Industry, Energy, and the Moral High Ground

Originally published in Flourishing Mar Apr 2013

I was watching television last night (March 26), when I was disturbed by a news item scrolling across the bottom of the screen.  Paraphrasing, the message was that the U.S. State Department will open new hearings on the Keystone XL pipeline project on April 18.  Huh?  I thought Hilary’s State Department had given President Obama clear passage to a decision on Keystone XL way back in 2012, long before the election.   And, I thought I’d read not long ago that the EPA Administrator was planning to resign, because she thought the President was going to approve the Keystone XL project.  So I checked, and my memory was correct.

This is why central planning and heavy-handed regulation don’t work; or perhaps I should say they don’t work for the American people or for economic progress.  We all know intuitively, I think, that political calculations in Washington more or less continuously trump reason and reality.  So, I’ve never understood how we get suckered into the belief that patently demagogic politicians and their swarm of camp followers can make better economic, environmental, and public safety decisions than the often brilliant and generally hard-working people who strive every day to offer life-enhancing products to increasingly discerning customers for a profit.  The historical evidence and our own life experience is virtually all to the contrary.  

We in the western world are the beneficiaries of the greatest development in human history—the Industrial Revolution—which enabled higher human productivity, more leisure time, faster and safer transportation, more complex scientific discoveries, safer and more comfortable places to live, and longer lives, to name just a few of its benefits; and left in its wake the Information Revolution and the emerging Biological Revolution. 

So, instead of trusting everything to the posers in Washington, I think we might want to once again embrace the free market principles that gave us that Industrial Revolution.  We could start, for example, by stopping the endlessly redundant nit-picking of every industrial project for the remote, one-in-a billion chance that somewhere, sometime, somehow, a pipeline will rupture and leave a temporary stain the size of a football field in some farmer’s patch of corn.  I mean no offense to the farmers, but do we think that the aggrieved farmer—who does retain his property rights—will not be recompensed, contractually or through the courts?

But wait, didn’t I also hear on the news yesterday that a Canadian freight train had derailed in Minnesota, spilling oil in a farm field?  Maybe we should weigh that all but trivial event—which I’m sure captured the President’s attention—against the incalculable human benefits of petroleum-based energy.  And, if you please, I’ll include nuclear and coal-based energy in my argument, too.

Really, it should be a moral embarrassment to us that in today’s world, millions of people die every year due to a lack of dependable energy supplies.  Isn’t it amazing that we environmentally aware, creature-sensitive Americans have cordoned off centuries worth of potential energy supplies in the form of natural gas, nuclear power, oil, and coal in the name of  “saving the planet”.  Rather than promote a better quality of life for desperate human beings throughout the rest of the world—which we could readily do at great economic, cultural, and moral benefit to ourselves—we instead celebrate, as  moral idealism, battery-powered cars with a driving range rivaling the distance of Tiger Woods’ 6 iron; and sorting through trash to put everything in its proper bin.  That’s a pitifully vapid—not to say inverted—path to moral self-esteem, don’t you think?

I’ve been watching this nonsense and remaining mostly silent for upwards of forty years.  But, yesterday I read something that was said by the greatest cultural icon of the 20th century in America:  Our lives begin to end the day we remain silent about the things that matter.   So—not to offend or debate, but to educate—my self-imposed muzzle has been removed.  (I know that you know that I write to you out of love; and if you’re not convinced by my argument, that’s ok.  I won’t hold it against you, and I’d appreciate the same consideration.)

We Americans have taken industrial and material progress for granted, and we’ve carelessly embraced “going green” as a moral ideal–expecting that the unprecedented standard of living we’ve enjoyed would continue.  For forty years, we’ve permitted relatively small, but politically connected and well-funded, groups of anti-industrial environmentalists to roadblock new energy production and industrial development at nearly every turn.  Some call them “tree-huggers”; but since I love trees—just as I value the clean air and clean water,  which are available only in the most energy–intense industrial economies—I just say they’re wrong.   Since policies have consequences, we’re paying the price for the government’s stifling of innovation, productivity, and growth in the energy industry with nearly nationwide economic stagnation and fruitless “green energy” cronyism.   “Going green” is doing more damage to our moral and economic future with every day that passes. 

