What President Obama’s Deepwater Quandary Might Mean for Maryland

Petroleum supply has been a central anxiety of U.S. leaders since World War Two.  In the context of the BP Gulf oil spill disaster, we are starting another national debate over energy and the environment — one that has important implications for Maryland.  Let’s pause to consider the “official projections” that inform this debate by taking at look at the Annual Energy Outlook 2010 (AEO 2010) from the Energy Information Administration.

The AEO 2010 projections are not a “crystal ball” prediction of the future but rather reveal the present-day state of conventional wisdom concerning energy trends.  The exercise of projecting out to 2035 simply clarifies what the EIA experts think is happening within the industry today.

With this caveat in mind, what we discover is that the “reference case” for petroleum is surprisingly optimistic.  EIA projects that the decades-long decline of domestic oil production will reverse.  Domestic production will rise — although not to anywhere near U.S. historic highs.

As the chart suggests, the heavy bet here is on increased output from deepwater wells:

In the short term, a vast majority of the increase comes from deepwater offshore fields. Fields that started producing in 2009 or are expected to start in the next few years include Great White, Norman, Tahiti, Gomez, Cascade, and Chinook. All are in water deeper than 800 meters, and most are in the Central Gulf of Mexico [aka “Hurricane Alley”]. Production from those fields, combined with increased production from fields that started producing in 2007 and 2008, contributes to the near-term growth in offshore production. (See page 75.)

If anything were to put a crimp in that deepwater production, then the projections for domestic crude supply would slip from modest growth back into decline.  Although the difference between those two projected states might be small in percentage terms, shifting from growth back to decline has outsized strategic implications for the United States.

The EIA analysts are also banking on CO2 enhanced oil recovery (EOR):

Lower 48 onshore production of crude oil continues to increase through 2035, primarily as a result of wider application of CO2 EOR techniques. EOR makes up 37 percent of total onshore production in 2035, up from 12 percent in 2008. (See page 75.)

So the reversal of U.S. production decline also hinges on the wider application of this new technology.

How does the rosy scenario for domestic production translate into projected imports?  Not surprisingly, AEO 2010 sees the import share of liquid fuels declining (“liquid fuels” means that they include domestic production of alternative fuels in their projections though it’s a relatively minor factor).

In the EIA model, higher oil prices accelerate domestic output and so cause the import share to drop faster; however, even the “reference case” shows decline.

If President Obama takes a tougher line on risky deepwater drilling, then he risks changing both of these charts from modest growth in domestic production and a declining import share back to the “bad ole days” of declining output and growing import dependence.

The EIA’s conventional wisdom could be overly optimistic to begin with and perhaps their rosy scenarios are improbable.  Nevertheless, when viewed through the lens of the AEO 2010, President Obama appears to have been backed into a political corner.  Does he want to face the voters in 2012 surfing on a gusher of deepwater oil or as a Jimmy-Carter-like prophet of energy doom and gloom?

While it may not be the actual choice he faces, one can rest assured that this version of conventional wisdom is echoing loudly and clearly within the walls of the White House.  Remember “Drill, Baby, Drill!”

What the AEO 2010 does not include in its projections is the growing burden of the U.S. oil import bill under any scenario.  (The import bill is the quantity of oil imported times the price.)  The AEO 2010 shows the world price of oil bouncing back sharply under both the “reference case” and the “high oil price case.”  This suggests that even if the percentage share of oil imports stabilizes or declines slightly, the total cost of imported oil will rise dramatically as the world economy recovers.

Will the U.S. be able to afford to import the oil it needs?  It is this challenge of the financial burden of oil imports —  and not simply the quantity of imports — that may be decisive in coming years and force us to grapple with cutting petroleum use.

How does all this affect Maryland?

1.  Maryland imports 100 percent of its petroleum. Every gallon saved translates into more dollars staying within Maryland.  Our state has a strong economic interest in national policies that cut the need for petroleum.

2. Maryland’s economy depends on its maritime resources. Our beloved and still-bountiful Chesapeake Bay must be protected from a Deepwater Horizon-type disaster which could be easily envisioned if irresponsible drilling is permitted off the Virginia coast.

3. Offshore drilling remains a threat to Maryland and other Atlantic states. It is noteworthy that the AEO 2010 forecast includes the output from expanded offshore drilling:

Removal of the Congressional moratorium on drilling in the Eastern Gulf of Mexico, Atlantic, and Pacific regions of the Outer Continental Shelf also allows for more crude oil production from offshore areas in the Pacific after 2016, in the Atlantic after 2021, and in the Eastern Gulf of Mexico after 2025. In 2035, U.S. crude oil production includes 0.4 million barrels per day from the Pacific offshore, 0.2 million from the Atlantic offshore, and 0.1 million from the Eastern Gulf of Mexico. (See page 75.)

The push to drill off the Atlantic coast will not go away.  This would be a nightmare scenario for Marylanders.  Will it be an issue in the 2010 governors’ race?


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One response to “What President Obama’s Deepwater Quandary Might Mean for Maryland

  1. Pingback: Is Petroleum A Barrier to U.S. Economic Growth? « Maryland Energy Report

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