With $4 gallons of gasoline, it is no surprise that energy is becoming a major issue in our upcoming elections. What is surprising is the remarkable adherence by Democrats to grievously and obviously failed policies, suggesting everything from maintaining the bans on oil and gas exploration off our shores to windfall profits taxes to simply nationalizing the oil industry (although Maxine Waters actually said “socialize” when she couldn’t think of the word “nationalize”.)

The American public is ahead of the politicians on this issue, and far ahead of the Democrats, with a Rasmussen survey last week finding that “67% of voters believe that drilling should be allowed off the coasts of California, Florida and other states.” According to the survey, offshore drilling is supported by 85% of Republicans, 57% of Democrats, and 60% of independent voters. Even John McCain has changed his tune, now calling to end the federal ban on offshore drilling.

The Department of Energy’s Energy Information Agency (“EIA”) recently put out its “Revised Early Release Annual Energy Outlook 2008” which should have us all worried about the prospects for energy prices if the Democrats get their way. The forecasts have been noticeably modified since their 2007 report, with the expectation for energy consumption in 2030 down 10%, but still an increase of 18%. But this is not a change anyone should be happy about, though radical environmentalists will be, because it is based in large part on a lowered forecast for GDP (from 2.8% growth to 2.4% growth) and personal income (down $1.3 trillion in 2030) and raised forecasts for energy costs and inflation. Just so you get an idea of what we’re talking about here, this is $1.3 trillion: $1,300,000,000,000.00 Even to the US Congress, that’s a big number.

Particularly striking is the note in the EIA’s overview that “the inclusion of EISA2007 is by far the most important” factor in their changes. EISA2007 is the Energy Independence and Security Act of 2007 which forces up the fuel efficiency of automobiles, effectively bans incandescent light bulbs by 2014, and massively increases the amount of biofuel required to be added to gasoline. (If you know how we can save the planet by burning our food, please let me know.) In other words, the government is saying that EISA will be a primary factor behind our GDP being reduced by two trillion dollars in 2030 and behind their expectation of imported oil costing $70/barrel instead of $60/barrel in that same year. Also, the EIA slightly raised their expectations for “primary energy intensity” meaning that despite what we’re told will be substantial gains in efficiency from EISA, EIA raised its forecast for the amount of energy required per dollar of GDP. It’s very much like the efficiency gains at Al Gore’s house.

Although any sensible approach to reducing high oil prices would include conservation measures, the primary focus must be on increasing supply. And that is exactly what could be done by the Federal Government lifting the ban on offshore drilling and by all governments making it less difficult to drill on multi-use public lands (not in National Parks) and ANWR.

The resources of just 11 major onshore federal land areas are estimated by the Bureau of Land Management to be 21 billion barrels of oil and 187 trillion cubic feet (“TCF”) of natural gas. Of this, the “mean oil reserve case” for ANWR is 10.4 billion barrels, or 50%. Of this land, only 24% is “accessible under standard lease terms”, with that 24% representing only 3% of the oil and 13% of the gas contained in the 11 land areas.

And, according to the government’s Minerals Management Service, “oil and gas resources in undiscovered fields on the OCS (2006, mean estimates) total 86 billion barrels of oil and 420 trillion cubic feet of gas. These volumes represent about 60 percent of the oil and 40 percent of the natural gas resources estimated to be contained in remaining undiscovered fields in the United States”. Much of this comes from Alaska. For the lower 48 states, EIA estimates 40 billion barrels of oil either undiscovered or inferred, and 213 TCF of gas, not including “unconventional” recovery such as “tight gas”, or gas from shale or coal formations.

It should be noted that resource estimates tend to be conservative. For example, in 1997 Alaska’s Prudhoe Bay reserve was estimated at 9 billion barrels of oil. To date, it has produced 15 billion barrels and is going strong. Similarly, 1984 estimates of Gulf of Mexico reserves were 6 billion barrels and 60 TCF. Since then, 13 billion barrels and 152 TCF have been recovered.

