Wednesday, October 15, 2008

Drill Baby, Drill!: Unrealistic, Reality, or a Bit of Both?

Attempts to keep politics out of any issue in today’s ultra sensitive pre-election atmosphere, be it the economy, religion, social values, foreign policy, the environment, and a host of others is difficult. However what stirred my interest in the subject of drilling for oil was the “Drill Baby, Drill” mantra voiced so effusively at the Republican Party Nominating Convention. Of course, controversy existed both before and after the convention.

Perhaps the most troubling aspect of the controversy is, basically, whether drilling in currently protected coastal areas, and Alaska is advisable. More specifically, is it worth the potential environmental harm?; will it produce meaningful enough oil to minimize our reliance on foreign (unfriendly) sources?; if so, over what period?; and the most current question: will it reduce the escalating price of gasoline quickly? To insure objectivity, more than one source has been consulted. And, as Sergeant Joe Friday used to say in the TV program, Dragnet, “Just the facts, Ma’am.” But first, some background.

To some degree the controversy is subsiding since the Congress seems to be moving toward a bi-partisan agreement that will allow at least some off shore drilling. A recent CNN poll indicates that about 69 percent of voters favor more drilling in currently protected areas and 51 percent say that the ban on offshore drilling is a “major cause” of higher gasoline prices. The point is not whether the poll participants are right or wrong, the question is whether they are well enough informed to make an educated judgment.

First some background as described in Scientific American. “World demand for oil, if it has not already done so, will unquestionably outstrip world supply. Crude oil production in the Persian Gulf has been nearly flat at just over 20 million barrels a day (mbd) since the early 1970’s. Whatever growth has occurred since then has come from oil fields outside the mid-East. However many of these fields (the North Sea for example) have not only reached production limits, but are in actual decline.” [There are some who believe––executives at Exxon Mobil for example––that new technology and new finds will solve the problem].

The China Card

However, a major factor is that the acceleration in global automobile usage is likely to be relentless. China alone, with today’s count of some 50 million vehicles (about 40 per 1,000 people) does not compare with some 240 million vehicles in the United States (roughly 800 per 1,000 people). With China’s booming economy, it already is the world’s second largest market for vehicles sales. We must assume that China’s economy will continue to prosper at a remarkable rate, enabling hundreds of millions of households within financial reach of car ownership.

Remember that China has a current population of 1.3 billion. Let’s assume that at some point it attains just half of the U.S. per capita ownership of passenger vehicles. That would account for some 500 million vehicles, about twice as many as in the U.S. Currently there are 650 million cars, trucks, and buses worldwide. A conservative estimate of an additional 500 million vehicles between China and India within the next 30 years raises the question of whether this magnitude of increased oil demand could be met. Placing this in perspective clarifies an issue that many Americans seem to ignore––oil is a global commodity, and oil prices are set in the world market.

The Scientific American article, published in late September, points out that “The 15 billion barrels or so of oil that is supposedly economically accessible in protected U.S. off shore sites would slake around six months of global demand in 2008, and of course a much smaller share by the time they reached the market in 15 years.”

Drill? With What?

However even if there were significantly greater supplies, a very major hindrance exists.A recent article in The New York Times explains: “…a shortage of ships used for offshore drilling promises to impede any rapid turnaround in oil exploration and supply. In recent years this global shortage of ships has created a bottleneck, frustrating energy executives and constraining their ability to exploit known reserves or find new ones.”

The article points out that the world’s existing drill-ships are booked solid for the next five years. It further states, “Demand is so high that ship builders, the biggest of whom are in Asia, have raised prices since last year by as much as $100 million a vessel to about half a billion dollars.” Some of the newest ships now lease for about $600,000 a day compared with $150,000 a day in 2002. (If you think ship building and leasing might interest you as an investment, research the companies Transocean (RIG), and National Oil Varco (NOV)––Disclosure: I own both). An article in U.S. News & World Report agrees that “...tight supplies of equipment and labor will severely constrain exploration in the next decade.” It puts the price of new drill-ships at $700 million, with many going to Brazil, West Africa, and South Asia. It also estimates that it would take seven to ten years “for the oil to start flowing.”

