The Gulf Economic Survival Team, a group of energy and business interests based largely in Louisiana,  had IHS Global Insight and IHS CERA study the impact of faster permitting of oil leases on offshore oil production and the economies of the United States and affected states.[ii] They determined that increased exploration and permitting approval in 2012 would:

• Create 230,000 U.S. jobs
• Increase U.S. GDP by more than $44 billion
• Increase tax and royalty revenues for state and federal treasuries by almost $12 billion
• Increase oil production by more than 400,000 barrels per day (150 million barrels per year)
• Reduce U.S. payments for oil imports by about $15 billion.

Other findings are:

• Almost twice the number of exploration and development plans are pending from the Department of Interior compared to pre-moratorium levels
• Approvals of exploration plans have decreased by 85 percent.
• The median number of days for approving an exploration plan has increased from 36 days to 131 days.

Further, ten oil rigs have left the Gulf of Mexico since the moratorium for more lucrative areas offshore in Egypt, Congo, French Guiana, Liberia, Nigeria, and Brazil.[iii] Although federal officials announced they were lifting the restrictions last October on a moratorium put in place in May 2011, a “de-facto moratorium” remains in effect that lowers oil and natural gas production and impacts businesses in the Gulf region.

The IHS Global Insight and IHS CERA Study

This study evaluated the pace of permitting offshore leases in the Gulf of Mexico by the Bureau of Ocean Management, Regulation and Enforcement (BOMRE), an organization in the Department of Interior. The period of review was from the end of the moratorium on offshore drilling by the Obama Administration in October 2010 until April 30, 2011, 6 months of data. They found that the number of pending exploration and development plans submitted to BOEMRE that have not received final action has increased by almost 90 percent from historical levels. The median number of days a plan is pending approval has increased from 36 days to 131 days. They also found that exploration and development plan approvals are down by more than 85 percent and approvals of drill permits covered by those plans are down by almost 65 percent. The slower pace of approvals will make other investment opportunities more advantageous for the industries involved. Already ten rigs have left the area for opportunities in other areas of the world.

After the spill and the reorganization of the Minerals Management Service into BOMRE, new safety and environmental rules were issued, probably causing a slowdown to both the number of applications and to the approval process.  This study, however, did not determine the causes for the slowdown nor what actions should be taken to fix it. Rather the study evaluated the impact of approving permits faster and reducing the backlog of the permits currently in the pipeline, finding that employment and tax royalty revenues would increase and energy security would improve from the increased production. The results of their analysis are shown in the table below.

Employment would not only increase in the Gulf States, but in states such as Florida, Georgia, California, Illinois, and Pennsylvania. Louisiana’s potential increased revenues of $1.3 billion would cut its budget shortfall by more than 80 percent. The state results are provided below.

The report’s message is that the output of BOEMRE in regard to regulatory oversight and responsiveness should be aligned with the level of investment that oil companies are willing to make in the Gulf. For instance, in June, Exxon Mobil announced a new discovery in the Keathley Canyon area of the Gulf with recoverable oil estimated at 700 million barrels and Shell announced plans to invest $2.5 billion in its Cardamon field in the Gulf.[iv]  Just the royalty to the federal treasury from Exxon’s find at today’s oil price is more than $13 billion.

It generally takes seven to ten years from exploration and development to initial production. And not all drilling activity results in oil production. Generally, only one in seven wells will result in economically viable reserves. So, in order to keep production at or above current levels, it is crucial for exploration to continue at historic rates.

Government’s Expectation of Offshore Oil Production

The Energy Information Administration (EIA) forecasts oil production over the next two years in its Short Term Energy Outlook, which it releases each month. In its latest outlook, the EIA is predicting that offshore oil production in the Gulf of Mexico will fall from 1.7 million barrels per day in January 2010 to 1.34 million barrels per day in December 2012, a drop of 360,000 barrels per day.[v] Prior to the Deep Water Horizon accident and the Obama Administration moratorium, the EIA was forecasting fairly robust oil production from the Gulf at levels averaging 1.7 million barrels a day in 2010 and 2011. Now, the 2011 forecast for offshore oil production from the Gulf of Mexico is reduced to about 1.5 million barrels per day.[vi] Note that the end of the forecast horizon in EIA’s April 2010 Short-Term Energy Outlook was 2011, so comparisons regarding the 2012 offshore oil production numbers cannot be made from a prior forecast.

