Friday, January 29, 2010

Where's the oil? How trade, deficits, strategic petroleum reservesaffect U.S. national security.(Energy).

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There is much confusion and debate over just how much crude oil there is in the United States, both onshore and offshore, as well as over how best to manage it.

Perhaps the most perplexing part about oil reserves is the concept of "economically recoverable oil," which explains why, for example, last July the world had more crude oil reserves than today.

Back then, oil reached $147 a barrel, so oil in hard-to-reach places became economically feasible again, because the cost of recovery could be passed along to the buyer and still allow for some profit. Mature wells across the United States that had been retired were reactivated. As a result, oil in those mature oil fields was put back into the calculation of total reserves. Today, with oil down closer to $50 a barrel, many of those wells have been capped again and the mature fields are now retired from the calculation of reserves.

This may confound the casual observer who believes that oil is either down there or it isn't. But it is not just a matter of geology, it's also a matter of accounting.

The simple geological fact is that the United States sits on several hundreds of billions, if not trillions, of barrels of oil, in one form or another. Oil was formed by trapped decaying organic material in the deep underground. The "Bakken formation"--located in North Dakota, Montana and Saskatchewan--alone contains between 200 and 400 billion barrels of oil, albeit mostly embedded in shale rock. Nevertheless, that amount is on a scale, at least in total barrels, comparable to some of the biggest oil fields in Saudi Arabia.

The similarity ends there, though. The Saudi oil production is largely made up of different light sweet crudes, which are the finest grades of oil, prized for their purity and usefulness in liquefying heavier crudes for cracking. The Saudi oil is also close to the surface and practically comes out of the ground by itself. Not so long ago, it cost only about $3 a barrel to extract Saudi crude oil, although this cost has been rising in recent years. The oil in the Bakken formation is not so sweet and no way as easy to extract.

Its presence has been known by geologists for decades. The oil is trapped deep between layers of stone with a chemical composition that makes it hard to drill vertically using current technology. The oil needs to be drilled horizontally at much higher cost. Right now, only about 1 percent of the total estimated reserves of the Bakken formation can be immediately and economically recovered. That still comes out to some 2 to 4 billion barrels of ready oil. The biggest factor affecting the cost of extraction is the depth at which the bulk of the shale is, a few thousand feet below the Earth's surface. Therefore the Bakken formation may not be economically recoverable until and unless the right combination of rising oil prices and declining costs of extraction meet at a sustainable and economically competitive point.

If energy companies have to replace their total production every year and add on 2 to 3 percent in new reserves to keep up with growing energy demand, there's a lot of oil still out there to extract at prices around $60 or $70 a barrel. Exxon, being conservative, can make money in its different projects even when the price is at $40 a barrel. Oil is being found in places such as offshore Brazil. It's not easy to reach. Offshore platforms have to sink a drill over 1,000 feet through water and then grind through another 5,000 feet of rock before they hit oil. But even the high cost of the offshore infrastructure is not as high as what drilling for and processing Bakken formation oil would cost.

Other locations offshore have been identified in Vietnam, Bangladesh, Nigeria and Somalia. In the United States, exploration by law is limited to only a part of the Gulf of Mexico. Alaska probably has some serious offshore oil deposits that may be in league with the North Slope formation.

Onshore in the United States the bulk of easy oil is largely gone. It was first found in Pennsylvania, then Texas, then pretty much all over. What remains in the lower 48 is the oil trapped in places that make its current recovery economically daunting.

Yet, one place in North America where another trillion or so of oil barrels is waiting for continued extraction is in the tar sands of Alberta. That tar sand is on the surface, so there's no need to mine the stuff hundreds or thousands of feet deep, and that helps keep costs down. The oil in tar sand has to be removed by treating it with steam. The water needs are significant, but the process now recycles the water to keep demand in check. Canada has invested billions of dollars to extract oil from tar sand, and has been developing the exploitation for about a half century. The recovered oil, currently about a million barrels a day and growing, is piped down to the United States.

