Wednesday, May 18, 2011

Drilling, Efficiency, and Energy Independence

[Note: I published this post several days ago. Blogger automatically reposted it when I altered its labels.]

My friend and colleague Kim Yi Dionne passed along this page from the National Resources Defense Council with the comment,"the graph says it all."

I agree that the graph says a lot, but what it says is probably not what the NRDC had in mind.

For some context, the graph is used to illustrate the NRDC's claim that increased energy conservation poses better prospects for increasing the United States's use of foreign energy sources than further development of domestic oil reserves.
The United States consumes 19 million barrels of oil a day, 25 percent of the global supply, but we have less than 2 percent of the world’s proved oil reserves. That means no amount of domestic drilling will reduce gas prices or provide enough to meet America’s daily demand for oil. The only solution: develop better cars and cleaner, safer sources of fuel. By 2025, we can reduce our reliance on oil through increased efficiency, transit, and alternative fuels, saving more oil than we can drill.
There are two incredibly silly things going on in this passage. First, the relative size of U.S. oil reserves don't tell us much of anything about the extent to which those reserves are actually developed and producing oil for the world market or how much of the oil used in the United states comes from domestic sources. Saying the U.S. has two percent of the world's reserves doesn't tell us much of anything about how much of the U.S.'s oil demand is met by domestic sources. In fact, according to the U.S. Energy Information Administration, the U.S. imported 11.75 million barrels of oil per day, on average, in 2010 (down from 13.71 million barrels in 2005, thank you very much). Presuming the NRDC's figure of 19 million barrels of daily oil consumption in the U.S. is correct, that means that about two-fifths of U.S. oil consumption is from domestic sources. Moreover, according to this vague and unsourced entry on Wikipedia, the U.S. produces about 70 of its own energy consumption, which sounds plausible considering our considerable domestic deposits of coal and natural gas. The NRDC text makes it sound like the U.S. gets 98 percent of its petroleum from foreign sources. It is sloppy, at best, and, perhaps, intentionally misleading.

The second incredibly silly aspect of this NRDC text is its claim that "no amount of domestic drilling will reduce gas prices." Prices rise and fall on marginal changes in supply and demand. So, the truth is exactly the opposite of the NRDC's statement. In fact, any increase in domestic oil production would result in lower gas prices, holding all else constant.

Back to the chart, though.

The point of the graph, I take it, is that reductions in petroleum use from various increases in energy efficiency are absolutely larger than increases in petroleum production. It shows projected energy savings from seven sources: increasing CAFE standards to 60 m.p.g. (from the current 27.5 m.p.g.), increased use of plug-in electric vehicles, increasing use pf public transportation and alternative commuting, more efficient trucks, retrofitting existing cars and trucks with better lubricants, tires, etc., clean fuels, and improved efficiency in air travel and heating buildings. It also indicates increased supply from "new drilling production."

Presuming all of these figures are correct, the graph still shows that increased supply from new drilling production is greater than fuel savings from four out of the seven of the proposed conservation measures (alternative fuels, retrofits, trucks, and plug-ins) and about the same as improved efficiency in air travel and heating (which are one combined category). Of the remaining pair of efficiency measures, one requires more than doubling current fuel efficiency standards. According to Autoweek (hat tip to Stephen Bainbridge), that kind of fuel efficiency mandate may raise new car prices by nearly $10,000 (from a current average of $28,400). So, the only way to achieve this fuel savings is to massively increase consumer costs in the auto market (essentially, an incredibly regressive indirect tax). The only single conservation policy without a comparable downside is investment in public transportation and various reforms to promote fuel-free commuting.

On the energy production side, the chart notes that "new drilling production" is really just new production from the Alaska National Wildlife Refuge. Presumably, ANWR is not the only place where oil exploration and development are currently proscribed. So, though we cannot know from the chart alone, the prospects for increased domestic oil production may be much larger.

Taken as a whole, the chart actually shows that increased domestic oil production is one of the single most effective ways to reduce dependence on foreign oil and reduce consumer fuel prices. Also, since oil exploration and development are profitable, largely private-sector activities, increased domestic oil production may be achieved without additional public fiscal burdens or regulatory measures that inhibit individual choice or market efficiency. Moreover, the positive effects of increased domestic energy production are not mutually exclusive from the benefits that may be achieved through conservation. Decreasing energy use while increasing domestic energy supplies are both necessary measures for energy independence and both stand to reduce enegry prices, including fuel prices.

In the end, the chart makes it quite clear that taking steps to further develop America's petroleum reserves are an important part of any energy program that aims for energy independence and low energy prices to support economic development. Thanks NRDC!

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