Conclusion

Studies are showing that we are losing oil production from the Gulf of Mexico from the Obama Administration’s moratorium and its continuing slowness in approving permits or a “permitorium”. The study by IHS Global Insight and IHS CERA is indicating that there are great economic gains to be reaped if the Administration speeds up their slow permit process.  But, the reality is that a slowdown is occurring with the resultant impact of less employment, less government tax revenues, less oil production, and less energy security.

A recent study estimated that in 2009, the development of the Marcellus Shale created 44,000 jobs in Pennsylvania; added $389 million in state and local revenue; over $1 billion in federal tax revenue; and almost $4 billion in value added to the state’s economy.  These economic gains were realized in just one state, whereas shale plays and basins can be found throughout many of the lower 48 states.

Despite revolutionizing the production of natural gas, some Members of Congress such as Colorado Congresswoman Diana DeGette are waging war against hydraulic fracturing, or “fracking”—the extraction technique that is enabling Poland and the U.S. to access greater amounts of shale gas trapped in tight underground formations. In her attacks on natural gas and fracking, DeGette hides behind the alleged dangers of natural gas production. She says that “natural gas is an important economic driver and a significant bridge fuel – particularly for Colorado – but we must ensure the process for extracting is done safely and responsibly.”

DeGette neglects to mention that two studies conducted by the Environmental Protection Agency (EPA) and the Ground Water Protection Council (the national association of state ground water and underground injection agencies whose mission is to promote the protection and conservation of ground water) found that there have been no confirmed incidents of groundwater contamination from hydraulic fracturing. Given this compelling evidence, we have to wonder what additional studies would convince DeGette and her allies that natural gas production is safe.

Americans can only hope that President Obama will not only learn how to polka in Poland, but will also the benefits of increasing natural gas production through the use of hydraulic fracturing.

Written Testimony of

Robert P. Murphy, Institute for Energy Research

Before the Subcommittee on Regulatory Affairs, Stimulus Oversight, and Government Spending

On the Matter of

“How Federal Reserve Policies Add to Hard Times at the Pump”

May 25, 2011

1. About IER

The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets.  IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s energy and environmental challenges and, as such, are critical to the well-being of individuals and society.

Founded in 1989 from a predecessor nonprofit organization, IER is a public foundation under Section 501(c)(3) of the Internal Revenue Code and is funded entirely by contributions from individuals, foundations and corporations.  Headquartered in Washington, D.C., IER supports public policies that simultaneously promote the welfare of energy consumers, energy entrepreneurs, and taxpayers.

2. Robert P. Murphy Resumé

Robert Murphy earned his Ph.D. in economics from New York University in 2003.  From 2003 – 2006 he taught economics at Hillsdale College.  After three years teaching, Murphy left academia for the private sector, taking a job with Laffer Investments, headed by Arthur Laffer of “Laffer Curve” fame.  In this capacity, Murphy maintained and improved stock selection models, and also helped write research papers for clients.  One of the Dr. Laffer’s main interests in this period was oil prices.

In the summer of 2007 Murphy joined IER as an economist.  His academic research has focused on climate change economics, specifically the proper discount rate to use when evaluating mitigation policies.  He has also given several public presentations on the oil industry, dealing with such issues as record oil prices, windfall profits taxes, and offshore drilling.  In addition, Murphy has prepared studies for IER dealing with oil and food prices, the effects of ethanol on gasoline prices, and the role of institutional speculation in oil prices. Murphy previously testified (having been invited by Dr. Ron Paul [R-TX]) on the connection between the weakening dollar and oil prices on July 24, 2008.

3. The Causes of High Gasoline Prices

Although gasoline prices are still below the record levels (not adjusting for price inflation) set in the summer of 2008, they have been higher in the early months of 2011 than ever before:

Gasoline prices are driven by a few major factors, as the following chart from the Energy Information Administration (EIA) illustrates:

If policymakers want to reduce prices at the pump, the two most relevant components of gasoline prices are federal and state taxes, as well as the price of crude oil. Federal policymakers clearly have the ability to lower the federal tax of 18.4 cents per gallon, while state officials could lower the respective fuel taxes in their jurisdictions. This would provide immediate relief at the pump, though depending on (what economists call) the relative elasticities of supply and demand, not all of the tax reductions would be passed along to motorists. For a purely illustrative example, even if the 18.4 cents per gallon federal tax were completely eliminated, the price at the pump might only fall by (say) 10 cents per gallon, meaning that retailers would earn an extra 8.4 cents per gallon themselves.

