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Will domestic drilling decrease prices?

By ROSALIE WESTENSKOW, UPI Correspondent   |   May 23, 2008 at 6:11 PM
THE DALLES, Ore., May 23 (UPI) -- A day after oil prices topped $130 a barrel for the first time in history, U.S. lawmakers debated Thursday whether increased production at home would lower prices at the pump.

In an effort to ease the burden on consumers as gasoline prices reach record highs of $4 a gallon, Congress passed a measure last week demanding that the administration stop pulling oil off the market to fill the Strategic Petroleum Reserve. The same day, though, the Senate rejected legislation that would have opened up areas in the Outer Continental Shelf and the Arctic National Wildlife Refuge for oil drilling.

Republicans, such as Rep. Dan Burton, R-Ind., say the vote was a mistake because supply is directly tied to price. The only way the United States can affect supply is to increase domestic production, proponents of drilling argue, particularly after President Bush's request last week that Saudi Arabia release more oil onto the market resulted in only a small increase of 300,000 barrels per day.

"We have enough oil in this country to make ourselves almost energy-independent, and not one person has mentioned it," Burton said Thursday at a hearing on oil prices and national security in the House Foreign Affairs Committee. "We have to look at the realities of today, and the reality today is that we have untapped reserves that need to be drilled."

The United States currently produces 5 million barrels of oil a day and consumes 21 million barrels. According to the Energy Information Agency, the country had 21 billion barrels of crude oil in proven reserves at the end of 2006.

This represents a paltry 3 percent of total world oil reserves, Sen. Jeff Bingaman, D-N.M., said last week in a speech on the Senate floor opposing the initiative to allow more domestic drilling.

"So if we want to affect the price of oil … by increasing world supply, our ability to do so is limited," Bingaman said.

Even if the United States produced all the oil in its reserves, the power of the Organization of Petroleum Exporting Countries to alter production rates makes it impossible for Americans to change the amount on the market, said Anne Korin, co-director of the Institute for the Analysis of Global Security, a non-profit think tank that focuses on energy security.

"We drill more, they'll drill less," she told representatives at Thursday's hearing. "It will not affect supply. … We'll reduce our reserves, and prices will not go down."

OPEC has routinely limited supplies to increase prices in the past, Korin said, and continues to do so.

"OPEC, spearheaded by Saudi Arabia, is deliberately keeping oil supply tight to prop up prices," she said. "While non-OPEC production has doubled over the last 30 years … OPEC production today is virtually identical to its production 30 years ago, even as the global economy has grown and with it demand for oil."

In addition, OPEC has effectively removed 2.4 million barrels of oil per day from the market, Korin said. In 2007 Angola and Ecuador, which collectively produce 2.4 million bpd, joined the group. However, OPEC's overall production stayed the same, as other members decreased their production by the equivalent of the two new countries' contribution.

But some lawmakers aren't convinced.

"I do reject the idea that simply because we produce more, they'll produce less," said Rep. Dana Rohrabacher, R-Calif.

The country also has additional oil reserves that are not included in traditional estimates, which could change the equation, said Rep. Mike Pence, R-Ind.

The United States has the world's largest known deposit of oil shale -- rock containing petroleum-like liquids -- largely on federal lands in Utah, Wyoming and Colorado. These rocks contain an estimated 1.23 trillion barrels of oil, according to the federal Bureau of Land Management, a section of the U.S. Department of the Interior.

"On what basis do we dismiss 110 years of (oil supply in) potential oil shale reserves?" Pence asked the witnesses at Thursday's hearing.

Several companies are trying to develop the resource, but it is more difficult to produce oil from shale than traditional reserves. The rock must be mined, crushed and heated, and then the resulting liquid has to be separated and collected. Despite these difficulties, the real obstacle preventing development lies in government regulations and opposition from environmentalists, said Jim Hansen, consultant for the Oil Shale Exploration Co., an Alabama-based company that hopes to produce oil from shale deposits in Utah.

"There are tons of regulations," said Hansen, a former U.S. congressman from Utah. "Just to cut the weeds, they want an environmental impact statement. And every time we get a permit, someone challenges it."

At a time of rising oil prices, Hansen said he doesn't understand why Congress and the rest of the country haven't welcomed the new technology.

"We feel we can produce it for about $52 per barrel," he told United Press International.

But that doesn't mean it will cost that much to buy the oil.

"We're not going to turn around and sell it for that," Hansen said. "We have to make a profit."

In the end, the problem is that U.S. policymakers often start with the supply side of the issue, instead of demand, said Joe Stanislaw, chief executive officer of The JAStanislaw Group, an advisory firm for investment in energy and technology.

"For example, if we in the United States had the average fuel economy of European cars, we could decrease our oil consumption between 2 million and 3 million barrels a day," Stanislaw told UPI.

High oil prices may turn out to have one positive effect as they spur Americans to finally change their energy consumption habits, Stanislaw said.

"We have a challenge on our hands," he said. "Why not see it as an opportunity to begin to change the thought process of Americans in relation to how we use energy?"

© 2008 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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