Politics

Drill Here, Drill Now, Pay Later

My post today is going to talk about oil. My truck loves oil, well gasoline anyway, it guzzles it like it’s going out of style.

Doing something about the price of oil basically comes down to two kinds of strategies. The first strategy is getting us off of oil. This in my opinion is the best strategy but it’s something that will take many years if not decades. The second strategy is to make oil cheaper. This is, at best, short-term and therefore the one most politicians like to talk about.

The first strategy, Long-Term Strategy, usually involves all kinds of nebulous, conceptual plans about exploring alternative energy sources, such as, wind, solar or nuclear and includes creating alternative fuel infrastructures. They often entail a “manhattan project-style” focus and investment from the top-down, governmental-level and usually involve some level of personal-behavior changes, such as recycling, more energy-efficient appliances and switching to CFL light bulbs. I think this is a very well thought out plan but would require a major push from the top down, it’s Scientific American’s Solar Grand Plan.

While I personally think these long-term plans are all necessary they won’t ever happen if the price of oil is low and (consequently) gasoline sits at $2 or $3 per gallon. The costs of these alternatives are simply too high to compete with cheap, energy-dense gasoline. It just won’t happen. History tells us it won’t happen. During the oil crisis of the 70’s the cost of gasoline was higher (quadrupled in price in just few months) and it’s availability was less (sharp decline in production) than it is today and yet where are all of the alternative fuels? There was no push then and there will be no push now. The nature of the Long-Term Strategy is just not politically expedient and the fuel shortages and high prices just didn’t last long enough. They were a hiccup.

I know that’s kind of downer to think about but let me give you a little hope. If the high cost of gasoline remains high and will likely remain so for the foreseeable future, if not forever, then and only then will the Long-Term Strategy look more and more appealing and may actually gain some political ground. In my mind, the only way that I can see the Long-Term Strategy ever happening is to have gas remain at $4, $5 or $6 a gallon. Maybe hope isn’t the right word, but you get my point.

The second strategy, Short-Term Strategy, is to try and alter the price of a barrel of oil or directly affect the price of a gallon of gas immediately. These kinds of strategies are the most politically expedient and will almost certainly make no difference in the long run. An example of this strategy you see today is McCain’s suspend-the-gas-tax-for-three-months strategy. Politically-expedient, pathetically-pandering and ineffectual to say the least. In 2000, The great state of Indiana suspended the state gas tax when gasoline was a horrific $1.75 a gallon. It did nothing then and has had no effect whatsoever (maybe except contributing to $30 million dollars worth of a budget shortfall from lost tax revenue). So let’s check my arbitrary list. Politically-expedient, check. Pathetically-pandering (I won’t mention this was all done in the summer and fall run ups to the 2000 election cycle), check. And ineffectual, what’s the price of gasoline today?, check.

I don’t want to create the impression that I am drawing some kind of false dichotomy. Many groups propose a combination of the above strategies. However, you can often tell when their strategy is a short-term one when the long-term elements are often nothing much more than lip service and vice versa.

That brings me to the reason for this post. There is a new strategy being touted by the one and only Newt Gingrich. His organization, American Solutions, has a new campaign called Drill Here, Drill Now, Pay Less.

Here’s a YouTtube of Gingrich giving a speech on this very topic,

“The 3 things you could do immediately that would dramatically lower the cost of oil…”

1) The first thing Gingrich proposes is that President Bush immediately release oil from our strategic oil reserves. The purpose of this strategy is directly impact the price of a barrel of oil, short-term, by punishing oil speculators. The theory goes that if you release this oil and flood the market with supply and since our demand for oil remains relatively steady there will be a correlating drop in price. This also has the very sweet taste of revenge added in because many oil futures speculators will lose their shirts, having bet that prices will continue to rise.

I’d like to make one minor point and that is if we decide to release 50% of our oil reserves we will only be able to release 4.4 million barrels a day of oil onto the market for a maximum of 80 days. To put this into little bit of perspective, the U.S. consumes 21 million barrels of oil a day. I don’t know what the impact of this release will do to actual gasoline prices and I dare say no one knows for sure either, although I’m sure someone could come up with a more reasonable prediction, it looks like for something shy of 3 months we will be able to increase total oil on the market by 20%. The impact of this exercise in reality is that it will have no effect to our over-time steady supply of oil. This will only create a temporary dip in the price of gasoline, at best, and at worst it will eliminate half of our strategic oil reserves since we aren’t sending anymore oil into the oil reserves. It will however severely hurt anybody with oil futures that come due during this short-lived time of lower price per oil barrel. Of course, punishing oil futures speculators is exactly Gingrich’s point.

Here’s where I have a major problem with this strategy in principle. The purpose of our government in regulating equities markets is to create trustworthy and transparent markets. The regulations that went into effect after the Great Crash of 1929 in the U.S. effectively created the modern regulatory institution of the SEC whose purpose was to ensure that our markets could be relied upon. There are reams of regulations dedicated to preventing or at least making it very difficult to execute a mass “pump and dump” scheme on the markets, therefore, liquidating peoples money and creating turbulence in the marketplace.