Moving on to the price of crude oil, at first it might seem as if federal policymakers have little influence on a commodity traded in the world markets. However, by expediting the development of offshore and other mineral resources on federal lands, policymakers could signal an increased future output of crude oil which would actually reduce prices even in the present. For example, when President George W. Bush announced in the summer of 2008 that he was ending the executive branch’s moratorium on offshore drilling, the price of oil dropped $9 during the speech itself.[1]

In addition—and of more relevance to this hearing—the Federal Reserve has a tremendous influence on the value of the dollar and the financial markets, and as such may have played a significant role in the sharp run-up in crude oil prices over the last few years.

4. The Federal Reserve’s Role in Rising Crude Oil Prices

After hitting record highs in the summer of 2008, the price of crude oil crashed amidst the financial crisis and slowdown in world economic growth. After hitting a low of $33.87 per barrel on December 19, 2008, the benchmark price of a Cushing oil futures contract had risen to $96.91 by May 17, 2011.[2] The following chart illustrates the wild swings in the oil market:

There are two main routes through which Fed policy could have influenced oil prices (quoted in dollars). First, the Fed could have caused the dollar to depreciate against other currencies. Second, the Fed could have raised the price of oil relative to most other goods and services. In the remainder of this written testimony, I will first lay out the extraordinary interventions of the Federal Reserve in the wake of the financial crisis, and then turn to each of the two possible connections to oil prices.

a) The Extraordinary Interventions of the Federal Reserve

The Federal Reserve has engaged in several extraordinary measures since 2007 to deal with the developing financial crisis. The Federal Reserve Bank of New York has compiled a timeline of these specific interventions.[3] In addition to cutting the federal funds target interest rate to virtually zero, the Fed has expanded its balance sheet by purchasing mortgage-related derivatives and Treasury debt. The following chart of the “monetary base” (a measure of physical currency in circulation plus banks’ electronic deposits with the Fed) indicates the scope of the purchases:

As the above chart indicates, from the creation of the Fed in late 1913 up until September 2008, the monetary base grew by a little more than $932 billion. From September 2008 until the present, the monetary base has grown by an additional $1,595 billion.[4] The Federal Reserve has clearly embarked on unprecedented injections of liquidity into the financial system during the last few years.

b) Dollar Depreciation and Oil Prices (Quoted in USD)

The U.S. dollar’s fortunes have varied during the financial crisis and its aftermath. In the midst of the global panic in the fall of 2008, the dollar strengthened sharply against other currencies, presumably because investors around the world began moving their wealth out of riskier assets and into conservative Treasury debt issued by the U.S. government. (If a foreign investor wants to sell assets denominated in other currencies and buy dollar-denominated assets such as U.S. Treasuries, this will require the other currencies to be sold in order to buy dollars, which in turn will tend to cause the price of a dollar to rise in the other currencies.)

However, as the global financial panic subsided and (presumably) in light of the Fed’s large injections of new dollars into the banking system, the dollar sank back to its pre-crisis levels. The following chart shows a (trade-weighted) index of dollar strength against other major currencies for the last ten years:

Crude oil is traded on a world market. If the dollar falls against another currency, such as the euro, then either the euro-price of oil has to fall, or the dollar-price of oil has to rise, to eliminate arbitrage profits. From its peak in March 2009, the dollar has fallen 17 percent against other major currencies.[5] Therefore, holding everything else constant, the dollar deprecation alone from early 2009 can explain a 20.5 percent increase in oil prices (quoted in dollars).[6] Put differently, the oil price quoted in (say) Japanese yen has not risen as much since early 2009 as it has in U.S. dollars.

It is on the basis of such calculations that a recent Joint Economic Committee report estimated that Federal Reserve policies have added almost 57 cents to the price of a gallon of gasoline for American motorists.[7] However, this calculation assumes that the entire drop in the value of the dollar (relative to other currencies) since the announcement of the first round of “quantitative easing” (in late 2008) has been due to investor concern over U.S. inflation. One could plausibly argue that the retreat from the panic of that period has also led investors to shift some of their wealth away from U.S. Treasury debt and into riskier assets, thus reversing the sharp increase in the exchange value of the dollar that began earlier in September of 2008.