If we freedom-loving, prosperity-seeking people continue to grant the anti-industrialists the moral high ground they claim to represent with their “green energy” agenda, they may continue to inspire support for their “green economy” suicide pact.  But, don’t miss my main point:  To sacrifice the modern human environment we enjoy here in America—fueled by petroleum, nuclear, and coal-based energy—to the non-human environment, as the anti-industrialists insist we do, is not just bad economic policy, it is immoral.  A mere moment’s reflection on the living conditions that exist in the non-industrialized world is evidence enough of that fact.  So, do we want to live like they do?  Or do we want to help them live like us?  Because those are our choices. 

The anti-industrialists like to talk about “industrial policy” by which they mean the obstruction of private industry initiatives and the demise of the large-scale energy production our modern economy requires.  The only industrial policy we really need to assure ourselves of a healthy environment, and to restore prosperity and abundance, is one which respects private property rights and individual self-determination.  As the history of western civilization since the beginning of the Industrial Revolution has demonstrated, human ingenuity and the natural human desire to create better lives for ourselves and our families will take care of the rest. mh

The Essential Heroes: the One Percent

 Originally published in Flourishing March 2012

Thirty-odd years ago, I was working for W. J. Powell Construction Company in Beloit,Kansas.  “Dub” was a wonderful person and a fair employer.  The job wasn’t all that challenging, though, so I would take a book to work, and often used my lunch break to read biographies.  That’s when it started—that little fire in the belly that says, “You can do more.”

 One of the books that I read during that period was Study in Power: John D. Rockefeller, Industrialist, Philanthropist, by Allan Nevins. 

 Born in 1839, John D. Rockefeller rose from the lowest rungs of society to become one of the world’s wealthiest men and greatest philanthropists.  His father was a ne’er-do-well elixir salesman and bigamist, who frequently abandoned his family for months and years at a time.  Notwithstanding, John D. was serious, studious, hard-working, frugal, and well-behaved; and before he was forty, he was a member of the One Percent.

 I mention John D. here, because I want to introduce you to a more recent member of the One Percent—a man from similarly humble beginnings.  The two men have more in common than great wealth.

 Born in rural Oklahoma in 1945, Harold Hamm was the youngest of thirteen children.  His father was a share-cropper, who raised his family in a one room shack, devoid of indoor plumbing.  Harold left home before graduating from high school, and took a job as a pump-jockey (a term of endearment, if you please) at an Enid, Oklahoma gas station.   

Fast forward fifty years: Last November, Harold Hamm was inducted into the Oklahoma Hall of Fame, along with Tommy Franks of Wynnewood; Marques Haynes of Sand Springs; Cathy Keating and Steve Malcolm of Tulsa; Elizabeth Warren of Oklahoma City; and (posthumously) Roger Miller of  Erick.  He still likes burgers from Sonic Drive-In, but Harold is now #36 on the Forbes 400 list of wealthiest Americans.  His net worth is $9.0 billion, give or take; virtually all of which is still invested in finding and producing oil and natural gas.

Ever grateful for his success, Harold’s many generous gifts include a recent $30 million donation for the Harold Hamm Diabetes Center on the University of Oklahoma campus.  “If it hadn’t been for education, I would have never had a chance to break away from the poverty cycle my family and I were caught up in ever since the Depression years.”  (After his initial success, Harold went back to school; and he has never stopped learning.)

Of his induction into the Oklahoma Hall of Fame, Harold said, “It’s a great honor, and it’s not anything I ever thought I would receive … it’s really beyond my dreams. …For this honor to come about right now while I still have some siblings alive, and for them to share this with me, means everything.”

That says a lot about the kind of man Harold Hamm is.  He started in business with a $1,000 loan, co-signed by a friend.  In 1967, at the age of twenty-two, he incorporated his business—a one-man, one-truck oilfield services company—as Shelly Dean Oil Co., named for his two oldest daughters.  His wife kept the books, and as the little company grew, Harold and Sue Ann’s daughters answered the phone.