Questions have also been raised as to why energy companies have not fully utilized their existing permits on federal lands. Existing federal leases contain an estimated 82 percent of all the natural gas and 79 percent of oil available. The negative arguments against drilling is probably best expressed by our own U.S. Energy Information Administration (EIA) that did a detailed study of the likely outcome of offshore drilling for its “Annual Energy Outlook 2007.” The conclusions were “The projections in the OCS [Outer Continental Shelf] access case indicate that access to the Pacific, Atlantic, and Gulf regions would not have a significant impact on crude oil and natural gas production or prices before 2030.” It reiterated “,,,any impact on average well head prices is expected to be insignificant.”

The most compelling and frankly, most sensible article promoting drilling in currently protected areas was written as an editorial piece in U.S. World & News Report. The author Morton Zuckerman is the publisher and editor-in-chief. He also happens to be one of my favorite editorial writers, second only to Tom Friedman of The New York Times. In the two page article titled “Stop the Energy Insanity” published in mid-July, Mr. Zuckerman covered a broad range of subjects with visible anger stating, “WE ARE IN A HOLE––AND STILL DIGGING. We have oil at a catastrophic $140 a barrel yet no sign of a bipartisan energy policy assured of passage––let alone the forceful execution needed to expand domestic supplies and restrict domestic consumption. Instead, we have the blame game about greedy speculators, careless consumers, and cowardly politicians, inevitable maybe in an election year but a betrayal of the promise of America.”

His intent is to make the case that “It’s clear that the age-old standoff on whether domestic drilling or conservation is the solution is now irrelevant. We must have both.” On the subject of the potential negative impact on the environment, he writes, “We can get past the lame repetition of the decades-old argument over the virtues of offshore drilling. Simply put: To refuse to exploit our vast oil reserves is insane. The United Sates is one of the few countries in the world that choose to lock up their natural resources by dramatically restricting production and exploration. At least until now.

He is also an advocate for drilling in the Arctic National Wildlife Refuge (ANWR), maintaining that, “…we’re talking about a tiny corner of 2.200 acres (an area the size of a small airport) out of 19 million acres. The proposed drilling promises to yield an estimated 10.4 billion barrels, representing well over 20 years of imports from Saudi Arabia. Drilling would take place on the coastal plain, a mosquito plagued tundra and bog in the summer, not in the snowcapped mountains of ANWR that television pictures would have you believe are at stake.”

He then writes that the outer continental shelf could be tapped with minimal environmental disturbance based on the fact that there were virtually no spills when Hurricane Katrina and Rita hit in the Gulf area. In addition, “The stellar environmental records of eco-sensitive regions such as Scandinavia, the Netherlands, and Great Britain have shown that the greatest oil spills would be avoided because they typically come from tankers importing oil, not from drilling or other off shore locations.” He also claims that since prices for crude and gasoline are set by future expectations, “Any policy that pushes the future supply to increase or leads future demand to drop can cause today’s prices to fall or to rise less than they otherwise would.”

So, what’s your opinion? Don’t be swayed by the preponderance of negative information above. Perhaps that’s just an indication of a more liberal media as some complain.

Monday, October 06, 2008

Infrastructure Insanity — Part III

The October issue of Vanity Fair magazine featured an interview with Michael Bloomberg, Mayor of New York City. One question asked of him was, “Who are your favorite writers?” The first name he mentioned was Tom Friedman, three time Pulitzer Prize winner, and op-ed writer for the New York Times, for whom I have expressed admiration in several previous articles. Mr. Friedman’s major strength is his ability to identify, embrace and emphasize critically important current issues. He is uncannily prescient in finding and then framing subjects that relate to the status of the U.S. as it functions and interacts in what he has described in his 2005 best-selling book as a “flat world.” (His most recent book, just released, “Hot, Flat, and Crowded” (already the number one selling book) will be reviewed in a future column).