In a sense, both perspectives attribute the fall in the value of the dollar to the actions of the Federal Reserve, but the latter interpretation (that the Fed averted a financial meltdown) is of course less critical than the former (that the Fed debased the dollar). In either case, the JEC estimate of the Fed’s impact on gasoline prices only looks at the direct mechanism of monetary policy’s influence on the exchange value of the dollar relative to other currencies. The JEC analysis does not consider the possible role the Fed has played in pushing up oil and other commodity prices, regardless of the currency in which they are quoted.

c) Commodity Price Surge as Inflation Hedge

In addition to causing oil prices (quoted in dollars) to rise because of a weakening dollar, Federal Reserve policy may also affect oil prices more directly to the extent that it has caused investors to shift some of their wealth into commodities as an “inflation hedge.” For example, since September of 2008, gold and silver prices have increased some 80 percent and 210 percent, respectively.[8] A certain segment of investors and the general public are very concerned about the future purchasing power of the dollar, and have invested in the precious metals to protect themselves from potentially large future price inflation.

More generally, some investors may be turning to other commodities (including oil) thinking that they will provide a relatively safe store of value, in the event that the dollar and other paper currencies weaken in the future. However, although this theory has a surface plausibility, in practice it is difficult to distinguish it from an explanation that oil’s price rise is due to “the fundamentals,” i.e. a genuine growth in end-user demand for oil relative to the increase in output.

If investors in the financial markets were in fact partially responsible for increasing the world price of oil (due to their efforts to protect themselves against currency depreciation), economists would expect to see a “speculative signature” in the form of inventory accumulation. The following diagram illustrates the logic:

As the above diagram indicates, if the actual spot market price were being held above the “fundamental” price, then producers ought to be increasing output while end users (such as oil refiners) would cut back on their purchases. The excess output over current consumption would then go into inventory accumulation.

Through mid-July 2009, there was evidence of a large-scale inventory buildup in crude oil. On July 8, 2009, Paul Krugman wrote that although he thought the run-up in oil in the summer of 2008 had been due to fundamentals, the price rise in the first half of 2009 was associated with bulging inventories in both tankers and conventional storage, suggesting that investor behavior in the futures markets could be partially responsible this time around.[9] However, the trend reversed in the second half of 2009. Looking at the entire period, official U.S. inventories of crude oil and petroleum products as tracked by the EIA as of February 2011 were 36.7 million barrels higher than in December 2008, an increase of a little more than 2 percent.[10] Thus inventories in the United States have grown, but the growth alone is hardly enough to explain the huge increase in the price of oil over the period in question.

Although there is no “smoking gun” in U.S. data, it is important to note that worldwide oil inventories are much harder to estimate. Only the OECD countries provide regular reporting on inventories to energy agencies. A potentially large source of error is China, which has been aggressively building strategic petroleum storage capacity while not being transparent as to exactly how much of its “oil demand” is actually being diverted into stockpiles, rather than being consumed.[11]

Besides storing oil above ground, another mechanism through which the actual market price could be held above the “fundamental” price would be a cutback in production. In effect, the owners of oil fields would be stockpiling inventory out of regular output underground.

The possibility of constrained output leading to the run-up in world price is consistent with the behavior of OPEC nations, as they have kept their official production quotas at the curtailed levels implemented after the global economic slowdown in late 2008, even as the world price recovered from its brief collapse. However, even though OPEC nations have constrained their production, output from other sources has more than compensated for the gap. Overall, estimated total world output of oil in the first quarter of 2011 was the highest ever.[12]

5. Conclusions

The Federal Reserve has engaged in unprecedented interventions in the financial system in the wake of the 2008 financial crisis. To the extent that the Fed’s actions have caused the U.S. dollar to fall against other currencies and led some investors to seek commodities as a hedge against price inflation, the U.S. central bank is partially responsible for the large run-up in oil prices since early 2009.

However, it is very difficult to isolate just how much of the price hike can be explained by Fed policy, versus “fundamental” factors such as the fall in Libyan production and the increasing oil demand from emerging markets. Absent very reliable worldwide data on inventory accumulation, the relative influence of monetary policy versus “real” factors specific to the oil market cannot be precisely quantified.

If policymakers want to lower the price of gasoline for American consumers, they have several options. Most obvious, they could reduce federal and state gasoline taxes. They could also expedite the regulatory and permitting process for the development of offshore and other domestic oil resources. Finally, with respect to the Federal Reserve, to the extent that a tighter monetary policy would strengthen the dollar and reduce investor concern about future price inflation, we would see lower crude oil prices and hence lower gasoline prices. It is notoriously difficult though to estimate the quantitative impacts of these policies, because market prices are influenced by so many different factors.

You can download a PDF of this testimony by clicking here.