“Back then it was one day at a time, it was one minute at a time, almost. It was a very meager beginning and we’ve been very fortunate.”

Harold’s little company has done well over the last forty-five years.  At the end of 2010, Continental Resources (formerly Shelly Dean Oil Co.), which is still based in Enid and Oklahoma City, had proved reserves of 364.7 MMboe (million barrels of oil equivalent).    Continental now operates in twenty states and is far and away the largest leaseholder (855,936 acres) and producer (6.9 MMboe in 2010) in the Bakken Shale region of North Dakota and Montana. 

Bakken, which accounted for 44% of Continental’s 14.7 MMboe production in 2010, had been written off by almost every industry expert just a few years ago as not worth exploring and developing—almost every expert, but not Harold Hamm.  According to the company’s 2011 Annual Report, Continental is “on track to triple production and proved reserves from 2009 to 2014”.  Like most businessmen in the One Percent, Mr. Hamm, who still owns 68% of Continental’s shares, consumes an infinitely small fraction of his income, preferring instead to reinvest in his community and in the work he loves to do.

One line that I remember most vividly from my ancient reading of Study in Power was a comment by one of John D. Rockefeller’s associates:  “He sees far ahead of everyone else; and then, he sees around the corner.”  What that man meant was that Rockefeller knew more than anyone else about his industry—because he studied more and worked harder.  Rockefeller nearly always sought the counsel of his associates, but he was willing to accept full responsibility for his business decisions by repeatedly staking his own life and fortune on them. Ditto, Harold Hamm.  That’s why they are the essential heroes—the One Percentmh

Peak Oil? Not Yet, Stephen Leeb

 Originally published in Flourishing February 2012.

Here and elsewhere over the last forty years, I’ve discussed the nonsense theory of “peak oil”, formerly promoted by newsletter writer, Stephen Leeb, and others.  In case you missed it, “peak oil” means we’re running out of oil.  We aren’t, and a new report, North American Energy Inventory*, dated December 2011, provides more incontrovertible evidence.

Based on data from the U.S. Geological Survey and the Energy Information Administration,  the Energy Research Institute concludes, “The massive supply of available resources means that North America’s access to affordable energy is limited only by the government policies we choose to adopt.”

The report provides data on oil, natural gas, and coal, but for this article, I’ll restrict myself to oil. 

North America has 1.79 trillion barrels of recoverable oil.  That’s almost twice the combined reserves of all the OPEC nations, and more than six times the proved reserves of Saudi Arabia.  It’s also more oil than the entire world has consumed since the first domestic oil well was drilled in Titusville, Pennsylvania more than one hundred and fifty years ago.

Based on those figures, Kansas could continue its current rate of oil consumption for another 23,358 years.  However, you should probably be told that those greedy oil people in Texas will run out in only 1,570 years, and when they do, they’ll come after our share.  Okay, however unfunny our government’s energy policies are, that last remark was a joke.  mh

North American Energy Inventory, Institute for Energy Research, December, 2011.  Available in PDF at http://energyforamerica.org/.

Life Without Oil

Originally published in Flourishing February 2012

Today, it’s common wisdom – if that’s the right word – to think of our environment as something that starts out healthy, but that we’ve messed up. The worst thing we produce, it is alleged, is “oil”. That just drives me crazy, because it’s the inverse of my entire life’s experience. Yours, too.

In the very early 1950’s, I attended kindergarten at Simpson Elementary School in Russell, Kansas. Our family lived in a rented house – a shack really – a few blocks away on Elm Street (no, not that Elm Street). I remember the day an oil-drilling rig pulled into our unpaved driveway and backed up across the street into the vacant lot next to my friend Nancy’s house. A few weeks later, the rig pulled out and a pump was installed; a black oil storage tank, too. Ker-thump, ker-thump, ker-thump. I was fascinated to watch the head of that pump bob up and down; and it never stopped. Drilling to China, maybe. Ker-thump, ker-thump – twenty-four hours a day. Like a beating heart. I don’t remember being frightened or otherwise damaged by the well, but I do remember that my mother was worried about a polio outbreak in our town that summer that had killed or crippled several neighborhood children about my age.