In an article that ran in The Times the end of August, Mr. Friedman underscored China’s seven year efforts to build a “magnificent $43 billion infrastructure for the [Olympic] games [not] by the dumb luck of discovering oil, it was the culmination of seven years of national investment, planning, concentrated state power, national mobilization, hard work.” He contrasted those efforts with our own infrastructure endeavors, writing, “When you see how much modern infrastructure has been built in China since 2001, under the banner of the Olympics, and you see how much infrastructure has been postponed in America under the banner of the war on terrorism, it’s clear that the next seven years need to be devoted to nation building in America.”

Here’s a quiz: What city can you fly into, arriving at a sleek airport, taking a 220 miles per hour magnetic levitation train, which uses electromagnetic propulsion instead of steel wheels and tracks to get to town in a blink? New York City’s La Guardia Airport? Don’t make me laugh! That’s Friedman’s description of the city of Shanghai. That’s only one example of what we are facing on a global scale.

Here are two more rather depressing examples straight from his brand new book cited above: “In March 2008, my wife and I flew from New York’s JFK Airport to Singapore. In JFK’s departure lounge we could barely find a place to sit. Eighteen hours later, we landed in Singapore’s expansive, ultramodern airport, with free Internet portals, and children’s play zones scattered throughout. We felt like we had just flown from The Flintstones to the The Jetsons. If all Americans could compare Berlin’s luxurious central train station today with the grimy overcrowded Penn Station in New York City, they would swear we were the ones who lost World War II.” If we have any dream of competing with China, or Singapore, or any number of European countries for supremacy in this new century, we better get our infrastructure act together.

What follows are some of the major problems we face in the major infrastructure categories as described in the last (2005) report by the American Society of Civil Engineers (ASCE) mentioned in previous articles.


All tragedies, but especially major ones where multiple lives are lost, captivate the American public. They are further driven by the news media, and invariably finger pointing begins in the hope of identifying a scapegoat. Politicians are particularly adept at seeking out a culprit, usually from the opposing party. But what if the politicians of all political stripes are to blame? (Our nation’s political leaders have been reluctant to address the infrastructure crisis because of the huge costs involved. There are two reasons for this miscalculation. For one the deadly subject of taxes might have to be invoked. For another, and even less justifiable motive, in Congress, the word infrastructure has become a euphemism for pork barrel spending––earmarks anyone?)

The collapse last year of the eight lane bridge carrying Interstate 35W over the Mississippi river was one such incident. In fact the 40 year-old bridge, though branded structurally deficient since 1990, had been inspected by Minnesota officials just three months before the collapse. it was not then considered to be in danger of imminent failure. Nevertheless, despite the tragic circumstances (13multiple deaths and 145 injuries), the incident did focus the country’s attention on the decaying nature of our infrastructure.

Here are two little known facts: 1) Ironically, according to the ASCE magazine, one of the deadliest bridge disasters in American history occurred on that very same 35W highway cited above, when on December 15, 1967, the Silver Bridge, crossing over the Ohio River, linking Ohio and West Virginia collapsed, killing 46 people. 2) Between 1966 and 2005, some 1500 bridges in the U.S. collapsed, most due to hydraulic conditions.

The scope of the problem can be better understood when it is realized that today there are over 590,570 bridges in the U.S., and in 1990 some 42 percent (some four in ten) were considered to be in less than ideal condition. The “good” news is that by May 2007, the number of problematic bridges had decreased to “only” 160,093, or 27 percent of the total. However, if you are taking a long road trip now, you will be comforted to know that just one in four of every bridge you drive over is structurally deficient, or functionally obsolete. What a relief! Ha! U.S. bridges are built to last about 50 years, and the average bridge in the country is now about 43 years old. The ASCE report card mark for bridges was a “C,” probably only because of the improvement over the previous report.