Given the nature of the Arctic, there is a small window of opportunity to work and it closed back in February. Now that gas prices average $3.88 a gallon, Americans are starting to wonder why the Obama Administration is actively shutting down domestic oil production.

Our response: it’s all part of the plan.

The Obama Administration has been unusually candid about their desire to increase the cost of energy. In fact, President Obama argued that under his plan, energy prices would necessarily skyrocket, but his cabinet members have been equally frank in the energy debate.

But don’t take my word for it. Energy Secretary Chu argued that, “Somehow we have to figure out how to boost the price of gasoline to the levels in Europe.” Not to be outdone, Secretary Salazar said he would object to new oil drilling if the price of gasoline reached $10 a gallon.

It’s time to end the war on affordable and reliable energy by giving American companies and workers the permits necessary to get back to work. Mr. President, let’s power our economic recovery with American energy.

A country as technologically savvy as ours should not be outperformed by a communist country operating as if it were still 1959.  Cuba announced that this summer they will begin drilling deepwater oil wells with the goal of completing five by 2013.  Back in the United States, the Obama administration has only recently started issuing exploratory permits for offshore drilling and they’re attempting to move away from it as they approach other countries to continue.

Only a month ago President Obama told us, “We can’t drill our way out of this [energy crisis]. We must break our dependence on oil.” Yet in Brazil, a few weeks later, he stated that his administration wants to assist the Brazilian government “with technology and support” in developing its oil reserves.  He then went on to say, “And when you’re ready to start selling, we want to be one of your best customers.”

Well Mr. President, which is it?  Are we ceasing our domestic drilling or are we breaking our dependence on foreign oil?

It’s staggering to think that Cuba produced 21 million barrels of oil in 2010, about one half of its oil consumption needs.  Meanwhile, the United States has the ability and resources to become completely independent of foreign oil; with an estimated 163 billion barrels of conventional oil still in the ground, according to the Congressional Research Service.  That much oil would sustain our production for over 50 years.

So before Secretary of Interior Ken Salazar testifies at his next Senate hearing and goes on record saying: “…we [U.S.] do not produce enough oil in this country to influence price of oil because it’s set in world markets,” – he should do his homework, crunch the numbers, and report them to his boss.

This revelation is nothing new.  In fact, it is a historical fact that only about 30 percent of leases will ever produce energy.  The report itself states that historically,“producing acres as a percentage of leased acres have averaged about 30%.” Two weeks ago, Michael Bromwich, the director of the Bureau of Ocean Energy Management, Regulation, and Enforcement, told the House Appropriations committee that companies are “doing well” if they find oil or gas on one out of every three offshore leases.

Back in 2008, when lawmakers were trying out these same arguments, IER showed how energy leasing actually works in the real world.  We’ve also shown who is really hoarding taxpayer land:

Disregarding the facts of energy production, the Obama Administration is misleading the American people.  In response to the report, Daniel Kish, senior vice president of policy at the Institute for Energy Research, issued the following statement:

“The Secretary of Interior’s bad imitation of Captain Renault – ‘I’m shocked, shocked…to find that companies aren’t producing oil on every acre they’ve leased’ – may fool some people.  But scientists in the field of geology dismissed this urban myth the last time opponents of US energy production tried it back in 2008 as an excuse to oppose lifting the offshore moratorium. “

“In 2008, then-Senator Salazar opposed opening the OCS even if gas prices reached $10 a gallon!  So no one should be surprised that he is now trying to cover up his worst-in-history energy record, especially as gas prices climb for motorists and businesses.  The Secretary should let Americans go back to work producing energy: offshore, in Alaska, and in the west on government lands.  In addition, the Administration should start celebrating our own oil production instead of Brazil’s.”

“The Secretary’s report today, and the implication that something is wrong when it is not, is showing the American people the same contempt his Department was found guilty of by a federal judge who ordered him to stop the moratorium on drilling in the Gulf.”

“Perhaps the Secretary, a rancher, would understand it better on his terms:  bulls do not produce milk, though they are an important part of the process.”

Because of the moratorium and de facto moratorium, the United States has lost an estimated 110,000 barrels per day in 2010 and 250,000 barrels per day in 2011 in the Gulf of Mexico. The Obama administration also keeps postponing the approval of an oil pipeline from Canada. The administration cannot seem to figure out the environmental implications of a pipeline despite the fact that there are more than 50,000 miles of oil pipelines already in the United States.  And instead of drilling here, the Obama Administration is promoting offshore oil production in Brazil and placing the United States into an air combat situation with Libya, a member of the Organization of Oil Producing States (OPEC).  It seems that Mr. Obama’s administration will go to lengths to obtain oil supplies from everywhere but the United States and Canada.