A few years later, from about the age of ten, my friends and I would swim in the Saline River as it flowed through the Bemis (oil) Field in Rooks County, Kansas between Hays and Plainville. The Boy Scout troop of which I was a member had access to a small cabin and skeet-shooting range in the area. Local oil producers had suspended some of their pipelines above the river, hanging them on steel cables. The pipelines occasionally leaked, but we weren’t concerned about the thin glassy film floating on the river’s surface; we were too busy watching for snakes. The suspended lines were also an adventuresome way to cross the river, swinging as they did from our shifting weight and a gusting high plains wind.

If you had been there with me, you would know that I was more endangered by the campfires we built from cow dung and fallen cottonwoods—or by the aforementioned snakes – than by the oil all around us. We strained and then boiled the drinking water we got from the river, not to rid it of oil – that floats to the top and is easily avoided by dipping your pail more deeply into the stream – but of bird droppings and other such “natural”, non-floating contaminates.

Amazingly, here I am, more than fifty years later, timeworn perhaps, but undamaged by the oily environment of my youth. The greatest risks to my health now seem to be appetite and sloth.

As I look back, I sometimes compare my life with oil to the life of Carl Petterson, Linda’s great-great-grandfather. When Carl came to America from Sweden more than one hundred and twenty five years ago, his first Kansas home was a sod-covered dugout in what is now the Green Mound neighborhood of southeastern Mitchell County. Even a kerosene lamp would have been a luxury for Carl, as I’m sure it might have been for some your ancestors. His nights were lit only by the moon, firewood, and lightning.

Carl didn’t have creosote posts or diesel-powered tractors. He fenced his eighty acres with hand-hewn limestone post-rock, and he walked his plow behind a horse. Still, Carl did well enough to leave five acres of his land for a church, and another five for the church cemetery, where Linda and I will be buried.

Today, his descendants can cultivate his eighty acres and mow his cemetery in less time than it took Carl to hitch up his horse and plow.

I could, of course, tell a similar story about Isaac Martin Harvey, who was born in London, and his son George Washington Harvey, who was born in Peoria, Illinois. They settled together on land that now forms the bottom of Lake Afton west of Wichita and south of Goddard. You know that Afton is a man-made lake providing an important water supply to area residents, as well as a relaxing place for recreation. It was developed in the 1930’s–and is currently maintained—with the use of machinery powered by refined derivatives of oil.

Contrary to modern assumptions, nature doesn’t give us a healthy environment to live in. For those who think that oil and oil pipelines are “dirty” and “unnatural”, I suggest reading some history* about more “natural,” pre-industrial times—or visiting a country where people are still living in “natural,” pre-industrial conditions. One might study places and times where the streets and streams were (and are) filled with both human and animal excrement; where childhood mortality exceeded (and still exceeds) fifty percent; where walking is the standard mode of transportation; and where gas stations and power plants are unheard of. I could go on, but you know all this. Many of you have been there and done that.

We in America live in an environment where the air we breathe, the water we drink, and the food we eat will not make us sick; and where we can even cope with natural catastrophes like Greensburg and Joplin. These are achievements made possible by cheap and abundant energy, e.g. oil. We can live this way only by getting machines—powered mostly by oil and its derivatives—to do more than ninety-nine percent of our physical, and even mental, work for us.

Products derived from oil are what we need to build and maintain comfortable, climate controlled homes. We need oil to produce and transport vast quantities of fresh and frozen food, to build hospitals, and to manufacture pharmaceuticals and orthopedic devices; etc., ad infinitum.

And, how do we travel across the country and around the world, very often for the sole purpose of safely enjoying the most beautiful parts of nature, which pre-industrial people had neither the time nor the energy to do? Oil.

I know that you believe in making decisions based on facts, not fantasies. So, consider the fact that so-called “green” technologies have given us no evidence that they can produce the plentiful, cheap, reliable energy that a modern and healthy human environment requires. Despite more than forty years of government subsidies, which draw resources from more viable and freely chosen purposes, and utopian “green” fantasies incessantly promoted by the government, the media, and in our schools, only two percent of the world’s energy comes from solar and wind technologies. Even that two percent must be backed up by conventional power-generating sources like nuclear, coal, hydro, natural gas—and oil. The sun is helpless at night; and even in Kansas, the wind is calm sometimes. But, these are the least of the obstacles to “green” energy efficiency. The laws of physics pose far greater, even insoluble, problems.

