The House of Representatives has embraced the much-debated energy bill, or as it’s known formally in the hallowed halls of Congress, H.R. 6. But don’t hold your breath that this creation of politicians will provide delivery into the promised land of energy independence or affordable prices for oil and its byproducts. H.R. 6 is legislation, not divine intervention, and as legislation goes, it leaves more than a few things to be desired.

Sure, the bill opens the door for drilling in the Arctic National Wildlife Refuge (ANWR) in Alaska. If the Senate gives the green light to the legislation—a big “if”–America will have access to oil that was formerly off limits. But how much oil are we talking about? A middle-of-the-road estimate is around 10 billion barrels, according to the Energy Department.
Make no mistake, 10 billion barrels is nothing to sneeze at. What’s more, the American economy needs it, to judge by the line of SUVs at the local gas station. Until and if we have a viable, economically reasonable source of alternative fuel arriving on the scene, the United States is looking at an oily future, like it or not.
Meanwhile, conservation warrants a role, and the country needs to do more of it. But let’s be clear about the limits of conservation: as a practical matter there are limits, starting on the political and social fronts. Translated, few politicians want to push too hard to compel Joe Sixpack to turn down the thermostat and drive a smaller car. Joe, being an American, is only too happy to go along with Washington’s policy of Don’t Ask, Keep Driving. Jimmy Carter, you may recall, tried that, and look where it got him. No wonder there’s not a lot of politicians running around in cardigan sweaters yelling, “Drive less, turn off the heat, and save America from doom.” That’s not a message that resonates with the American public. Of course, if and when oil reached $100 a barrel, maybe the resonance would be a bit more compelling.
In any case, saving energy isn’t the same thing as producing it. Or, as House Resources Committee Chairman Richard Pombo says, via the San Francisco Chronicle, “We cannot conserve our way out of an empty tank of gas.”
Fair enough, but neither can we pump our way out of the current energy challenge with ANWR. The United States is now consuming 20 million barrels a day, if not more. At that rate of consumption, ANWR would be depleted in about a year and a half. In practice, of course, ANWR’s supply will take years if not decades to fully deplete because the U.S. has multiple sources of supply.
In fact, it’s those multiple sources that are at once the current solution and the long-term burden. A solution because the growing share of foreign imports of oil provide energy that is otherwise lacking in domestic supply; a burden because a variety of geopolitical and geological trends threaten to complicate the business of importing oil as the years go by.
Neil McMahon, the oil analyst in residence in the London office of Sanford C. Bernstein Ltd., puts his rhetorical finger on the core challenge for the global economy in a research note yesterday by wondering where additional global supply will come from in the years ahead. The focus of late has generally been on demand, and how all the usual suspects are sparing no expense to slake their respective oily thirsts. But demand must be met with supply, or so one hopes.
No matter how you slice it, China is front and center on the subject. As it happens, the world’s most populous country with an economy to match just happened to report that it’s oil imports rose dramatically in March by 23%, according to ChinaView.com.
Who can satisfy a 23% rise in oil demand? The answer, increasingly, is Opec. Non-Opec oil, by contrast, threatens to suffer diminishing status in relative and absolute terms. “Ever since crude prices hit $30/bbl in 2003,” writes McMahon and his team, “most have presumed that higher prices would be a sufficient market signal for producers to increase supply and act as the natural mechanism to bring prices lower. However, even now at $50/bbl pricing, all evidence suggests that, outside of OPEC and the FSU [former Soviet Union], no supply response from the oil industry heartlands has been forthcoming.”
McMahon charges that the International Energy Agency and others have been “overestimating the supply response to oil prices above $40/bbl….” In fact, the IEA may be on track to overestimate to the tune of 500,000 barrels a day, or about half of the expected growth in global supply for 2005.
The problem is that bringing large quantities of new, non-Opec supply on line is difficult and expensive. It also takes time. Exactly how much and how soon, if every, any new, non-Opec supply will find its way into the economies of consuming nations is debatable. But for the moment there’s full transparency in the fact that this silver bullet isn’t forthcoming. Even high prices don’t seem to coaxing non-Opec supply increases, Bernstein observes. Even at $50 a barrel, non-Opec supply increases (excluding the former Soviet Union) are notable by their absence. What’s more, that’s atypical. In the past, high prices have brought new non-Opec supply on line. This time around, nada. Based on the past dozen years of oil history, the current absence of new non-Opec supply hikes “marks a distinct departure from historic price/supply relationships.”
That leaves Opec in the driver’s seat, a status that’s geologically preordained for the cartel. But even Opec won’t be able to flip a switch and materially raise output any time soon. In support of that fact, Saudi Arabia, which claims the world’s biggest oil reserves and the most spare capacity at the moment, has announced plans to double its investment in energy development in the next five years to $50 billion, according to the Wall Street Journal (subscription required).
Indeed, the game has changed for Saudi Arabia in that the kingdom has scrapped the illusion of sticking to Opec’s oil production quotas. Rather, the new rule is sell every barrel of oil that you can get your hands on. The age of subtlety in oil diplomacy is over.
Let’s call it the fallout from the realization that Saudi Arabia’s current production ceiling, said to be around 11 million barrels a day, will be woefully insufficient in just a few years, if it isn’t already.
Meanwhile, inquiring minds want to know what $50 billion of new investment will buy in the way of increased output from the kingdom. The Journal cites no less an authority than Ali Naimi, Saudi Arabia’s oil minister, who projects that his country’s production will rise to 12.5 million barrels a day by 2009, or about 25% higher than current levels.
But 2009 is a long way off, all the more so when you learn that China’s on track to import the equivalent of an entire ANWR in 15 years at the most.
Perhaps the Chinese economy will slow, and give the world’s oil producers time to catch up. Then again, perhaps not. China’s GDP expanded at an unexpectedly strong 9.5% in the first quarter. To quote Agence France-Presse via Taiwan News, “China’s runaway economy showed no signs of slowing in the first quarter….”