The Reissuing of Permits

On February 28, 2010, BOEMRE issued its first deepwater permit since the BP oil spill in April 2010 to Noble Energy Inc., allowing the company to resume work on a well that it had already drilled to 13,000 feet. Initial drilling on the well began in 6,500 feet of water on April 16, 2010 and was suspended on June 12, 2010, due to the moratorium. So, it took BOEMRE 8.5 months to allow the drilling of this well to proceed.

On March 11, the second permit reapproved by BOEMRE for drilling in the deep water Gulf of Mexico went to BHP Billiton Ltd. BHP Billiton received a revised permit to drill Well SB 201 on Green Canyon Block 653 about 120 miles off Louisiana. Initial drilling of the well began on Feb. 16, 2010, in 4,234 feet of water.  Oil prices were trading at $106.95 per barrel on March 7, a 29-month high, when BOEMRE made its positive assessment on the drilling permit.

The third permit reissue occurred on Friday, March 18, as the BOEMRE allowed ATP Oil & Gas Corporation to resume deep water drilling in the Gulf of Mexico.  The permit given to ATP Oil & Gas Corporation is for a revised new well in Mississippi Canyon Block 941, 80 miles south of Venice, Louisiana.    The well, which was being drilled at ATP’s Telemark Hub in 4,000 feet of water, reached 12,000 feet.  ATP began drilling at the site in August 2008 and stopped drilling in July 2009. At the time the moratorium was imposed, a rig was preparing to install a production facility at the site.

While ATP is using a stationary drilling platform and the other two companies are using a mobile offshore unit, each of these companies will be using the same company and procedure to respond to a well blowout if one should occur—Helix Energy Solutions Group Inc.

On March 22, ExxonMobil became the fourth company to receive a reissue permit from BOEMRE for deep water drilling in the Gulf of Mexico. Unlike the wells being drilled by the three permits awarded earlier by BOEMRE, the Exxon well is new. However, the Exxon permit is also a reissue because Exxon had a rig on site and a permit to drill when BP’s oil well exploded.  The Exxon permit covers drilling in a Keathley Canyon Block in 6,941 feet of water, about 240 miles off the Louisiana coast. Exxon’s permit is the first approved by BOEMRE that will use an oil containment system developed by the Marine Well Containment Company, a coalition formed by major oil companies to develop undersea containment technology.

On March 21, BOEMRE approved Shell Offshore Inc.’s supplemental exploration plan to drill three exploratory wells in the Gulf of Mexico, which is an extension of a plan approved in 1985. The approved plan provides the framework for Shell to drill in 2,950 feet of water at its Cardamom Deep discovery about 255 miles southeast of Houston and about 130 miles from the Louisiana coast. The discoveries made in 2009 and 2010 could hold more than 100 million barrels of oil. Shell will have to obtain permits for each of these wells and has already applied for one of those permits. Unlike some of the other approvals, where BOEMRE waived the environmental assessment requirement, Shell did submit an environmental analysis that met the guidelines of the BOEMRE.

Shell’s well equipment will include sub-sea blowout preventers designed to cut off an uncontrolled surge of oil or gas, and in case of a blowout, it will tap containment equipment and vessels from the Houston-based Marine Well Containment Company. Under Shell’s worst-case scenario, a blowout at the site could spill 14.4 million barrels of oil over the 109 days it would take to drill a relief well.

Unfortunately, while Shell’s plan has been approved by BOEMRE, it now faces legal challenges from environmental groups, asserting that the government cut off a detailed review that is required under the federal National Environmental Policy Act. In any legal challenge, the federal government will have to defend its environmental assessment of Shell’s plan, but the red tape will cost U.S. consumers an increased delay in getting access to the oil resources.

Lost Gulf of Mexico Oil Production

The Energy Information Administration (EIA) forecasts U.S. oil production from the Gulf of Mexico (GOM) in its Short-Term Energy Outlook on a monthly basis. To obtain the amount of oil production lost from the Gulf of Mexico due to the Administration’s moratorium, we compared the estimated oil production in the GOM from EIA’s April 2010 STEO to that of its most recent forecast in its March 2011 STEO.  In early April 2010, the EIA was forecasting GOM oil production at 1.75 million barrels per day in 2010 and 1.65 million barrels per day in 2011. In EIA’s most recent STEO, its 2010 GOM oil production forecast, which is now essentially data, was 1.64 million barrels per day, 110,000 barrels per day lower. For 2011, the GOM oil production estimate in EIA’s March 2011 STEO is 1.4 million barrels per day, 250,000 barrels per day less than its April 2010 forecast.