What Mr. Conservative, lassez-faire Republican Newt Gingrich wants to do is to artificially “dump” on the markets. What ever happened to the free market, sport? Talk about the worst kind of market tampering. Another case of political ideology trumping the lip service this guy pays to “conservative principles”. The funny thing is you get all kinds of people who decry any kind of regulation of the markets and at the same time they actually support this guy.

2) The second thing he mentions is looking where the oil is. He mentions Rocky mountain shale oil, drilling in Northern Alaska and drilling for oil in the Gulf. What Mr. Gingrich fails to mention is the environmental damage that shale oil requires. If you didn’t know shale oil requires that you take a “reserve”, dig out the shale and suck out all of the oil. Whole mountains are dug up to do this. Drilling for oil also has major environmental issues which is precisely why it is illegal to do so. Because if Brazil screws up an oil rig in the Atlantic the environmental impact affects more than just Brazil. I’m not sure Gingrich is aware but our oceans are all connected. I have actually been in Florida swimming at a beach that had globs of oil in the water from a recent “oops” on an oil rig. There are reasons this activity is not allowed.

The other thing to notice is that he bills this as an immediate solution. The exploration, drilling and start-up time for a new drilling site, even if approval and permits were in place today, takes years before the first barrel is shipped to a refinery which takes additional time to refine into gasoline before it goes to market. His “immediate” solution years if not upwards of a decade.

I do want to bring your attention to the total lack of information citing any negative effects that drilling has. According to Newt, there’s no reason we shouldn’t be doing this. Psst, notice the name of the campaign.

3) The third “immediate” thing we could do is “maximize alternative fuel sources” and speaks very clearly and correctly about what we can do with nuclear power and a switch to an hydrogen economy. I support that one hundred percent but I question how Gingrich’s plan will accomplish this. Again, immediate seems to be a relative-term. Does anybody know how long it takes a nuclear power plant to come online? The Canadians have managed to build and bring online a nuclear reactor in 6 1/2 years, however in the U.S. more reasonable estimates have been coming in at 10-15 years from start to finish.

This perhaps reveals my bias against Gingrich but his third point is little more than lip service to a long-term strategy. I can, however, say this with a clear conscience because his campaign is not called Nuclear Here, Nuclear Now, Pay Less. No, his plan is called Drill Here, Drill Now, Pay Less.

Seriously his simple 3 point plan comes down to a lobbying effort to get us to drill in the Gulf coast and in the ANWR region of Alaska. Period. He knows that no President is going to funk with the markets by dumping oil from the strategic oil reserves. There’s just simply not enough oil to have any real impact beyond punishing speculators in the short-term. He knows no President would want to show how little our strategic oil reserves actually contain and that it isn’t much more than a PR campaign.

Gingrich also knows that nuclear is not an immediate solution to anything. It simply takes too long for nuclear power plants to go live to have any impact “immediately”. Turning garbage to gas? “More fuel-efficient” vehicles? Please. This comes off as nothing more than a hand-waving exercise.

To further drive home my point, here is follow-up video from Gingrich,

Please note that of the three points he mentions earlier he chooses to reiterate that you can “speak out about the need for higher production and lower prices” (Item #2 above)  and that we should call our Senators and tell them that we want them to “follow a policy of drilling here, drilling now, so that we can all pay less” (again, Item #2). To further his point he then speaks about the two new oil reserves that Brazil has found and that, by the way, Brazil is energy independent. He wants us to talk to our congressman about shale oil strip-mining, drilling off our coasts and in Alaska. (Again, Item #2)

To end his follow-up he warns us about the new Warner-Lieberman bill that would raise gas prices. This evil about to be perpetrated on the people is an attempt to cut green-house gas emissions by 65% of 2005 levels by the year 2050. Of course, Gingrich has a problem with this since he doesn’t accept the science behind Global Climate Changes. In addition, the rise in gas prices he cites is likely attributed to a study underwritten by the National Petrochemical and Refiners Association. Will this bill likely raise gas prices? Probably, however I would like to see a study performed by a disinterested party. By the way, the study said that this bill would increase gasoline prices by .48/gallon, by 2034.  I’m pretty sure I’ve seen gas go up about a $1 in just the last 16 months from good old supply and demand economics.

To sum it all up. The arguments are inconsistent internally by containing pathetic market tampering vs. Gingrich’s long held conservative free market rhetoric. The purpose of this campaign is to open drilling in the ANWR region and elsewhere, despite the smoke and mirrors of the “maximize” alternative fuel sources bullet point. And I think Gingrich’s follow-up pretty much confirms my point. And his plan offers a long-term strategy for gaining energy independence only if we produce and refine oil here. This does nothing to switch us to the ultimate in energy independence, renewable energy. We’ve only shifted our reliance on a finite supply of energy from one place to another that will not “benefit” us for another decade.

I remain skeptical Mr. Gingrich.

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