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FRIEDMAN: Some pain, some gain from rising oil prices

  • Clay Bennett, Chattanooga Times Free Press

An email came in the other day with a subject line that I couldn't ignore. It was from the oil economist Phil Verleger, and it read: "Should the United States join OPEC?" That I had to open.

Verleger's basic message was that the knee-jerk debate we're again having over who is responsible for higher oil prices fundamentally misses huge changes that have taken place in the United States' energy output, making us again a major oil and gas producer — and potential exporter — with an interest in reasonably high but stable oil prices.

From one direction, he says, we're seeing the impact of the ethanol mandate put in place by President George W. Bush, which established fixed quantities of biofuels to be used in gasoline. When this is combined with improved vehicle fuel economy — in July, the auto industry agreed to achieve fleet averages of more than 50 miles per gallon by 2025 — it will inevitably drive down demand for gasoline and create more surplus crude to export. Add to that, says Verleger, "the increase in oil production from offshore fields and unconventional sources in America," and that exportable U.S. surplus could grow even bigger.

Then, add the recent discoveries of natural gas deposits all over the United States, which will allow us to substitute gas for coal at power plants and become a natural gas exporter as well. Put it all together, says Verleger, and you can see why the United States "will want to consider joining with other energy-exporting countries, like those in OPEC, to sustain high oil prices. Such an effort would support domestic oil and gas production and give the U.S. a real competitive advantage over countries forced to pay high prices for imported energy — nations such as China, European Union members, and Japan."

Indeed, Bloomberg News reported that "the U.S. is the closest it has been in almost 20 years to achieving energy self-sufficiency. .<TH>.<TH>. Domestic oil output is the highest in eight years. The U.S. is producing so much natural gas that, where the government warned four years ago of a critical need to boost imports, it now may approve an export terminal." As a result, "the U.S. has reversed a two-decade-long decline in energy independence, increasing the proportion of demand met from domestic sources over the last six years to an estimated 81 percent through the first 10 months of 2011." This transformation could make the U.S. the world's top energy producer by 2020, raise more tax revenue, free us from worrying about the Middle East, and, if we're smart, build a bridge to a much cleaner energy future.

All of this is good news, but it will come true at scale only if these oil and gas resources can be extracted in an environmentally sustainable manner. This can be done right, but we need a deal between environmentalists and the oil and gas industry to lock it in — now.

Says Hal Harvey, an independent energy expert: "The oil and gas companies need to decide: Do they want to fight a bloody and painful war of attrition with local communities or take the lead in setting high environmental standards" — particularly for "fracking," the process used to extract all these new natural gas deposits — "and then live up to them."

Higher environmental standards may cost more, but only incrementally, if at all, and they'll make the industry and the environment safer.

In the case of natural gas, we need the highest standards for cleanup of land that is despoiled by gas extraction and to prevent leakage of gas either into aquifers or the atmosphere. Yes, "generating a kilowatt-hour's worth of electricity with a natural gas turbine emits only about half as much CO<sub>2</sub> as from a coal plant," says Harvey, and that's great. "But one molecule of leaked gas contributes as much to global warming as 25 molecules of burned gas. That means that if the system for the exploration, extraction, compression, piping and burning of natural gas leaks by even 2.5 percent, it is as bad as coal."

Hence, Harvey's five rules for natural gas are: Don't allow leaky systems; use gas to phase out coal; have sound well drilling and casing standards; don't pollute the landscape with brackish or toxic water brought up by fracking; and drill only where it is sensible.


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