America’s oil choice: Pay up, or get off

By Chris Nelder | February 20, 2013, 1:55 AM PST

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The oil industry has an important message for you, America: You’re not paying enough for fuel. And if you want to realize the fantasy of “North American energy independence,” you will have to pay more for it — a lot more.

Getting drivers to go along with this notion will not be easy, so the industry has couched this message in much more careful language.

Its new media campaign began with a Feb. 5 editorial in the New York Times by Christof Rühl, group chief economist of BP. After claiming victory for optimists over peak oil pundits like me and trumpeting “North America’s oil and gas renaissance” — new “tight oil” production from shale formations like the Bakken in North Dakota and the Eagle Ford in Texas — Rühl explained how the “expected surge of new oil will lead to increased supply overall and continued market volatility.”

He wrote: “If history is any guide, OPEC will cut production and forego market share in favor ofprice stability.” (Emphasis mine.)

The United States and Canada have an important policy choice to make, Rühl asserted. “Nations with abundant resources must decide whether to follow the path of open markets, including foreign access and competitive pricing,” or “opt for restrictive investment regimes that risk becoming less rewarding.” (Emphasis mine.)

In other words, North American oil prices need to be higher. And the way to do that is to export crude to the rest of the world.

An editorial in the Financial Times the day after the Times piece, written by the head of the International Energy Agency (IEA), Maria van der Hoeven, echoed this message.

Under the subtitle “Conditions expose misalignment between resources and regulations,” she explained how “logistical and policy hurdles above ground” are “depressing domestic oil prices and curtailing investment.” The glut of oil at U.S.’s primary delivery point in Cushing, Oklahoma, caused by new tight oil production have driven the price of some varieties of mid-continent crude as low at $50 to $60 a barrel, well below the primary West Texas Intermediate (WTI) benchmark price of $96. The main European benchmark grade, Brent, currently trades at more than $117.

The industry has a choice to make, van der Hoeven wrote: “Either U.S. crude is shipped abroad, or it stays in the ground.”

That’s right: The United States needs to become an oil exporter to “avoid [the] shale boom turning to bust.”

Elected officials in Alberta, Canada, have complained similarly in recent weeks about the glut, the “bitumen bubble.”

Tar sands oil is fetching just $50 to $60 a barrel due to a lack of export capacity, which is why the industry has been pushing for the approval of the Keystone XL pipeline. The discount from global prices will cost the Canadian province an estimated $6 billion in lost royalties this year, and the provincial government is anxious to find export routes for its crude.

A Feb. 17 article in the New York Times put a finer point on the dilemma: “If the Keystone pipeline is not completed, energy experts say, weak prices will make the economics of future oil sands projects questionable.”

As indeed they are. Two weeks ago, tar sands giant Suncor Energy wrote down a $1.5 billion investment in an $11.6 billion upgrade project that was to be built north of Fort McMurray, the heart of the tar sands development. Without Keystone XL, “the province seems fated to face continuing steep price discounts, as a captive in an oil-glutted North American market,” opined theGlobe and Mail, and the upgrade project could be cancelled altogether.

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A strategic choice

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C. Gil Mull, a 78-year-old career petroleum geologist who worked for Atlantic Richfield (now ARCO), Exxon, the U.S. Geological Survey, and Alaska Geological Survey and Division of Oil and Gas, shared his perspective with me recently. Mull was fortunate enough to be working at the discovery well when the Prudhoe Bay field was found on the North Slope of Alaska in 1968.

“I was proud to be associated with the group that found the largest field in North America, but we’ve squandered it, pouring it into SUVs and all the rest,” Mull told me ruefully. “We’ve squandered it for 40 years without making much progress toward a more sustainable energy future. No doubt that the fractured shales have given us a huge increase, but there’s no way it’s going to make up for the decline of conventional resources. It can buy us more time but I hope we don’t screw this one up!”

I couldn’t agree more. It’s time we did something about our oil addiction, for real. Exporting crude is not the way to do it.

(Photo: The author, in front of a sculpture made from two oil tankers at Burning Man in 2007.)

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