March 20, 2012

Our Glorious Ocean of Hydrocarbons

A FRIEND OF MINE recently posted on Facebook this story from Investor's Business Daily detailing the United States' oil reserves, which may in fact be much larger than originally thought. Far from only having 22 billion barrels of proven reserves, IBD's John Merline reports the United States has as much as 400 billion barrels of oil recoverable using present technology, and theoretically much more beyond that.

Now, I don't know about you, but when I hear that, it makes me think that we're sitting on top of a glorious ocean of hydrocarbons, just waiting to be exploited and put to good use. We already know, of course, that we have vast amounts of natural gas available to us -- so much gas, in fact, that the price has fallen to roughly $2 per million BTU and our producers are routinely "flaring" the stuff -- that is, burning the excess that can't be transported or otherwise used. So if we've already let the horse out of the barn when it comes to natural gas, why not do the same with oil production?

I mean, if you consider the tradeoffs inherent to this equation, you've got the environment and global warming concerns (1) on the one hand, and an amazing -- incredible -- unbelievable sum of money on the other (2). So to me, it's worth considering whether what could be done with all that money outweighs any environment problems that may result. You know, perform a cost-benefit analysis.

Now, if we use that 400 billion barrel figure mentioned above, that's roughly $42.8 trillion worth of oil at today's prices. Leaving aside the economic impact of all that oil for a moment, we could do a lot with $42.8 trillion.

Of course, part of the reason to pursue this idea is that oil prices will fall as a result. This is important, considering oil acts as a lubricant for the engine of our economy. Lower oil prices mean lower input costs. Lower input costs mean lower prices and greater profits. Lower prices and greater profits means more prosperity. It especially means more prosperity for regular working people, whom all our politicians and talking heads have forgotten about over the past decade or so. But you may rest assured they are still out there, slogging away.

You see, there are plenty of people out there for whom the New Economy isn't really working out. They may not have the skills or the education to knowledgeably design a bridge or program a computer -- and for some, going back to school to gain that education isn't a realistic prospect -- but they sure know how to do a lot in terms of the strong-back, heavy-labor tough stuff associated with oil production. In oil-rich North Dakota, where unemployment is at 3% and a truck driver for an oil producer can make upwards of $100,000 per year, regular working people are making out like bandits and presumably having a great time doing so. There's no reason why we shouldn't make these opportunities available to as many people as we can.

Additionally, it stands to reason that of those trillions of dollars, a heck of a lot of it will go to the Government in tax revenues -- from the workers themselves, who will be making money hand over fist, and from the companies producing the oil, which will be making money hand over fist. Imagine what could be done with that money. It's entirely possible we might be able to afford all the programs we currently have without having to borrow money to pay for them. For that matter, we might even be able to afford new programs that could provide great benefits to the people making use of them.

Imagine if the oil we produced let college students pursue their studies without having to shoulder immense student loan debts. Imagine if it provided health care for millions of people who couldn't otherwise afford it. Imagine if it meant we could lower tax rates for everyone. The possibilities are endless -- and it's not as if we have any good reason to wait.

The only possible reason that makes sense for not exploiting the oil, of course, is that it leaves us the last man standing when everyone else runs out. But even that's taking long-term thinking to an irrational extreme, because a) as Keynes famously said, in the long run, we are all dead; and b) as economics students know, we will never actually run out of oil, because people will quit using the stuff once better alternatives become available. (It's the old college-economics analogy about being stuck in a room stocked full of pistachio nuts; I forget who came up with it. Anyway, the idea is you're never going to crack all of the pistachios, because eventually you'll give up searching for the nuts amongst the growing, and eventually giant, number of discarded shells).

Of course, if there are better alternatives available, we should keep researching them -- they might come in handy someday, and it will keep our scientists at work. (Even oil may prove inferior to an engine powered by a thorium laser). But at the same time, we shouldn't go searching through the couch cushions for loose change when we've got a crisp $100 bill sitting on the kitchen table, either.

One final point to mention regarding the environmental aspects of oil production, which seems to be a major driver in terms of opposition to looking for more oil. Aside from the fact oil production today is necessarily much cleaner than it was 40 or 50 years ago (and do you think BP wanted to pay $20 billion to clean up its spill in the Gulf?), it's worth noting where the oil itself would be produced. Our major deposits are located in Montana, Wyoming, and western North Dakota, and it is there that much of the expected surplus would be wrung out of the ground.

Folks, I don't know about you, but I don't have any plans to visit Wyoming, Montana, or western North Dakota anytime soon. (Nor do I plan to visit Alaska's North Slope). It's one thing to be upset if an oil refinery will be built next to your house; it's another thing entirely to be upset because someone's building an oil refinery 1,500 miles away, in a state where you don't live, have no plans to visit and wouldn't even think about except for the fact some activist acquaintance posted about it on social media. If people in these locales are willing to drill for oil, we should not only let them, we should encourage them -- because we'll reap the benefits for their sacrifice.

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1. I have to say that all this concern over global warming doesn't make sense to me. The last time we had a warm period, the Vikings had self-sustaining colonies in Greenland. Greenland, for God's sake. To be more precise, though, there's nothing to indicate the costs of global warming would outweigh its benefits -- and that's the key issue for me (and other people who are blasted as "climate change deniers"). The benefits include longer growing seasons, lower food prices, less hunger and less world instability. Also, shipping and resource exploitation will become easier, particularly near the poles. With those things as the result, we should welcome global warming with open arms, not waste trillions of dollars in a futile attempt to stop it.

Unfortunately, however, I don't think we'll be so lucky. I subscribe to The Twilight Zone theory of global warming, which is based on an old episode of the show ("The Midnight Sun"). This theory stipulates that everyone calling for drastic action to stop global warming will find, in something of a twist ending, that we're actually in for a severe bout of global cooling. I base that on solar cycle theory regarding global temperature patterns (i.e., it's the Sun wot does it), known past history regarding said patterns (e.g., the Maunder Minimum), and associated research, particularly out of Russia -- the last place that wants any global cooling to happen.

As one might expect, the costs associated with global cooling would be significant -- and would lead to shorter growing seasons, higher food prices, more hunger and perhaps famine in less-developed parts of the world, and greater world instability.

2. It's worth noting the $42.8 trillion figure is a low estimate for the value of the oil, as there may be as many as three trillion barrels of oil to exploit. Based on some back-of-the-envelope calculations, that would provide us with enough money to ensure every household in America had a solid gold toilet.

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Yeah, So I've Been Busy These Last Two Years

I HAVEN'T POSTED since December 2010? God. It's amazing what a new profession and graduate school training does to a guy. Anyway, I'm hoping to devote time again to the blog in the near future, because there's so much I would like to write about, but I haven't had the time or the energy to pursue it. But let's see if I can't change that!

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