I know I’m old-fashioned: I still believe in a day’s work for a day’s pay and stuff like that. But it’s amazing to me that we’re so gullible as to take energy advice from politicians who tell us to trust our health and prosperity to unproven unprovable and wasteful “green energy” technologies. All the while, they condemn as “dirty” the very energy source—oil—that has brought us the cleanest, healthiest, most prosperous environment in the history of mankind.

Go figure. There are literally billions of people around the world who yearn for a liquid fuel, carried through a magnificently stout pipeline – or any pipeline – to help them create a modern human environment for themselves and their families. Yet here we are, so pleased with our own “green-ness” that we take the practical and affordable energy we get from fossil fuels for granted. And now, we’re actually putting another clamp on the aorta of our energy-driven, oil-dependent economy by postponing the proven, subsidy-free, Keystone XL Pipeline.

Our nature as human beings is to use our intelligence to create more livable and more comfortable environments for our families and ourselves. Dug-outs and dung fires will no longer do. Moreover, in America, we don’t need rulers or czars to dictate or approve what, where, and how we can produce and transport the energy our lives require. Perhaps I digress, but I don’t think so.

We are intelligent and independent individuals living in a society dedicated to liberty and prosperity. As such we have every right and obligation to embrace market-based energy production and privately financed transportation systems; in particular, the Keystone XL Pipeline which is needed now to bring oil from Canada to America’s gulf coast refineries.

The Keystone XL Pipeline would double the capacity of the existing Keystone from 591,000 barrels of oil per day to 1.3 million barrels. The CEO of Gulf Oil estimates that Keystone XL would save American consumers about $.20 per gallon on the price of gasoline. Alternatively of course, we can continue to import that oil from Saudi Arabia. No joke, that’s another price we’ll pay for being “green”.

So, the “dirty oil” objection is really just a dirty trick. Every energy source creates some kind of unpleasant byproduct. I’ve already mentioned firewood and cow dung, and I trust your experience is close enough to my own, that no further detail is needed. I could tell you about the side-effects of mining the materials that go into solar panels and windmills, and the incredible amount of coal and oil that goes into manufacturing, transporting, and assembling their parts, but you can easily intuit all of that for yourself. The “dirty oil” objection is just a shell game used by scoundrels—and that is exactly the right word—to divert our attention from the fact that they really don’t want any kind of industrial development at all.

Let me say it again, plainly: Virtually every necessity and convenience of modern life depends on the production and flow of oil—a Herculean task. It is sheer fantasy to imagine that the likes of Solyndra or Beacon Power will ever match the life-enhancing power of North America’s great oil industry. mh

* A good place to start is Civilization and Capitalism, 15th-18th Century, Vol. I: The Structure of Everyday Life, Fernand Braudel, University of California Press, 1992.

The Pessimists’ Dead-End

Originally published in Flourishing January 2012

In 1957, Bennett Cerf, then CEO of Random House, took a chance on a wildly dystopian and philosophically radical novel.  You may have heard of it—more than seven million copies have been sold, and many of its author’s personal papers are now housed in the Smithsonian—Atlas Shrugged, by Ayn Rand.

I mention Atlas here, because its author is now widely perceived to have been incredibly prescient.  For example: One of the most interesting characters in the novel, Ellis Wyatt, had figured out how to get oil from shale, a crazy idea back in 1957.  Like today’s high tech oil and gas producers, Wyatt’s genius had the potential to lift the nation’s economy out of a deep recession. In the novel, government leaders conspired with their business cronies and political supporters to destroy a railroad needed to transport crude oil from Wyatt’sColorado oil fields to distant refineries.  Equivalently today (December 20, 2011), after three years of environmental studies, our President and Congress are still fighting over the construction of a similarly needed pipeline.

But pessimists and dystopians, please make a note:

In the real world—sooner or later—rational economic self-interest trumps political ideology, always. 

