You can download the show (26 mins) here: RealPlayer | WinAmp | Windows Media | MP3

Related articles that came up in the discussion:

Scoring the rhetoric on Obama’s energy policies

Oil demand shift: Asia takes over

A model of oil prices

The cost of new oil supply

Numerous factors affect oil prices, like supply and demand, geopolitical unrest, natural disasters, monetary policy, and speculation, as I detailed in February.

But there is another factor exerting a continuous upward pressure on prices: the substitution of unconventional resources for conventional crude.

When conventional oil hit its production plateau around 72 – 74 million barrels per day at the end of 2004, but demand kept growing, we turned to various unconventional liquid fuels to make up the difference, such as natural gas liquids, biofuels, and most recently, “tight oil” from shales like the Bakken Formation in the U.S.

Source: Gail Tverberg, Our Finite World

The above chart, from an excellent new post by Gail Tverberg summarizing new international production data from the EIA, shows our increasing reliance on unconventional liquids. The supply of crude (plus condensates) flattened out, while natural gas plant liquids (NGPLs) grew substantially, and “other liquids” (mostly ethanol) became significant contributors to supply. The “processing gain” wedge really should be ignored, as it simply represents an increase in volume that results from refining heavy crude oil into lighter fuels; it’s not actually additional fuel.

The advent of tight oil in the U.S. has been hailed as the beginning of our incipient energy independence, although I have found no basis for such optimism in the data.  In fact, this is the third or fourth time we have been treated to such cornucopian stories. A few years ago it was biofuels that would save us from peak oil, and before that it was natural gas liquids, deepwater oil, heavy oil, tar sands and coal-to-liquids. One need look back no farther than 2005 to find plenty of pollyannish projections in reports from the EIA and IEA, and in op-eds in the Wall Street Journal. None of those projections panned out.

The argument was that high oil prices would make these previously-uneconomic resources viable, and to a limited extent that has been true. What we didn’t know then, however, was the pain tolerance limit of consumers. In 2008 we found that limit as we approached $120 a barrel for oil and $4 a gallon for gasoline. Prices are once again beginning to kill demand in the U.S., but under a slightly lower ceiling, because the economy isn’t nearly as strong as it was in the first half of 2008. Now the ceiling is closer to $100 a barrel.

The new floor

The new floor for oil prices is being set increasingly by the production cost of these unconventional liquids. A few decades ago, we could produce conventional oil profitably in the U.S. for under $15 a barrel. But those days are long gone for the U.S., and for most of the world (except a few old fields in places like Saudi Arabia). As every major oil company has admitted in the past few years, the age of easy and cheap oil has ended.

As the cheap oil from old mature fields is depleted, and we replace it with expensive new oil from unconventional sources, it forces the overall price of oil up. This is because oil prices are set at the margin, as are the prices of most commodities. The most expensive new barrel essentially sets the price for the lot.

Research by veteran petroleum economist Chris Skrebowski, along with analysts Steven Kopits and Robert Hirsch, details the new costs: $40 – $80 a barrel for a new barrel of production capacity in some OPEC countries; $70 – $90 a barrel for the Canadian tar sands and heavy oil from Venezuela’s Orinoco belt; and $70 – $80 a barrel for deepwater oil. Various sources suggest that a price of at least $80 is needed to sustain U.S. tight oil production.

Those are just the production costs, however. In order to pacify its population during the Arab Spring and pay for significant new infrastructure projects, Saudi Arabia has made enormous financial commitments in the past several years. The kingdom really needs $90 – $100 a barrel now to balance its budget. Other major exporters like Venezuela and Russia have similar budget-driven incentives to keep prices high.

Globally, Skrebowki estimates that it costs $80 – $110 to bring a new barrel of production capacity online. Research from IEA and others shows that the more marginal liquids like Arctic oil, gas-to-liquids, coal-to-liquids, and biofuels are toward the top end of that range.

My own research suggests that $85 is really the comfortable global minimum. That’s the price now needed to break even in the Canadian tar sands, and it also seems to be roughly the level at which banks and major exploration companies are willing to commit the billions of dollars it takes to develop new projects.

