There’s Oil in Them There … Ocean, If We Decide We Want It
Interior Secretary Ryan Zinke had a quick sit-down with Florida’s Republican Governor Rick Scott in the Tallahassee Airport on Jan. 9 and was speedily convinced to remove the Sunshine State from the government proposal.
Cue the stampede. Within a day, five Democrat governors from New York, Oregon, North Carolina, Delaware and Washington state all requested – via Twitter, of course – that their states be exempted as well.
Like most things during the Trump era, policy gets lost in the political spectacle. The hot take here being that Zinke made the decision to boost Scott’s credibility on the issue as he prepares to run for the U.S. Senate against Democrat Bill Nelson, an ardent opponent of offshore drilling.
But beyond the hot take, two interesting questions remain.
One: How much hydrocarbon is under the U.S. offshore continental shelf?
Two: Does the United States need more oil and gas?
In terms of oil and gas availability, there is currently quite a bit – possibly much more than has been forecast. The Interior Department in 2016 estimated U.S. offshore oil reserves to be 90 billion barrels and natural gas reserves to be 327 trillion cubic feet. By comparison, the U.S. uses about 7 billion barrels of oil a year, and 90 billion barrels of oil at today’s prices is worth a cool $5.4 trillion. The natural gas would add another several trillion dollars in wealth.
But here’s the rub. Nobody really knows how much is there. The potential supplies could be much more or much less; there have been no advanced 3-D seismic surveys done in the last 30 years that would give a definitive answer.
The Obama administration claimed in 2010 to want to allow seismic surveys of the Atlantic offshore, but then successfully dragged its feet for years until cancelling the effort altogether in early 2017.
Many people in the environmental community would like to keep the knowledge of the underlying hydrocarbon secret. And, given the ambiguity concerning the societal benefits of drilling, politicians often err on the side of caution, favoring the existing environmental endowment over the unknown potential income from offshore development.
In terms of whether the U.S. needs the oil, the geopolitical answer is definitely “yes,” and the economic answer is “probably.”
From a simple strategic standpoint, the United States will need oil and especially natural gas resources 30 years hence, given the current trend toward electrifying the passenger car fleet. It would be nice to drive automated cars in 2047 on electricity derived from renewables and natural gas, not crude oil. Global demand for petrochemicals, which produce all of the plastic the world uses, isn’t going anywhere but up in the next three decades.
Climate change is also a serious concern, but the problem with cracking down on the U.S. oil and gas industry is the free-rider syndrome concerning climate emissions around the world. Russia and Saudi Arabia will simply fill in any lost production from North America. It’s also arguable that allowing U.S. exports of natural gas to Asia, Africa and Latin America would keep nations in those areas from using coal-fired generation to expand their electricity grids.
Given the four-decade period of economic dependence on oil importers from the Middle East, it’s not a stretch to argue that the United States would be in a better position, both financially and politically, if it was not highly dependent on a resource dominated by Saudi, Russian and Iranian interests. The cost of U.S. military presence in the Persian Gulf – which is expressly necessary to keep open the Strait of Hormuz, through which about 20 percent of the world’s oil passes each day – is estimated to be in the tens of billions of dollars each year.
As things stand, Zinke doesn’t have to exempt any additional states from the drilling plan, although he may choose to do so. From the period 2019 to 2024, the new plan envisions over 40 individual lease sales covering all tracts of the outer continental shelf (OCS), spanning almost the entire U.S. coastline. It would also include development off of nearly the entire coast of Alaska.
Interestingly, there is no revenue-sharing for offshore drilling, except for a small revenue-sharing program for Gulf Coast states. This means that, by law, the federal government gets 100 percent of the revenues from any hydrocarbon production along the Atlantic, Pacific or Arctic coasts. This 100-0 spilt has made no sense for decades, given how much of the oil-spill risk falls on individual coastal states.
States in the west like New Mexico, Utah and Wyoming get a 50-50 split in royalties from the oil produced on federal lands within state boundaries. It would be unwise for coastal states to agree to any offshore drilling unless a proper revenue-sharing bill was passed through Congress.
So, don’t expect drilling off the coast of Santa Monica and New York’s Long Island anytime soon. The government is required to carefully consider eight factors before it can make a decision about where to dig new oil wells. These include local geology and ecology, national energy needs, local ocean use, and oil and gas companies’ interests.
The industry’s top priorities are the eastern Gulf of Mexico (which is why the Florida exemption is significant), the Atlantic Coast from Georgia to Virginia, and anywhere off the coast of Alaska.
Presumably, this program will play out over the rest of President Trump’s tenure and beyond, since five-year drilling plans take so long to come to fruition. A future Democratic administration would likely pull the plug on much of the current plan. What Trump and his minions are trying to do – it seems – is gain enough additional knowledge about the scale of the resource offshore to potentially change the political calculations of future production.
Image Credit:Kurt Adams