And, increased oil and natural gas production, along with an efficient transportation and pipeline system, are in the best interests of American businesses, American job-seekers, and American consumers.  So, let’s get right to the good news.

Shale gas production is not just increasing, it’s growing almost exponentially.  In 2010, shale gas production represented 29% of natural gas wells completed and 27% of total natural gas production in the U.S.  By 2020, it’s expected that shale gas production will more than double, and by 2035 shale gas will represent 60% of all American natural gas production. IHS Global1, a respected worldwide research firm, estimates that the value of the natural gas extracted from shale will grow from about $26 billion in 2010 to $72 billion in 2020, and more than $153 billion by 2035; and that estimate assumes that natural gas prices will increase at a rate less than the overall inflation rate.

In 2010, shale gas production contributed about $76 billion to domestic GDP, and more than $18.6 billion to federal, state, and local government tax and royalty revenues.  Those numbers are expected to triple to $231 billion and $57 billion by 2035.

At a time (2010) when jobs were—as they are now—seemingly in short supply, the shale gas industry supported more than 600,000 American jobs.  By 2035, that number is expected to grow to 1.6 million.

And, here is why I’m really excited about the potential expansion of the shale gas industry:  Increasing production of natural gas could mean lower energy costs, and lower energy costs could mean a new industrial renaissance forAmerica.  According to the IHS study, increasing production of shale gas could lower the cost of manufacturing in many critical American industries. 

Among the possible beneficiaries, the electric utility industry is likely to move away from coal and toward natural gas as a fuel for its generating plants.  Exports of PVC and related products manufactured in theU.S.have already tripled since 2007 as a percentage of total production.  Other chemical producers, including agricultural chemical manufacturers, and aluminum, steel, and cement producers could benefit, too.

This is all confirmed by another new study2 by Pricewaterhouse-Coopers,   which found that seventeen chemical, metal, and industrial manufacturers commented in their 2011 SEC filings that shale gas developments drove demand for their products, compared to no—zero—such statements just three years ago.

 The PwC study also says that it’s very likely that there will be a significant return of manufacturing from offshore in coming years—as many as one million new jobs by 2025—especially to areas of the country friendly to shale gas production and/or with easy pipeline access. 

Labor costs overseas and corporate tax rates at home could be negative factors, but don’t pooh-pooh these more positive conclusions too quickly, as tax and labor conditions could change suddenly, dramatically, and favorably, too.

Like the heroes in Atlas Shrugged, I have an implicit trust in the American entrepreneurial spirit. I first witnessed that spirit as a teenager among the roughnecks of Ellis County, which at the time was the highest oil producing county in Kansas.  That spirit still lives in America—especially in the shale gas and oil industry—and that’s why I’m so sure the pessimists are wrong. mh

 

  1. The Economic and Employment Contributions of Shale Gas in the United States, IHS Global Insight (USA) Inc., December 2011.
  2. Shale Gas: A renaissance in U.S. manufacturing? PricewaterhouseCoopers LLP, December 2011.

Michael Jordan & Oil: The Law of Comparative Advantage

Originally published in Flourishing March/April 2010.

First, consider these facts:*

  • Just 18% of our oil imports come from the Persian Gulf.
  • The US produces 74% of all the energy it consumes.
  • Because only 26% of our energy is imported, only 4.7% of US primary energy comes from the Persian Gulf. (18 x .26 = 4.68)
  • There are 173 net oil importers in the world.  So, if the US quit buying oil on the world market, there would still be 172 net oil importers.
  • Crude oil contains about 18,400 Btu’s per pound.
  • Corn contains about 7,000 Btu’s per pound.
  • Wind-generated electricity may cost more than twice as much to produce as much electricity from plants fired by natural gas, nuclear, or coal.

Now, what is the law of comparative advantage, and why does it matter?

The law was first identified and formulated by the great British economist David Ricardo to explain that international trade and the division of labor are mutually advantageous to two or more countries, even if one is superior to the others in production of virtually any commodity, product, or service.  In fact, the law applies to any situation involving the division of labor.