Production costs soaring

Indeed, production costs have been soaring since we began relying heavily on unconventional fuels. This is the direct result of rising prices for essential inputs like steel and diesel fuel (whose cost inflation is directly tied to the rising cost of the underlying fuels like hard coal and oil), of which ever-greater amounts are needed to drill and complete a new well. Adding another mile of high-specification steel pipe to a deepwater well, or another thousand feet of drilling and well casing for a deeper tight oil well, adds significant costs.

Globally, the cost of drilling a new oil well has gone parabolic:

Source: EIA

The cost of adding a new barrel of reserves — drilling to prove that the oil is there and economically recoverable, before actually producing it — has also jumped sharply:

Source: EIA

(It’s unfortunate that EIA doesn’t have more recent data than 2008 for this analysis, because the sharp downturn at the end of this chart owed mostly to the economic crash in the latter half of that year. Analogous recent data from the oil patch suggests that the curves in the above chart should have resumed their previous, pre-crash trajectory by now.)

As production costs push ever closer to the retail price ceiling, profit margins fall. Consider Canada as an example. Oil production there will likely turn a mere 5 to 8 percent annual return on equity for the next several years, according to analysis by ARC Financial. Under $60 a barrel, they note, “the industry is broadly unprofitable” and would not be able to attract reinvestment. Similarly, University of Alberta energy economist Andrew Leach noted this week that the average operating profit margin of Canadian-owned oil and gas assets is now 7.7 percent, while foreign-owned assets offer only a 5.5 percent margin. A far cry from the heady, ultra-profitable years of 2003 – 2005.

So while the press, ever-anxious to assign blame for high oil prices, highlights the enormous profits that oil companies are making, the fact is that much of those profits owe to producing oil from wells drilled in a much cheaper era and selling it in the new high-priced era.

This will not remain the case for many more years.

The 2014 – 2015 tipping point

Unconventional oil is currently just 3 percent of global supply. The IEA projects that it will make up 6.5 percent of supply by 2020, and 10 percent by 2035. As it gradually replaces cheap oil conventional oil, its real production costs will continue to push oil prices up. Eventually, those costs will cross with the pain tolerance limit of consumers.

Skrebowski sees rising costs outrunning the ability of economies to adapt to higher oil prices by 2014, producing an “economically determined peak” in oil production. After that point, prices will remain economically destructive, and render sustained economic growth impossible. At the same time, it will make new oil production harder to finance.

This matches well with numerous analyses of oil supply that project a major tipping point around 2014 – 2015. At that point, as I have reminded readers repeatedly, we will likely begin down the back of Hubbert’s Curve and see net losses in global oil supply every year.

“Unless and until adaptive responses are large and fast enough to constrain the upward trend of oil prices, the primary adaptive response will be periodic economic crashes of a magnitude that depresses oil consumption and oil prices,” Skrebowski concludes. “These have the effect of shifting consumption from incumbent consumers — the advanced economies — to the new consumers in the developing economies.”

As I detailed last month (“Oil demand shift: Asia takes over“) that is precisely what has been happening since 2005. The world’s emerging markets are buying their first cars and their first trucking fleets, and those vehicles have much better fuel economy than ours. They will be able to pay a price for oil that we cannot tolerate. From 2015 on into the future, fuel will become increasingly unaffordable for U.S. drivers.

So by all means, we should celebrate the ability of high oil prices and truly miraculous technology to bring us oil from under two miles of water and another five miles of rock in the Gulf of Mexico; from previously inaccessible deposits in the Arctic; and from low-grade resources like tar sands and tight oil shales. That technology will mean that we won’t literally run out of oil in the coming decades as depletion takes its toll. But we should not imagine that it will bring us energy independence or bring back the good ol’ days of $2 gasoline. What it will bring, eventually, is oil for Asia as the U.S. and Europe are forced to park their cars for good.

Photo: “Offshore Eiffel,” artwork by Greg Evans.