It’s not the bridges alone that are the problem. ASCE reports that the interstate highway system handles more than 700 billion vehicle miles annually “on a network little changed since its original conception over 50 years ago.” By 2035 interstate travel could reach 1,8 trillion vehicle miles, and travel on all public roads could reach a total of 5 trillion vehicle miles. The American Association of State Highway and Transportation Officials (AASHTO) suggest that current highway arterial capacity must be doubled to accommodate all the projected growth in traffic. The amount of money required to maintain, as well as improve existing transit infrastructure is almost incomprehensible. A report issued in 2006, titled, “Status of the Nation’s Highways, Bridges and Transit, predicted that the total cost through 2024 would exceed $3 trillion, 300 billion. The report card scoring on roads fell from “D+” to “D.”

Oh! The Inanity of it All

The ways of our politicians’ minds are wondrous things. Consider these facts as outlined by PBS&J, a respected consulting firm specializing in infrastructure, engineering, and construction: “Our interstate roadway system was planned more than 75 years ago and the mechanism devised for its dependable funding, the Highway Trust Fund, was created by the Highway Revenue Act 52 years ago. About 45 percent of all highway spending comes from the trust fund which gets its money mainly from the 18.4 cents-a-gallon excise tax that drivers pay at the pump.”

Here’s where you have to hold your sides from laughing: “Gasoline was only 30 cents a gallon and the excise tax on it in was just 3 cents in 1956 when Congress created the fund. Now, decades later, interstates are reaching the end of their typical 50 year life cycles and require expensive rebuilding or revamping. As gasoline prices rose during the interim, so did the tax. But a tax averse Congress has kept it at 18.4 cents a gallon since 1993 when gasoline prices were about $1.10 a gallon. [Oh, for the good old days.] Today the gas tax is less than one half of 1960 levels when adjusted for inflation.” If Congress had the fortitude and common sense to index the tax to the price of gasoline, the trust fund’s revenue would be based on a tax at least three and a half times larger (about $.65 cents) than it is today, and we would not be facing the following, almost comic situation:

The Role of Unintended Consequences

The amount of money available from the Trust Fund for road, bridge, and public transit expenditures is basically predicated on how much gasoline is consumed. With the recent escalation of gas prices, Americans curtailed their driving sharply, using less gasoline, and tax revenues fell. The Department of Transportation (DOT) had originally estimated (and hoped) that the trust fund would not go broke until sometime next year, forcing the next administration to deal with the problem. But surprise! surprise! In early September, of this year the DOT announced that by September 30 th the Highway Trust Fund would be in deficit and Washington would be required to begin delaying payment to states for construction work after that date.

Panic set in, and because more than 300,000 jobs were jeopardized, the House of Representatives voted to transfer $8 billion from the Treasury’s General Fund. How did they come up with that number? Funny you should ask­­––and funny is the answer. In 1998, $8 billion was diverted from the Highway Trust Fund into the General Fund for non-highway expenses. So, this was essentially just a transfer back to where the money legitimately belonged before Congress hijacked it. After some arm twisting, enough Republican senators were convinced to pass the same bill and despite President Bush’s threat to veto it originally, he finally signed the highway trust fund rescue plan in mid-September with no ceremony or comment.

To complete the comic relief, Transportation Secretary Mary E. Peters said in a statement, “Americans cannot afford to have Congress play ‘kick the can’ with highway funding for another year, another month, another week.” “Kick the can”? Is that all this is––just another game? The solution? While it’s too late for this administration, the next one must come up with a bi-partisan, comprehensive, earmark and lobby free energy plan that takes into account what has deteriorated into dire infrastructure needs.

Next month’s article will address several new, unique and controversial suggestion as solutions to the infrastructure funding problem, as well as the ASCE reports on other infrastructure segments.