Energy: Is Offshore Oil Drilling the Answer?

Houston—There's something about the heavy air here that puts visions of drilling in the mind. On Tuesday, John McCain, who came to pander to the local oil industry, called for a reversal of the 27 year ban on offshore drilling. (President Bush echoed it today), and threw in a plea to drill in the Arctic National Wildlife Refuge for good measures). After two days here, chatting with people in the oil industry, and with the many locals who benefit from it, I was ready to wade into the waters off of Boca Raton, Florida, and start prospecting for black gold.

Partisans of more drilling frame their arguments as a simple declarative statement. If we just open up the coastal shelves and ANWR for drilling today, the very prospect of marginal additions to global supply (current usage is about 87 million barrels per day in the world) at some point in the middle of the next decade will magically cause prices of crude-and hence gasoline-to fall immediately. Of course, gas at $4 a gallon inspires a lot of similarly addled thinking. The canard that China is drilling near Florida's coast recently traveled a direct route from a George Will column to a Dick Cheney speech. One of my luncheon companions here asserted confidently that Russia was already drilling offshore. I nodded, and just barely avoided choking on my crawfish taquitos.

On the 45th floor boardroom of Shell's U.S. headquarters, I did, however, hear a reasoned, measured—almost convincing—case for more drilling. It was delivered by John Hofmeister, who is retiring next month as president of Shell's U.S. operations, and is embarking on a quest to inspire ordinary Americans to demand from their elected representatives a fundamental change in energy policy. (Call it Houston Astroturf.) Hofmeister isn't what you'd expect from an oilman. His accent is the flat patois of the Midwest, not a Texas twang. His degrees are in political science, not engineering or geology. When we met, he wore a light cotton button-down shirt with a Shell Eco-Marathon logo on it. Hofmeister emphasizes that he is speaking in his capacity as the founder of a new non-profit, Citizens for Affordable Energy, and not for Shell.

Hofmeister believes that demand—not shortages or speculation—is driving up the price of crude, specifically demand for so-called "middle of the barrel" products such as diesel, aviation fuel, heating oil. (Crude is refined into heavy low-end products, like asphalt or marine fuel, light refined products like gasoline and petrochemicals, and the aforementioned middle products.) While demand for gasoline is flat, inspired by a drop in U.S. consumption, demand for the other products continues to soar. With new discoveries being offset by declining fields, global crude oil production has been stuck at about 85 to 86 million barrels of day. "We have to get crude production up to 89 million or the low 90s," he said.

The U.S., which produces about 5.1 million barrels per day, could help contribute to stalled production, he says. Eliminating the Congressional ban on exploration and production on the coasts and on federal lands that are currently off limits for exploration would allow for the production of oil and natural gas equivalent to about 3 million barrels per day.

But drilling is only the first leg of a three-legged stool. Hofmeister believes that in the next decade, the U.S. can boost production of alternative fuels (mostly cellulosic ethanol) from 500,000 barrels per day today to 2.5 million barrels a day. And a drive for greater efficiency—principally by replacing the gas-guzzling U.S. car fleet with more parsimonious autos—can reduce daily demand by 2.5 million barrels per day. Over time, the combination of significant increases in production and significant demand destruction, "would hit the energy futures on its head," bring down prices, create jobs in the U.S., and decrease reliance on energy imported from tyrants.

Sounds good. But wouldn't any increase of U.S. production simply get eaten up by rising demand in the global market? "You would expect demand to grow in the development world. But based on energy investments being made today, there will be increased international supplies," he said. Ultimately, he believes, the reset of the world will follow the U.S. lead in biofuels and demand destruction.

What about the opposition? If expanding drilling can't gain traction with gas at $4 per gallon, the cause would seem to be hopeless. Hofmeister believes opposition to more drilling comes from peak oil enthusiasts, who believe the U.S. has essentially run out of hydrocarbons and thus should abandon hope of finding more; from environmentalists, who believe the negatives of carbon emissions and possible environmental damage from spills outweigh any possible positives, and thus want to shift away from hydrocarbons altogether; and from politicians and landowners in coastal states like Florida and California, who fear that their views and property values would be hurt. "Those numbers of people are large, and influential, and politically active," he said.

But Hofmeister believes that data and reason will bring them around. "The phenomenon of the roundness of the earth means that at a certain point away from the shoreline you can't see operations offshore." he said. He believes the industry's safety record—there hasn't been a devastating spill since the 1969 Santa Barbara debacle—should inspire confidence. "You'd have to say the industry has performed very well." (Exxon, cough, Valdez, cough.)

Hofmeister agrees with the environmentalists that petroleum has a finite future as a transportation fuel. "The internal combustion is a great invention that has served us well for a century, but it is time for us to move on," he said. Ultimately, cars will be powered by hydrogen, or electricity. So why not go whole hog and use today's high prices as an excuse to proceed more rapidly to the next big thing starting now? "The reason I advocate more hydrocarbons now is the social disequilibrium that is being caused by the shortage of domestic hydrocarbon production," he said. High gas prices are "a national problem of excruciating social pain." And the pain is widespread. Hofmeister is cutting back the miles he runs up on his Volkswagen Phaeton. "I wince when I pull to a gas station."