A fever has swept over American energy observers in recent weeks as they compete to write the most optimistic story of impending energy independence. For example, see Clifford Krauss in the New York Times, Citigroup’s Ed Morse in the Wall Street Journal, and Raymond James’s outlook covered by Angel Gonzalez for Dow Jones, with perhaps the “Bonanza” theme song in the background.

Or if not a fever, then perhaps a mental illness, or heavy doses of good acid. Because as far as the data shows, none of these projections have any basis in reality.

The vogue suggestion is that North American oil production is about to surge and wipe out our 8.7 million barrels per day (mbpd) of oil imports, making us self-sufficient in oil by 2020. Most of this new oil is expected to come from fracked shales like the Bakken Formation in North Dakota, plus new drilling in the Gulf of Mexico and offshore California, an increase in Canadian tar sands production, and a miraculous reversal of the long production decline in Mexico.

Citigroup, under the leadership of Morse, probably holds the current record for the most outlandish projection. It suggests that North America will add the equivalent of 1.4 mbpd of new production every year between now and 2020, including 0.4 mbpd from tight oil. (That projection was then thoroughly debunked by Dave Summers at The Oil Drum.)

What these optimistic scenarios don’t tell you is what they really look like, and what they’ll really do to the U.S. in the long term.

Tight oil

The basis of this new euphoria, as I explained in February, appears to be the 0.6 mbpd or so of “tight oil” production from the Bakken. These wells typically produce a mere 80 to 100 barrels per day on average, to 150 barrels a day at the high end. Using the higher production figure, achieving 0.4 mbpd of new production every year through 2020 would require at least 20,000 new wells nationwide.

To see the effects of such drilling, consider this map of oil and gas wells in the Elm Coulee field of Montana, the first commercially successful portion of the Bakken Formation. Some 7 to 10 active oil wells per square mile dot this field.

Source: ESER

But that’s more representative of a formation with a single pay zone. Some U.S. shales actually overlap each other, so perhaps instead we should visualize the Denver-Julesberg basin, an area we’ve been drilling for roughly a century. The basin contains multiple layers of oil- and gas-bearing rocks, including the Niobrara Shale, which is anticipated to produce 250 thousand barrels per day by 2020. This map shows 20-25 producing wells per square mile near Platteville, Colorado.

Source: ESER

That, then, is the onshore portion of the new energy independence vision: A pincushion, where we draw 60 to 150 barrels per day from each hole. And we’ll have to keep drilling them like mad, because production from those wells drops sharply in the first year then tapers off to negligible levels after 15 years or so, and eventually becomes uneconomical.

Production profile of a typical Bakken well. Source: North Dakota Department of Mineral Resources

How far can tight oil from these shale formations take us? According to the current Energy Information Administration (EIA) survey of U.S. shale gas and shale oil (tight oil),  we have an estimated 24 billion barrels of undeveloped technically recoverable shale oil in the Lower 48. In 2011 the U.S. consumed 6.85 billion barrels of oil. So the big bonzana of shale oil amounts to about 3.5 years of demand.

Outer Continental Shelf

What about our offshore potential? The oil and gas industry has been agitating for greater access to the Outer Continental Shelf (OCS) since onshore oil production began declining in the 1970s. What if we opened all of it to drilling, without any restriction?

Source: U.S. Minerals Management Service [Click for larger version]

The 2011 assessment from the Bureau of Ocean Energy Management (BOEM) gives a mean estimate of 88.6 billion barrels for the entire OCS. (The data in this assessment varies only slightly from the 2006 data shown in the chart above.) Therefore, if we drilled the entire OCS, it might meet 13 years of demand. If the 95 percent probability estimate of 66.35 billion barrels is correct (and the P95 estimates usually are), then it would meet less than 10 years of demand.

ANWR

After the onshore tight oil in the Lower 48, the offshore oil of the OCS, and the Gulf of Mexico where oil production has modest growth potential, the only remaining serious prospect in America is the Arctic National Wildlife Refuge (ANWR), the target of the most contentious battle for new oil drilling in the last decade. We won’t know how much oil is there until we actually drill it, but according to the current estimate from the U.S. Geological Survey, the federal portions of ANWR might have 4.2 billion barrels under the P95 estimate (0.6 years of demand), or 7.7 billion barrels under the mean estimate (1.1 years of demand).

