Florida since 1993), executive director of the Florida Petroleum Council, an oil interest lobby group, said the industry already has changed since the moratoriums were put in place.
“Technologies that we use and the extraction of oil and gases is much more compatible with offshore resources and protection of the environment,” Mica said.
Others disagree, saying that not only is the risk too great, it’s unnecessary.
“Offshore drilling is dirty, dangerous and it doesn’t deliver,” said Adam Rivera, citizen outreach director for Environment Florida. “Just the routine toxic pollution from offshore drilling poses a huge threat to our beaches and our coastal-based economy.”
The Florida Sierra Club agrees. “It should not be left up to one state to decide whether or not to jeopardize beaches in neighboring states with risky offshore drilling. An oil spill off the coast of Virginia could impact beaches, marine life, and the tourism economy of New Jersey,” said Sierra Club National Press Secretary David Willett. “The places being suggested for new drilling have been deemed so special that Congress and consecutive presidents have protected them under an Outer Continental Shelf drilling moratorium since 1981.”
Furthermore, critics say, the oil companies are not even using the 5500 offshore leases they already own.
According to a report issued by the Committee on Natural Resources Majority Staff in June 2008, “In the last four years, the Bureau of Land Management has issued 28,776 permits to drill on public land; yet, in that same time, 18,954 wells were actually drilled. That means that companies have stockpiled nearly 10,000 extra permits to drill that they are not using to increase domestic production.”
“The oil companies are loudly claiming they need to drill off the coasts of Florida and California,” said Senior Senator Bill Nelson. “They will argue that this is going to increase the supply of oil. But they aren’t telling you they are not drilling on 32 million of 39 million acres already under lease from the federal government in the Gulf of Mexico. And they aren’t telling you that more than 8 million new acres they got in the Gulf two years ago has done nothing to bring down prices.”
“The industry should be sinking wells in areas already under lease before demanding control of millions of new acres or destroying long-protected lands,” Nelson said. “The President knows that exploiting our coastlines won’t bring down gasoline prices anytime soon.”
Critics also accuse the oil industry – and the current administration – of opportunism, saying that they are taking advantage of a bad situation, of giving people false hope so they can line their own coffers.
How much oil lies under Florida’s coast is up for debate. The National Petroleum Council estimates that 5 billion barrels lie off Florida’s coast alone, while the Energy Information Administration suggests the number is closer to 16 billion barrels. Other estimates go as high as 21 billion barrels.
However, according to the Minerals Management Service, of all the oil believed to exist on the Outer Continental Shelf in the Gulf of Mexico, 79% of it is located in areas that are currently open for leasing and not being used.
Not a Short-Term Solution
All of this debate is, for the short term, largely irrelevant due to the fact that any new source of oil will take at least 15-20 years to develop.
“The U.S. still has a big difference between its consumption and indigenous production,” said Art Smith, chief executive of energy consultant John S. Herold, “Even a vast oil deposit roughly four miles beneath the ocean floor won’t significantly reduce the country’s dependence on foreign oil and it won’t help lower prices at the pump anytime soon. We’ll still be importing more than 50 percent of our oil needs.”
In a report ordered by President Bush from the Energy Information Administration entitled ‘Annual Energy Outlook 2007 With Projections to 2030’, it states, “The projection in the OCS (Outer Continental Shelf) access case indicate that access to the Pacific, Atlantic and eastern Gulf regions would not have a significant impact on domestic crude oil and natural gas production or prices before 2030.”
John McCain admitted as much when he said on Monday, “I don’t see an immediate relief, [but] the fact that we are exploiting those reserves would have psychological impact that I think is beneficial.”
President Bush said the same in a speech he recently gave in the Rose Garden. After outlining his plan to drill for oil in the Alaska National Wildlife Refuge, the restricted area of the OCS (coast of Florida) and the Green River Basin in the Rocky Mountains, he said, “The proposals I’ve outlined will take years to have their full impact.”
The Real Reason
So why is gas so expensive? Evidence points to the unregulated speculative trading of oil futures on the stock market, along with increasing demands for oil from developing countries.
In an article in the June 9, 2008 edition of NewsWeekly, Peter Fusaro, founder of the Energy Hedge Fund Center, said that “There has been vastly increased trading levels as hedge funds, investment banks, pension funds, and other professional investors have poured money into oil and other commodities, seeking a hedge against inflation and alternatives to a shaky stock market.” In the last five years, he said, “Investment in index funds tied to commodities (oil) has grown from $13 billion to $260 billion. More than 630 energy hedge funds are placing bets – up from just 180 in 2004.”
The Senate investigated the rigging of the oil market by speculators in the summer of 2006. They determined that market speculation contributed to rising oil and gasoline prices, perhaps accounting for $20 out of a $70 barrel of oil. “As much as 60% of today’s crude oil price is pure speculation driven by large investment banks and hedge funds,” states a report on online news service OpEd News.
Malcolm Turner, Chairman of Turner, Mason & Co. – a refining consulting firm in Dallas, explained that, with energy demand in China escalating and world supplies static, the influx of money has helped chase prices higher. “The hedge funds and speculators have run it up way beyond where it should be,” he said.
