The People of America's Oil and Natural Gas Indusry

Developing Domestic Energy - What the Issue Is

John Felmy
Posted March 18, 2011

As a rule of thumb it is generally not a good idea to spend a lot of time arguing against the ridiculous. But when the ridiculous is coming from folks who have the power to implement policies which will harm our economic and energy security an exception to the rule is warranted. Such is the case with the notion that oil and natural gas companies don't want to develop oil and natural gas resources.

"The issue "is not a failure of the government to lease lands or to authorize drilling," [Sen. Robert] Menendez said. "It is that millions of acres under lease exist but the industry is not developing them."

Of course a year ago Sen. Menendez let "...the administration know that offshore drilling is a non-starter for me," and earlier in the week we got "The other side of the aisle likes to say if we just produced more oil and gas, prices will go down, but the facts suggest something different." So I suppose it is good news that the Senator is now eager for increased domestic production. But the above argument is what we call "The 'Use It or Lose It' Deception" and while there are numerous political reasons why we might be seeing it right now, I will simply assume those making the argument have no idea how energy production works. Erik explains here:

"Companies purchase leases for the right to explore for the resources. You don't know if a lease actually contains oil or natural gas until you move forward and drill an exploratory well. Companies purchase a large portfolio of leases to give them the greatest opportunity to find oil and natural gas. They work hard to survey and study all of their leases with the hope that they can narrow the list down to a subset that have the best likelihood of actually containing oil or natural gas. However, it is not uncommon for a company to spend $100 million to drill a well and find no oil or natural gas. In fact, companies drill more wells that have no oil or natural gas than wells that actually do."

In other words, within the leased lands there are more areas which do not contain oil than do. A company that randomly dropped $100 million wells onto leased land where there was no oil would soon be out of business and would contribute nothing to the supply of oil. The effect on price? Please consult the law of supply and demand.

Now please ask yourself. Who in their right mind would advocate for expensive, symbolic projects which raise costs for consumers and return nothing? Oh wait, we are in Washington, please withdraw the question.

Developing America's domestic oil and natural gas resources is necessary to power our nation's economy, create jobs and enhance our nation's energy security. And America's oil and natural gas companies invest heavily and want to invest more, to develop these resources. Unfortunately, from the very beginning, the current administration has taken dozens of specific steps to stop or delay development. And as to those leases, Erik has more:

The administration itself is preventing the industry from developing these leases because it is not issuing permits to drill or conduct seismic studies of these leases. They want the industry to develop the leases it already possesses, but they won't grant the permits to do so.

The administration's approach to energy policy is to propose and support energy taxes. However, a recent study by Wood Mackenzie concludes increased access to domestic oil and natural gas--rather than increased taxes on the U.S. oil and natural gas industry--is the best strategy for increasing government revenue, jobs and energy production. Increased access could (by 2025) create 530,000 jobs, deliver $194 billion more in tax, royalty and other revenue to the government, and boost domestic production by four million barrels of oil equivalent a day. Raising taxes on the industry with no increase in access could reduce domestic production by 700,000 barrels of oil equivalent a day (in 2020), sacrifice as many as 170,000 jobs (in 2014), and reduce revenue to the government by $128 billion dollars by 2025.

America's oil and natural gas industry supports 9.2 million jobs. Positive energy policy has the potential to increase that number, while negative policies can put many of those jobs at risk. Energy is a global business and negative policies could shift these American jobs offshore to other areas around the world. We have already seen rigs leave the Gulf and move to Africa and South America.

What we don't need from policy makers is a communications campaign designed to obfuscate the fact that an energy policy of "no" is no energy policy for America. What we need from policy makers is a firm "yes" to developing the energy that Americans use today, and will use tomorrow.

Get briefed on the onshore and offshore lease programs.

ABOUT THE AUTHOR

John Felmy is API’s Chief Economist. He is responsible for overseeing economic, statistical and policy analysis and has over twenty-five years experience in energy, economic and environmental analysis. John is a Pennsylvania native and received Bachelors and Masters in Economics from Pennsylvania State University and a Ph.D. in Economics from the University of Maryland. He is a member of several professional associations including the American Economic Association and the International Association for Energy Economics.