AMERICAN SECURITY COUNCIL FOUNDATION

National Security Report

Promoting ‘‘Peace through Strength’’®

In This Issue:

Pain at the Pump and the Will to Drill By Alan W. Dowd

ASCF Senior Fellow

Volume 1III, Issue IV— April 2012 Page 2

The national average for a gallon of gasoline is $3.92—and rising fast. In fact, it

was $3.10 per gallon in January 2011, $2.67 per gallon in January 2010 and $1.81

per gallon in January 2009. The bad news is that we’re still months away from the

summer driving season, when gas prices peak. If there ever was a time to tap

America’s vast petroleum reserves, it’s now.

There are many causes for the spike in oil (and hence gasoline) prices.

Oil is a global commodity serving a global market, and global demand is rising—

especially in China and India.

Plus, the worst of the Great Recession came in 2009, which slowed economic

activity and energy consumption. With economies growing again, albeit anemically

in many places, the demand for energy (especially oil) is back on the upswing.

Plus, markets are jittery about what’s happening across the oil-rich Middle East. The Arab Spring revolutions effectively took Libyan

oil off the market for much of 2011; destabilized Egypt, which controls the Suez Canal; and triggered deep concerns about the

ability of Kuwait, Saudi Arabia and other petro-states to weather the storm.

Plus, Saudi Arabia, the world’s oil safety net, may be running out of oil. Leaked diplomatic cables suggest that Saudi officials

privately worry that the kingdom’s reserves may be overstated by 40 percent.

Plus, international sanctions have taken a healthy portion of Iran’s daily output of 3.5 million barrels off the market.

Plus, Nigeria—which accounts for 8 percent of U.S. oil imports—is being buffeted by a jihadist insurgency that could topple the

regime.

Plus, the dollar is weak, which affects exchange rates and encourages speculation.

Add it all up, and the result is pain at the pump.

But America need not be held hostage to the vagaries of this global market—or the whims of petrocrats, speculators and dictators.

By encouraging production,” The Washington Post’s Robert Samuelson argues, “we can enhance our energy security and help stabi

lize global market—and prices—through greater supply.”

That brings us back to America’s vast—yes, vast—petroleum and natural gas reserves. How vast?

• The U.S. Geological Survey (USGS) estimates that the Arctic may hold 90 billion barrels of oil. About a third of the oil is in

Alaskan territory.

• Yet another USGS study concludes that North Dakota and Montana “have an estimated 3 to 4.3 billion barrels of undis covered, techni cally recoverable oil.”

• In the U.S. swath of the Gulf of Mexico, British Petroleum estimates a new reserve could yield 6 billion barrels of oil, and

Chevron has found an oil field with some 15 billion barrels of oil.

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• The American Petroleum Institute (API) reports that opening up new offshore areas in the outer continental shelf “could lift domestic crude production by nearly 1 million barrels per day,” and if the U.S. fully developed all of its onshore fields, “output could rise by as much as 2 million barrels a day by 2030.” • As The Economist has reported, geologists call a swath of the Rocky Mountain states “the Persian Gulf of gas,” thanks to discoveries of between 165 trillion and 260 trillion cubic-feet of natural gas.

• All told, the National Petroleum Council pegs America’s conventional oil reserves at 274 billion barrels. That’s a lot of

oil—even for a country that consumes 20 million barrels a day.

However, that’s just the tip of the iceberg. RAND estimates that Colorado, Utah and Wyoming sit atop an ocean of oil-shale deposits, once thought to be too expensive to convert into petroleum. These states hold between 500 billion and 1.1 trillion recoverable barrels—the equivalent of three times the amount of oil in Saudi Arabia. As RAND’s James Bartis explains, “We’ve got more oil in this very compact area than the entire Middle East.”

I In other words, the United States possesses enough oil to meet its energy needs for a couple centuries.

API concludes that taking full advantage of domestic oil reserves could decrease foreign oil imports by 79.7 percent. That

would send a signal to the global oil market, and the law of supply and demand would bring the price of oil (and gasoline) down. But Washington has to have the will to develop and tap those reserves—or at least the good sense to get out of the way so that industry can meet the demands of the market.

Regrettably, that’s not happening today. Clinging to official estimates of just 22 billion barrels of “proven reserves”—reserves

that are measured and known—the president insists that America possesses only “2 percent of the world’s oil reserves,” dis

misses oil as “the fuel of the past” and fixates on developing “the clean energy of tomorrow.”

But as the above litany underscores, proven reserves are a tiny part of the picture. A report by the National Center for Policy Analysis details how inaccurate “proven reserves” can be. In 1920, the USGS estimated total world oil supplies at 60 billion bar rels. In 1950, the experts pushed that number to 600 billion. By the mid-1990s, the estimate was higher yet—2.4 trillion. And today, the estimate is 3 trillion barrels of oil. The reason for this constant upward readjustment is technology. “Before the first U.S. well was drilled in 1859, petroleum supplies were limited to oil that oozed to the surface,” according to NCPA.

The president is quick to point out that “oil production in America is at an eight-year high.” But it could—and should—be

higher.

Although the president deserves credit for challenging industry to think about the post-petro economy, the reality is that oil is

the fuel of the both present and the foreseeable future—and the clean energy alternatives of tomorrow are simply not yet

ready to shoulder the burden at a competitive cost.

Hybrid cars save lots of gas, but they still cost considerably more than non-hybrids, which makes them too expensive for many

consumers. The Honda Civic Hybrid, for instance, starts at $24,200, the normal Civic just $15,955—a 51-percent difference. The

Chevy Volt, a plug-in hybrid, costs $40,000. The market’s response speaks volumes: GM’s goal was to sell 45,000 Volts this

year; the automaker is on pace to sell 9,600.

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Likewise, hydrogen offers great promise, but the costs remain prohibitive. And the infrastructure and distribution channels

are nowhere close to what’s needed to serve the post-petro economy.

The well-intentioned but costly examples of government-funded alternatives—from Solyndra’s solar-powered bankruptcy, to

ethanol’s endless subsidies, to wind power’s bird-killing side-effects—only serve to underscore how efficient and cost-

effective petroleum and other fossil fuels are by comparison.

Fully exploiting domestic oil reserves is not the only solution to our energy woes, but it must be viewed as the main ingredi-

ent until an economical, dependable, free-market alternative is developed. Vast reservoirs of domestic oil remain untapped

because, as Samuelson puts it, “environmental purity and energy practicality are at odds.”

Environmental groups, for instance, are staunchly opposed to oil-sands and oil-shale development, which helps explain why the president opposed the Keystone XL pipeline extension—it would have carried oil derived from Canada’s oil-sands—and why his administration has reduced the acreage set aside for oil-shale development.In addition, the EPA used its power over air permits to delay drilling in Alaska. Drilling permits have decreased by 36 percent under the Obama administration. And Washington has imposed a moratorium on new offshore drilling, while some states have blocked offshore development.

If Americans want to know what a genuine commitment to oil exploration and production looks like, they need look no fur-ther than this hemisphere. Alberta is converting its oil-sands into 1.31 million barrels of oil per day, building toward 3 million barrels per day by 2020. Deep-water drilling and a $1-trillion investment have positioned Brazil to become a top 5 oil-producing nation by 2020. It all comes down to will.