The reason is because normally, when prices for something go up, people quit buying it. That has not happened with gasoline. People are consuming nearly as much gas now as when it cost half as much because they need to get to work and buy groceries. The result is that the soaring prices haven’t created an overabundance of un-wanted fuel, as you would expect if oil were overpriced. That is what has emboldened speculators to keep bidding the price higher, testing what the market will bear. Since the oil market is unregulated, there is really no end in sight.
The world’s largest oil exporters, the Saudi Arabians, agree. Concerned that the impact of $130 – per – barrel oil on their customers’ economies will give an opening to alternative fuels, they plan to increase production from 300,000 bbl. per day to 9.45 million bbl. Analyst David Kirsch, of Washington D.C. oil consultants PFC Energy thinks that, “Due to the amount of investment money in the commodities market, the Saudis blame the recent price shortages on speculation and fear of shortages – something that is beyond their control. They say there is plenty of oil on the market.”
Senator Nelson blames the “gas gouging” problem on a bill passed 8 years ago called the Commodity Futures Modernization Act of 2000 (CFMA). Signed by then President Bill Clinton, the bill was created in large part to allow for the creation of U.S. exchanges for the listing of a new sort of derivative security, the single-stock future. According to Wikipedia, the CFMA has received criticism for the so-called “Enron Loophole,” which exempts most over-the-counter energy trades and trading on electronic energy commodity markets.
To combat this problem, he has recently introduced legislation – S.3134 – that “would ban all unregulated speculative trading in oil futures,” he told me in an email. “Oil now hovers around $140 a barrel, but recent congressional testimony from a leading industry executive revealed the price of crude should be no more than $55 per barrel, given the rules of supply and demand. That means pump prices for regular unleaded should be about $2.28 a gallon – not more than $4.”
The Senator seeks to, with his legislation, “lower gas prices much sooner and by an estimated 25 percent to 50 percent, and to reign in speculators who have been able to bid up crude oil prices to unrealistic and shocking highs, largely because of a legal loophole that, in effect, unleashed insider trading for the past few years.”
Down the Road
To decrease our dependence on foreign oil, it stands to reason that the oil companies should harvest the land they already have – according to the Committee on Natural Resources, development of and production from the 68 million acres currently under lease but not in production would cut US imports of oil by one third, as opposed to opening up protected coastland areas, which “at most would only amount to a 10 month supply,” according to Senator Nelson.
I asked Senator Mel Martinez for his opinion, and he told us that he believes we should drill on land already obtained for such purpose. “I helped design the Gulf of Mexico Energy Security Act (S. 3711), which was passed into law in 2006,” he told me. “This bill opened 8 million acres of the Outer Continental Shelf in the western Gulf of Mexico for oil and gas exploration while securing environmental protection for Florida’s beaches. Although this opened OCS area contains trillions of cubic feet of natural gas and millions of barrels of oil, no new production has begun. Production in this area is the most immediate option we have for a large-scale increase in domestic energy supply. We must take advantage of this available asset before considering expanding coastal drilling that may jeopardize our beaches.”
In the long run, though, the solution may lie in the dramatic changing of our lifestyles. America is a country with 5% of the world’s population that consumes about 25% of world oil production – 22 million barrels per day. We currently import 60% of this total, and that is not likely to change much even if we start drilling like madmen – according to the Energy Information Association, even when US production was at its peak in 1970 (and accounted for more than 40% of all the oil produced in the world), it could not keep up with consumption.
Dr. David Hill of the World Innovation Foundation Charity in Bern Switzerland – the same foundation that oversaw the Manhattan Project – said some have been aware of the problem for years, and that the solution must be a global one. “Scientists and engineers have known about the dire problem and the end-game scenario since mid last century but politicians have never taken the warnings of scientists seriously enough to change things and the way we operate. That is basically the reason why we are in the mess that we are in today.”
So is there a road to cheaper gas? It appears so – for a while – if we manage to reign in the speculators. But even so, we’re going to have to bite the proverbial bullet and start focusing immediately on finding another way to make things go.
Barry Craig, a mechanical engineer and veteran of the nuclear power industry, said that the U.S. Government needs to step up to the plate. “Efforts have been under way for three years to get a comprehensive energy bill through Congress, but even that long-stalled measure falls short of what needs to be done. It treats energy efficiency as a stepchild, and while funds are earmarked for research programs on alternative fuels, the measure provides no incentives for them,” he said.
“Our future depends on measures to reduce the demand for oil.”
Keri Hendry – published in the Island Sand Paper, Issue 385, June 27th, 2008
As this story was going to press, we received the following information:
On Tuesday, House Democrats successfully postponed consideration of an Interior Department spending bill – that included the continuation of the Florida offshore drilling ban – until the end of the summer. Republicans had prepared a proposal that would have ended the ban and allowed oil development 50 miles from shore in all U.S. waters.
When asked Thursday morning if there were any way that Democrats might bargain away their stance on Florida offshore oil drilling, Senator Nelson told me, “I am firmly fixed against new drilling of the state of Florida. For all the reasons we’ve discussed -including the discovery that speculators are largely to blame for the run up in oil prices.”