For context, EIA estimates that the US will consume about 8 billion barrels of oil and 23 billion TCF of gas in 2030.

The costs of exploration, especially offshore, are enormous. According to Andy Radford, Policy Analyst at the American Petroleum Institute ("API"), “if you’re in deep water (the vast majority of offshore opportunities), you’re looking at upwards of $200 million to drill a single well. Once you include lease costs and the costs of building a platform for full-fledged production at a site, you’re looking at $1.5 billion, or even $2 billion in the deepest water.” However, according to Radford, advances in 3-D and 4-D seismic technology have made such costs better bets, even though just the seismic mapping of a resource can cost $100 million. Essentially, the 3-D technology allows accurate location of a resource and the 4-D technology allows much better assessment of the best spot to drill into in order to drain the reservoir most efficiently. This allows far fewer wells to be drilled, something which should please environmentalists, oil companies, and consumers.

There are three most-common arguments against allowing offshore drilling: Environmental impact, non-producing existing leases, and time to production. Both arguments can be rebutted clearly and simply with facts. Regarding the environment, of all the billions of barrels of oil we’ve produced, less than 0.001% has spilled. And, according to the API’s Radford, “although over 100 offshore structures were destroyed by hurricanes Katrina and Rita in 2005, there was no significant release of hydrocarbons.”

As far as current leases not generating production, Radford points out that shallow water leases are typically five years, with deep water 8-10 years. “That’s what it takes to do the exploration you need” to prepare for production. A ‘non-producing’ lease is not an ‘inactive’ lease.” In other words, the process of mapping a leased area to determine whether production is feasible and economic, then drilling one exploratory well if it seems justified can take up to three years by itself. Exploration companies are working very hard in currently-leased areas to see if they can be turned into productive resources. Since they lose the leases which cost millions or tens of millions of dollars if they don’t generate production within those time frames, the implication that oil and gas companies are somehow slacking off with existing leases is ridiculous. Finally, I would not that it takes a certain kind of mind to argue on one hand that we shouldn’t allow new drilling because oil companies are slackers and at the same time argue that we shouldn’t allow new drilling because it takes 10 years to get to production in many cases, such as might be expected in ANWR. Furthermore, the argument that changing our policy will have no short- or medium-term impact on energy prices represents a fundamental misunderstanding of the way markets work, including the way speculators trade.

According to Richard Ranger, another API analyst, history shows that carrots work a lot better than sticks in bringing energy resources home to Americans: “In 1995, people were talking about the Gulf of Mexico as a ‘mature resource’. Clinton signed the Deep Water Royalty Relief Act under which the federal government waived their 12.5% royalty until either a price or production threshold was met. Since then, natural gas production in deep water is up 407% and oil production is up 386% in the Gulf. The increase in crude oil production attributable to that Act is about a million barrels per day, nearly equal to our imports from Saudi Arabia.” (And more than we import from Venezuela.)

Onshore opportunities in the lower 48 are nearly as large as offshore, even without the tremendous potential of oil shale and other unconventional sources which may become economically viable with the advent of new technology such as “hydraulic fracturing”, which cracks rock and “expands the zone”, allowing more energy (especially natural gas) to be retrieved and making such projects worth pursuing.

The good news is that we do have a choice because our nation has tremendous energy reserves, if only the Democrats would let us get at them. But, as API’s Ranger notes, “As people from both coasts move to the West, where many of our onshore resources are concentrated, we are seeing more application of the BANANA principle: Build Absolutely Nothing Anywhere Near Anybody.” Unless and until that changes or is overcome, Americans should expect environmentalists, liberal multi-millionaires, and their foot soldiers in Congress to continue to saddle us with high energy prices.

Although the pain in Americans’ wallets has woken us up to the issue, most still do not understand either the magnitude of the demands for energy we will need to meet in coming decades or the ability of our own onshore and offshore resources to satisfy much of that increase in demand. In other words, if we keep doing what we’ve been doing y preventing development of domestic supplies of energy, we will see price increases and shortages that will make us long for the good old days of $4 gasoline.