Wednesday, August 06, 2008

BARACK OBAMA

That EIA Report Obama Cites Treats Oil As If It's Less Than $50 a Barrel

Since offshore drilling has become a top tier issue in this campaign, I've encountered more than a few readers who hold up the Energy Information Administration report like a protective talisman and declare, "No oil would be produced until 2017! No oil would be produced until 2017!" Obama himself mentioned it in his speech.

As I've noted, that report assumes nothing happens until 2012. Beyond that, offshore drilling skeptics haven't offered anything to refute the report that some California oil deposits could be accessed within one year; probably because refuting it would mean acknowledging it, and it's easier to win the argument when you pretend there's no contrary evidence.

Campaign Spot reader Rick points out another fascinating detail in that EIA report's final paragraph:

Although a significant volume of undiscovered, technically recoverable oil and natural gas resources is added in the OCS access case, conversion of those resources to production would require both time and money. In addition, the average field size in the Pacific and Atlantic regions tends to be smaller than the average in the Gulf of Mexico, implying that a significant portion of the additional resource would not be economically attractive to develop at the reference case prices.

In other words, if oil is expensive, these fields will look like good investments; if oil is cheap, building offshore platforms and drilling will look less worthwhile to oil companies.

So what are the reference case prices for EIA's report? You have to look elsewhere on their site to find it:

In the reference case, increased non-OPEC and OPEC supplies are expected to cause a price decline from 2006 levels to under $50 per barrel (2005 dollars) in 2014.

Yesterday oil traded at $119; it peaked at $147 a barrel this year. I suppose it's theoretically possible that without offshore drilling, the price of oil will be cut in half over the next six years while demand from China and India continues to surge. But it sure doesn't look likely. And if oil is more expensive, oil companies will find offshore drilling more worthwhile — bringing more domestic supply sources online, reducing transportation costs, and eventually reducing prices.

The rest of the EIA range in that report is from $34 a barrel (!) to $101 a barrel by 2030.

I'm sure the folks at EIA are fine, fine people who try their best. But predicting future oil prices is difficult even for trained experts. On page 103 of their 2002 edition of their Annual Energy Outlook, the EIA predicted that by 2010, the range of oil prices from $17.64 to $30.44 per barrel. We're pretty close to that date, and again, a drop from today's $120 or so to $30 a barrel in the next two years just doesn't seem likely.

The EIA report is one assessment from an agency whose predictions have proven considerably flawed at best, and at worst, was completely blindsided by the oil price explosion of recent years. It shouldn't be held up as the final word on why offshore drilling is a bad idea.

UPDATE: PowerLine's John Hinderacker finds an even more egregiously off-base short-term prediction: "The EIA, writing in early 2007, assumed that oil prices would decline from their 2006 peak; that in 2008, the price of crude oil would be around $60 a barrel; that it would continue to decline until around 2013 to a low of about $50 a barrel; and that the price would then gradually increase to a little under $60 a barrel by 2030. Those were the assumptions on which EIA concluded that it would not be economically profitable to get most OCS oil out of the ground."

ANOTHER UPDATE: A reader points out that the numbers in the 2002 report are in 2000 dollars, which, because of the decline of the dollar over the past seven years, doesn't buy as much as it used to. He points that the price of gold has increased 3.24 times since 2000, and that by this calculating the price of oil in correlation to this commodity, the EIA's range is $57.15 to $98.63 in 2008 dollars, and their expected scenario was about $75 a barrel. That top range number looks better, but their highest estimate still underestimated today's price by $20 and is $50 below this year's peak.

But even improving the 2002 high-end estimate doesn't make the 2007 prediction look much better.

08/06 10:09 AMShare