March 18, 2005 — With crude prices surging, pump prices setting records, and Congress on the way to approving new oil drilling in Alaska, the Answer Desk Inbox has been flooded with mail about oil. Rodney in Maryland wants to know why the U.S. doesn't just pump more of its own reserves. Gregg in Bigfork, Montana is wondering what it will take to break American's dependence on gasoline. James in Florida can't figure out why we aren't already drilling Alaskan oil. And Ron in Washington says — enough is enough: the government should just step in a keep gasoline prices from rising any further.
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JUST PUMP MORE
My understanding is that the U.S. has plenty of oil in reserve. What will it take before we tap into our reserve? Why are we not using our reserve to keep gas prices down? What is the reserve for? — Rodney, Frederick, Md.
Unfortunately, the U.S. Strategic Petroleum Reserve, a government-owned stockpile of crude socked away in a series of salt domes in Texas and Louisiana, represents just a drop in the barrel of U.S. oil demand — which is running at roughly 20 million barrels a day. The Bush administration has been topping off these reserves, but they’re still less than 700 million barrels. At current levels, the reserve could replace imports for just 53 days.
As for the so-called “proven reserves” — the oil fields owned or leased by companies that develop them — no one really knows how much oil is in the ground, in the U.S. or elsewhere. But the news isn't good there either. After exploring and drilling in the U.S. for more than 100 years, most of the readily available oil has been pumped out of the ground. If you look at “proven reserves” — all the oil in the world that’s been discovered so far — the U.S. has maybe 2-3 percent of what's left. According to Energy Dept. estimates, U.S. reserves range between roughly 20 to 30 billion barrels. By contrast, total global reserves are somewhere between 1 to 1.2 trillion barrels.
The more important question is production capacity: how fast can oil-producing countries get that oil out of the ground? Global demand is now about 82 million barrels a day — rising by about 2 million barrels per day (bpd) each year. But the only country with any real extra capacity is Saudi Arabia, and they claim to have only 1.5 million barrels or so to spare.
Over the next several years, other oil producers will gradually expand production — but there are limits to how fast that can be done. So it's very possible that demand will grow so fast there's simply not enough to go around. If and when that happens, prices could hit $80 or $100 or — who knows? Even during the “shortages” of the 1970s, the oil was there — it was just held back from the market. But at their meeting this week in Iran, for the first time in the cartel's 45-year history, some OPEC ministers admitted that they've lost control of oil prices .
WHATE ABOUT ALASKA?
From an economics standpoint, the old supply-and-demand theory is right on. However, there is some relief to everything that you fail to mention. According to all reports, the Alaska reserves are bountiful but for many years the environmentalists have fought to stifle attempts for our country to be more self efficient. Why do you not mention this … and why is there so much opposition?— James C., The Villages, Fla.
This week’s Senate approval was a major step toward development of oil discovered in the Alaska National Wildlife Refuge — an area that’s been off limits so far to oil drilling. Though the industry’s latest technologies will certainly help minimize the impact, a green light for the project would be a major setback for opponents who have been working to preserve one of the last remaining wilderness areas in the U.S.
But don’t expect ANWR drilling to slow the rise in oil and gasoline prices. Even after the final decision has been made to develop ANWR, it will take years before the oil starts flowing. No one can say for sure, but some estimates figure it could be 10 years before we’d see significant production from these oil fields.
And even at its peak, the oil in ANWR might generate 1.6 million barrels per day, according to DOE estimates. (A lot depends on how fast you tried to pull it out of the ground.) If you use the mid-range estimate of 10.3 billion barrels total reserves, and spread it over 40 years of production, you get an average rate of about 700,000 barrels per day.
To put that in perspective, the U.S. consumes roughly 20 million barrels per day, of which we import something like 12 million bpd. So 700,000 bpd will help, but it won’t come close to solving the problem of U.S. dependence on shrinking supplies of foreign oil.
The other thing to remember is that oil prices rise and fall based on global demand — not just supply and demand in the U.S. So tapping ANWR would have and even smaller impact on global demand of 82 million barrels per day. It’s just not enough oil to make much of a difference.
KICKING THE HABIT
At what point do the rising oil prices and bottom line gas prices justify increased investment in alternative fuels? The technology is available to move to more pure ethanol blends and hybrid electric is still growing in popularity for smaller SUVs and cars, what are we waiting for? The cars can be built to handle alternative fuels but there are too few places to re-fuel if you own one. What needs to change to encourage more widespread availability of alternative fuels?— Gregg H., Bigfork, Mont.
Well, $55 oil is already making alternatives a lot more attractive. But most alternative energy sources are suited for generating electricity. Gasoline is an extremely dense fuel source — better even than hydrogen. (In order to get the same energy in the same space with H2 you have to pressurize it in a very heavy fuel tank, which adds weight, which cuts efficiency, etc.) So don't expect to see solar-powered cars popping up in dealer showrooms.
Gas-electric hybrids are a good first step because they are advancing development of an all-electric drive train that we'll ultimately need to get away from gasoline. But that is decades away. Oil demand will likely exceed production capacity well before those alternatives are ready.
And sales of hybrids are just a tiny fraction of the new cars being put on the road every year. Some 17 million cars and light trucks are expected to be sold in the U.S. this year — of those, hybrid sales will be measured in the tens of thousands. Even if every American driver suddenly decided to switch to hybrids, there’s no way car makers could produce them fast enough.
Why are gas prices not consistent all over? For instance, I can understand why Hawaii is so much higher but Oregon is the 4th highest and it does not have big tourism like California and maybe Nevada. And, then you get in other states and gas prices start around $1.50 — Linda C., Grants Pass, Ore.
For starters, state taxes vary widely – from a low of 8 cents in Alaska to nearly 40 cents in New York. (2004 figures) Many parts of the country require special blends of cleaner-burning gas with certain additives — shortages of those blends can drive up prices. And transportation costs vary depending on how far you live from the nearest refinery.
U.S. OIL EXPORTS?
My question is ... Does all of the oil produced in the continental United States and Alaska STAY in the United States? If not, why not?— James W., Munfordville, Ky.
A lot of people wonder why the U.S. exports oil (mostly from Alaska) while it needs to import so much of what is consumed here.
While some oil does get exported, the amount is literally a drop in the barrel — something like 10,000 barrels a day in exports compared to roughly 10 million bpd in imports. That works out to about .01 percent of U.S. production.
The oil companies should no longer decide on gas prices. The government should step in and set a price across the U.S. I am tired of paying for high fuel when these oil companies are making billions each month in profit. I am tired that we have to fill their pockets.— Ron M., Richland, Wash.
The alternative you suggest has been tried before; the U.S. last set price controls in the Nixon administration, which kept a lid on prices until roughly 1981. Such controls would almost certainly bring back outages and rationing.
When supply is inadequate to meet demand, there are only two choices — let prices rise, or restrict distribution. Having lived through the gas lines of the 1970s, I'd rather cough up a few extra bucks.
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