In his prime, Michael Jordan could play baseball better than 99% of all Americans.  He did, in fact, earn a tidy sum of money playing minor league ball; but just about the same as others with similar ability.  In basketball, though, Michael was the greatest player who ever lived.  In basketball, the skill differential between Michael and the other players was much greater.  As a result, Michael had more fun and made far more money playing basketball than baseball.  Baseball was not hurt by Michael’s absence, and basketball was elevated immeasurably.  That’s the law of comparative advantage.

The countries of the Persian Gulf are the Michael Jordan of oil—they have more oil than any other region of the globe.  But, they don’t have much fresh water or arable land.  In agriculture, they are, at best, minor league.  For the sake of illustration, let’s assume that it costs those countries less than $10 per barrel to extract oil from the ground.  Let’s also assume that producing corn, to whatever extent they might be able to do that, costs them at least $3.50 per bushel.  If, based on world market prices, they can sell corn for $3.50 and oil for $75, their comparative advantage is clearly the production and distribution of oil. 

What about us?  Ignoring the fact that access to many of our own reserves is limited by the government, the United States itself has vast reserves of oil and other fossil fuels.  The costs of bringing oil out of the ground in the U.S. vary widely, but let’s say the range is from $15 per barrel to $200 per barrel.  With a market price of $75 per barrel, at what point does it make economic sense to import oil from the Persian Gulf countries?  The obvious and correct answer is. . .

. . . anytime our cost of production exceeds the market price (in this case $75), we should purchase any additional oil we need—whether from Mexico, Canada, or any other country—in the world market for oil.

Producing oil domestically at a cost greater than that at which we can buy it overseas makes no sense.  Nor do we benefit in the slightest degree from the attempt to attain energy independence via subsidized “alternative energy”.  In either case, we simply increase our own energy costs.  More importantly—like Michael playing baseball—we divert significant capital and human resources from industries where they could be employed more productively.  In my opinion, growing corn for ethanol, instead of for food, is but one glaring example of such misallocation of resources.  The “green jobs” boondoggle is another. 

In sum, I believe it surely is true that we can and should produce a significant supply of energy right here in the U.S., but the law of comparative advantage tells us that the quest for energy independence is a fool’s errand.  mh

A Brief Economic Update on Oil

Originally Published in eFlourishing Issue 10, May 30, 2010

The theory of “Peak Oil”, like the theory of “anthropogenic global warming”, is, I believe, factually unsustainable. Both theories conveniently discount the scope and effects of natural phenomena and the unlimited potential of the liberated human mind. Fortunately, as Mrs. Cunningham taught her history students nearly fifty years ago, the truth will out. According to a recent Gallup poll (http://www.gallup.com/poll/126716/Environmental-Issues-Year-Low-Concern.aspx) , the number of people who take “Global Warming” seriously has fallen to 28%. “Peak Oil” is headed for the dust-bin of science, too.

Oil production increased in the Gulf of Mexico and North Dakota last year. Those increases more than offset declines elsewhere in the U.S. for the first annual increase in U.S. oil production since 1991. The U.S. Energy Information Administration (EIA) reported in its March 2010 Short-Term Energy Outlook that U.S. oil production in 2009 averaged 5.32 million barrels a day, up from 4.95 million in 2008. That’s an 8% increase.

Several weeks ago, a subscriber/client sent me a link to some information about the Bakken Formation in North Dakota. I checked it out. According to a 2008 report by the U.S. Geological Survey, Bakken could increase technically recoverable reserves by up to 4 billion barrels. Though newsletter and stock promoters often exaggerate the potential of the Bakken Formation, the recent EIA Outlook shows that Bakken does add significantly to production. The increases in production in both the Gulf of Mexico and North Dakota’s Bakken Formation show – yet again – how oil company investments in rapidly developing technology can increase both known reserves and current oil production.

As the economist Dr. Reisman reminds us, from its surface to its center – a distance of four thousand miles – the Earth is nothing but a solidly packed ball of natural resources. Even with the scientific and technological progress we’ve made during the 150-year history of the oil industry, we’ve succeeded in drilling in just a few places to a depth of only about seven miles – a pin prick.