Source: Energy Information Administration, Short-Term Energy Outlook, April 2010 and March 2011

Conclusion

The four permits issued by the BOEMRE are for activity that was suspended after Interior Secretary Salazar imposed a moratorium on deepwater drilling on the US Outer Continental Shelf. Only the Shell plan approval relates to new exploratory wells, but even that plan is an extension of a plan approved in 1985 and requires each well to obtain a separate permit.  According to Michael Bromwich, Director of the BOEMRE, there are still 13 new deep water exploration plans pending. And, he correctly notes that approval of the Shell plan will bring in more applications. He has even indicated that there is a “high probability” some offshore leases would be extended to account for the five-month drilling ban that followed the BP oil spill and subsequent permitting delays.

The slow process described by some as a permitorium or a de facto moratorium has resulted in at least one rig, the Noble Clyde Boudreaux, to leave the Gulf of Mexico for Brazil, where deep water drilling is finding a renaissance with a find of some 30 billion barrels of oil.

As Senator Mary Landrieu said, “While this is another step in the right direction toward getting our Gulf Coast back to work, this administration is still moving too slowly to get this industry back up and working at full speed. We will know that the oil and gas industry has once again found solid footing when we have reached a point where approvals for exploratory permits – or permits of any kind – are not considered newsworthy.”

Secretary Geithner

We agree wholeheartedly. Of course, Geithner had in mind the other OPEC nations, whereas the “major producer of oil” we mean is the United States of America—the world’s third largest oil producer.

Geithner’s Admits That Boosting Oil Output Would Calm Fears

An AP story gives the full context of Geithner’s remarks

Seeking to ease global energy concerns, Treasury Secretary Timothy Geithner declared Tuesday he was confident major oil producers can counter any shortfall in supplies resulting from the crisis in Libya.

Oil prices have spiked higher recently as a result of the Libyan uprising and fears of unrest elsewhere in the region. They retreated somewhat on Tuesday as OPEC ministers discussed whether to ramp up production but remain near 30-month highs.

“It’s important to recognize that the major producers of oil and the major developed economies do have substantial reserves, resources available that they could mobilize if necessary to respond to any supply disruption,” Geithner said after talks with German Finance Minister Wolfgang Schaeuble in Berlin.

We at IER are glad to see that the Treasury Secretary understands the way to “ease global energy concerns” is to reassure the public that more oil is available. (Based on the actions of some of Mr. Geithner’s fellow cabinet secretaries, we were beginning to wonder.) That’s the message we’ve been broadcasting for quite some time now: the way to boost economic output, provide more affordable energy, and ease the government’s fiscal problem is to unshackle the producers of domestic energy.

Offsetting Libya’s Interruption

Of course we are being facetious in our discussion; when he said “major oil producers,” Geithner had in mind OPEC nations.

Although Americans have been trained not to think so, the United States is a major oil producer—the third-largest in the world, behind Russia and Saudi Arabia:

Source: Energy Information Administration

Incidentally, Libya isn’t even among the top-15 oil producers.  The reason it is of such concern to world markets is that (in 2009) it was the 12^th largest exporter of oil. These exports have now come to a virtual halt because international banks are declining dollar-denominated oil transactions with Libya, on account of U.S. sanctions.

It is ironic that Americans are fretting over the disruption in Libya’s oil exports—about 1.6 million barrels per day—when there are enormous untapped resources at home. The ANWR 1002 area alone could generate an estimated one million barrels per day in additional U.S. output.

Affordable Energy Means a Stronger Economy

In addition to reassuring the public that more oil would be forthcoming, Geithner also said that “even in the face of these uncertainties,” there are “encouraging signs of gradually strengthening recovery” in the world’s large economies. Whether or not his rosy assessment is correct, Geithner is right to note that uncertainties in energy availability are a drag on economic growth.

In a similar vein, on Monday Atlanta Fed president Dennis Lockhart said that rising oil prices might require “QE3,” in other words a third round of asset purchases to bolster the struggling recovery. According to a CNNMoney story:

Appearing at the National Association of Business Economics in Arlington, Va., Lockhart said that while he doesn’t think additional purchases are currently warranted, more stimulus could be needed if oil prices continue to climb.

