Domestic oil sources need to be developed
If you care about your money, you might want to get familiar with the following names: Elm Coulee-Billings Nose; Poplar Dome; Little Knife
Structural; Middle Sandstone; and Northwest Expulsion Threshold.
Along with some others, they are the names of some of the areas in North Dakota and Montana that make up the Upper Devonian-Lower Mississippian Bakken
Formation, Williston Basin Province that have shale oil that can be recovered with today's standard industry technology and practice. "Upper
Devonian" and "Bakken Formation" may have little potential to become household phrases, but what lies within them under the earth's surface
could significantly affect our economy, our wallets and our daily lives.
Last week, the U.S. Geological Service updated its estimate of the amount of oil that sits quietly down there underground. Government geologists now believe
there are about 3.65 billion barrels of oil and 1.85 trillion cubic feet of natural gas there, about 25 times their previous estimate.
The USGS reports that the huge difference in the estimates is because of improved knowledge of the underground structural formations as well as the
improvements in drilling and extraction technology that make large-scale extraction possible.
The reason why this new assessment is important is that the oil reserves lie under U.S. soil. That has a national security dimension, of course, but it could
have a substantial economic impact as well. It could ease the pressure on oil supply and stabilize prices, and, as importantly, it could help make U.S.
monetary policy more effective.
Congress, as it did with the Alaska pipeline, may very well put restrictions on the end-use of the oil extracted from the Montana and North Dakota area so that
it can only be sold domestically, not shipped overseas. If it does so, that will have a significant effect on how sensitive gasoline prices are to U.S.
monetary policy and the financial markets' ups and downs.
The low interest rates in the U.S. are one of the major contributing factors in the continued price increases for oil. Most of our oil is imported, and we pay
for it with U.S. dollars. Our low interest rates here, though, exert a downward pressure on the value of the dollar, so that even if other reasons were not
driving crude oil prices up, we would be paying more at the pump.
The Federal Reserve has been lowering short-term interest rates in order to bolster the U.S. economy in general and the financial markets in particular. Each
rate cut has been greeted with enthusiasm, but the markets still seem fragile and vulnerable.
The Federal Reserve, then, is concerned that a rate increase could send the financial markets into a dark mood that would drag the rest of the economy with it.
So it is stuck with low interest rates even while it watches the rising price of oil seep through the economy, raising the prices of nearly everything we buy.
The introduction of a significant supply of crude oil from sources inside the United States would change the math of the oil-dollar equation. When refineries
in the country buy crude oil from a U.S. source, they really don't have to care so much what the dollar is worth in euros. They just buy the oil, refine it
into useful products and sell them at a profit.
Raising U.S. domestic production would reduce the total amount of oil demanded in the global market, which would exert a welcome downward pressure on crude oil
prices. Foreign suppliers might react by cutting back production, but even so we would be better off.
One reason we would gain an advantage is that the increased domestic production would cut the Federal Reserve some slack. If it felt the need to lower interest
rates to combat inflation it could do so without setting off another rise in oil prices -- and price inflation in everything else.
The rising price of gasoline has caused problems for household budgets and is changing spending patterns as well as driving habits. The rising price of diesel
fuel is affecting truckers immediately and directly, and its increased cost will find its way to virtually every product sold in America.
The rising price of crude oil, though, is also the reason why the Bakken Formation oil in Montana and North Dakota can be extracted. The technology, called
"horizontal drilling," is expensive and only worthwhile when crude oil prices are high. Today's crude oil prices certainly qualify.
The oil extracted from our own northern plains states would ease the pressure on global oil prices a little, but its immediate economic benefit would be to
free up our monetary policy so that it can do its job. That would be a good thing.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.
Poster's Note: I posted this because it is so typical of a conventional economist's perspective on our developing oil supply crisis. McCusker is
treating oil as just another economic input. If we want better fiscal health, we just need to ramp up domestic production. Its that simple. It would reduce
global demand and 'cut our Fed some slack.' Yeah. Thats it. That Bakken deal can do it! There's billions of barrels there. Do you see how these
overstated potential big reserve numbers cause a false sense of security? He fails to do the math of 500 wells there each doing 200 bls/day (several years
hence) equaling another 100,000 bls a day in a world that will be consuming 90 mil bls/day. Go ahead and bump it up to 2-3000 wells. Its a trickle.
I googled his name and didnt come up with anything substanitive except for pieces on airline industy ticketing procedure inefficiencies and such. http://downstreamventures.yuku.com/forum/newtopic/id/1. Its minuta while Rome was starting to
burn. This piece was too.
Do you see what I mean? Economists and conventional economics MISS the biggest economic fundamental unfolding today- a peak oil perspective. Its time for them
to start questioning their basic core approach and perspectives. Contrary to their contentions and their deficient theories, the transition past hydrocarbons
WON'T be seamless. It'll be calamitous. Fed policy on interest rates is relatively inconsequential. These guys should be screaming about bumping up
against the limits to growth. Adam Smith is not coming to the rescue. Neither is Bakken.