Conventional wisdom holds that buying oil from abroad is making the United States unsafe. But if it is assumed that the nation will be depending on crude oil, this is one case when relying on foreign sources for cheaper energy for the short term actually makes the United States safer.

Right now, the United States imports about 60 percent of its crude oil consumption and produces domestically the remaining 40 percent. It is a sensible and favorable balance. Contrary to the strident rhetoric of the past presidential election, the United States is not buying the bulk of $700 billion a year in oil from unfriendly countries. The truth is both simpler and more complex. U.S. total oil imports from Canada are greater than those from Saudi Arabia and Venezuela combined. The U.S. trade deficit with its four largest foreign oil suppliers (Canada, Saudi Arabia, Mexico, and Venezuela) which collectively supply 60 percent of U.S. imports, is still 20 percent smaller than the trade deficit with China, from whom the United States does not buy a single drop of oil. That trade deficit with China has translated into that country holding more than 20 percent of U.S. treasury debt.

Meanwhile, Russia is focused on pumping itself out of oil and natural gas as fast as it can to raise cash. The head of OPEC was invited to Moscow last October ostensibly for Russia to consider membership in OPEC. Moscow wanted to scold the head of OPEC into having Saudi Arabia and other OPEC members respect their targets. The OPEC head countered that Saudi overproduction was keeping the cost of oil low so as to help Western economies endure the current global meltdown. The Saudi strategy was costing Russia billions of dollars in oil revenues.

Therefore, the real problem for the United States is not with the energy exporting nations, but with China. China currently holds almost a trillion dollars in U.S. securities--$700 billion in treasury bills alone.

It's not by coincidence when a few months ago Moscow called for replacing the sinking U.S. dollar with a substitute international reserve currency that the world markets yawned.

But when Beijing called for investigating just such a strategy the world markets snapped to attention and some major holders started dumping millions of dollars that same day. When U.S. Treasury Secretary Timothy Geithner at a conference conducted by the Council on Foreign Relations claimed the United States didn't reject the Chinese proposal outright, that same morning the dollar was aggressively dumped until he later returned and corrected himself.

What China is doing is using its immense U.S. dollar reserves to go around the world and not just snap up oil, gas and coal leases at bargain basement prices, it is lending that money to foreign energy companies to explore and drill for new energy sources, now that banks aren't lending. China just lent billions to a Brazilian company to develop new offshore oil fields.

Eventually, China will have to face the fact that the easy and cheap oil is no longer available and it will have to pay more for what it can get. While China and the United States are both net importers of energy, and Russia a net exporter, unlike the United States, China doesn't have its own Bakken formation. It only has coal reserves.

When Russia, Iran, the Gulf states, and others run out of the comparatively easy and cheap oil to export, China and others will have to pay a lot more for their oil imports from those or other countries, while the United States will still be sitting on a veritable wealth of oil reserves that will continue to move more and more into the economically recoverable brackets as the price creeps up.

This assumes that the United States hasn't effectively banned oil after agreeing to detrimental terms under any new international treaty or domestic regulatory regimes.

The United States can and should pursue environmentally safer energy technologies, develop clean coal and less polluting and more efficient gasoline and diesel hybrid vehicles, as well as solar and wind where it makes economic sense. The "economically recoverable" rule also applies to all the solar and wind that it makes sense to exploit. But it should not be done out of fear, confusion or shame.

The United States is the world's dominant economy and military power in part precisely because it learned how to make energy cheap and plentiful.

John M. Manoyan is a chemical engineer, nuclear physicist and is now an investment advisor in San Francisco. Michael G. Frodl is a tax attorney and co-founder of the Forum for Environmental Law, Science, Engineering and Finance. Their personal views do not represent those of FELSEE Manoyan can be reached at and Frodl at


Source Citation
Manoyan, John M., and Michael G. Frodl. "Where's the oil? How trade, deficits, strategic petroleum reserves affect U.S. national security." National Defense 95.668 (2009): 16+. Academic OneFile. Web. 29 Jan. 2010. .

Gale Document Number:A203539054

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