“If [the rising price of oil] plays through to the broad economy in a way that portends a recession, I would take a position we would respond with more accommodation,” Lockhart said at the conference.

Though he doesn’t think current oil prices around $106 a barrel are a problem, he said the evidence is clear that oil spikes can bring about a recession.

“I think at the $120 range … it’s a manageable level,” he said. “Around $150 it becomes a much more serious concern.”

Critics of the Fed’s loose-money policies heaped scorn on Lockhart’s remarks, since the earlier rounds of “quantitative easing” are arguably a main driver of rising commodity prices. Furthermore, one can quibble with Lockhart’s dismissal of $106 crude oil as not “a problem,” but at least he recognizes that $150 oil would be a “much more serious concern.” At this point, we’ll take what we can get, because Secretary of the Interior Ken Salazar didn’t agree back when he was a senator from Colorado.

As House Speaker John Boehner recently recalled, back in 2008 Salazar got into a verbal joust on the Senate floor with then-Senate Minority Leader Mitch McConnell. In the face of soaring gasoline prices, McConnell had offered a measure that would open up offshore drilling in the event that prices broke $4.50 per gallon. Salazar objected, and McConnell kept raising the threshold, eventually reaching $10 per gallon. Still, Salazar said he would not support the further development of domestic oil and natural gas. Interesting readers can watch the video:

Conclusion

Despite himself, Treasury Secretary Geithner agrees with us that plentiful and affordable oil supplies are crucial for the health of the global economy. We just hope he can convince his fellow Secretary Ken Salazar.

that the agency is at last granting one solitary deepwater drilling permit in the Gulf of Mexico. Could it be that the Administration is finally softening its position of maintaining a “permitorium” against all offshore drilling in the Gulf of Mexico?

Michael R. Bromwich, Director of the Bureau of Ocean Energy Management

Not even close. The Obama Administration remains as committed as ever to discouraging domestic oil production.

In the wake of the Deepwater Horizon incident, the Obama Administration brushed aside recommendations from respected engineers, scientists and industry experts, and slapped a moratorium on new deepwater drilling in the Gulf. The Obama Administration seemed to relent with much fanfare in November when officially the moratorium was lifted, politically positioning itself as taking a “reasonable position,” and the political pressure eased. Yet, in the ensuing months, approximately zero deepwater drilling permits were issued.

Keeping the permitorium in place is important to the Obama White House and it can be counted on to resist any deviation from that viewpoint. From day one of his presidency, Obama has pursued an energy agenda that puts a chokehold on affordable energy sources like oil, coal, and natural gas while lavishing generous government subsidies on the producers of costly energy sources like wind, solar, and ethanol. And with each passing week, American consumers pay higher gas prices at the pump, more for their electricity bills, and higher food prices.

Right on cue, the Obama Administration decided to issue one single drilling permit in an attempt to alleviate the intense public pressure to lift drilling restrictions. The White House doesn’t really expect that a drop of oil will actually be extracted as a result of this one permit. It’s all done with a backroom wink and a nod. Before any serious work is done in the Gulf, lawyers representing deep-pocketed anti-energy organizations can be counted on to file an injunction against any actual drilling.

This will happen just as surely as the sun will rise tomorrow. In fact, this sort of governing-through-litigation occurs with startling regularity. In early February, for instance, three environmental groups teamed up and filed a formal notice of intent to sue Interior Secretary Salazar for ignoring marine-mammal protection laws when on paper, at least, he approved offshore drilling in the Gulf. “Under Salazar’s watch, the Department of the Interior has treated the Gulf of Mexico as a sacrifice zone where laws are disregarded and wildlife protection takes a backseat to oil-company profits,” said Miyoko Sakashita of the Center for Biological Diversity. Judging from that strident rhetoric – wink, wink, nod, nod – you’d almost think Salazar favored drilling in the Gulf.

The Obama Administration has made a token gesture of issuing just one drilling permit in the Gulf of Mexico. It is no coincidence that the permit was approved the same week that Secretary Salazar goes to the Hill begging lawmakers for funding for more government bureaucrats.  What’s more, this isn’t a permit that will lead to any new drilling, but rather to resume a well that was already underway last year. This is vintage Obama Administration. Instead of winning the future, the White House would rather just win the news cycle. Meanwhile, workers in the Gulf remain without jobs and American consumers are feeling the pain at the gas pump.