Oil shale

There is another unexploited resource in America known as oil shale, not to be confused with shale oil (tight oil). Oil shale is a dense, hard rock impregnated with kerogen, an “uncooked” form of hydrocarbon that nature hasn’t yet converted into actual oil. Oil cheerleaders like to talk about the trillion barrels or so of it that exists in America in places like the Green River Formation of Utah, but as yet no one has figured out how to produce it commercially (at a profit). So we may consider our prospects from oil shale to be a big fat zero.

All resources

For a final point of reference, there is the EIA’s 2010 assessment for the entire U.S. Although it uses 2008 data, I believe it is their current overall assessment. It shows 198 billion barrels of technically recoverable resources (not “proved reserves”) for the entire country, excluding areas where drilling is currently prohibited and areas within 50 miles of the Atlantic coast. By this assessment, the U.S. could meet 29 years of demand. Including “undiscovered technically recoverable resources“—like ANWR, OCS and tight oil—we might have enough to last about 41 years in total.

Finally, for reasons I have explained in previous columns, I do not believe that biofuels or tar sands can be significantly scaled up from current levels. The expectations for these fuels in the 2020 independence stories are simply not supported by the data.

The real prospects for U.S. oil production

So if all limits on drilling in the U.S. were removed, and if the estimates of undiscovered, unproved oil are correct, there is enough oil remaining on U.S. soil and in federal waters to meet demand for about 41 years, including 17 years’ worth from ANWR, OCS and tight oil shales.

But at what rate could we produce it?

We can’t know the production rates of OCS and ANWR until we produce them, but as I explained last month, exploiting those resources would be a long-term effort: probably 10 years to bring the first oil online, and 15 years or more to reach maximum output around 2 to 3 mbpd. By that time, it would be hardly noticeable as it compensated for the loss of oil production in the U.S. and elsewhere due to the depletion of mature fields.

Suppose we forget about all these niggling realities for a moment and just take the Citigroup projection at face value. Let’s assume that U.S. petroleum production climbs from 5.8 mbpd in 2011 to 10.2 mbpd by 2020 as they forecast. Let’s further assume that all limits on drilling are removed. What does this increased rate of production do to the lifespan of our resources?

It cuts it nearly in half.

At today’s production rate, we would exhaust all of the proved, inferred, and undiscovered oil in the U.S. in 133 years. But if we ramp up to Citigroup’s 10.2 mbpd rate and hold it there, we’d exhaust it in 76 years. Leaving out undiscovered resources, we would exhaust U.S. oil in 39 years at the current production rate, or in 22 years at the “energy independence” rate.

What “energy independence” really means

So now we know what the “energy independence” strategy really means.

If we take the status quo path, maintaining imports and overall production at current levels, but do not drill ANWR or OCS and do not increase tight oil production, we might have about 40 years to prepare for the day when U.S. oil production goes kaput. (Actually, it would be a gradually declining production rate over a longer time, but let’s not overcomplicate the math here.) If we maintain imports and overall production at current levels but gradually drill everything, and the remaining prospects lived up to expectations, we might have 133 years before the oil dried up.

Alternatively, if we take the “energy independence” path and turn all of America into a pincushion, open all the wilderness, accept all the risks of freshwater contamination from fracking and saltwater contamination from offshore spills, and improbably raise oil production to meet all of our oil demand, we might have 76 years of output left. If we drill everything and raise production to meet all of our liquid fuels demand (which is currently met by natural gas liquids and biofuels in addition to oil), we might have 41 years. And if we try to drill everything and meet all of our needs domestically, but the undiscovered oil turns out not to be there, or not to be commercially viable, then we could drain the dregs in just 22 years.

As veteran petroleum geologist Dr. Colin Campbell says of peak oil, “As any beer drinker knows, the glass starts full and ends empty and the faster you drink it the quicker it’s gone.”

All the talk of incipient energy independence is a mere pacifier and a distraction. It’s a way of avoiding the fact that at some point we must take action and prepare for the day when the oil is finally gone. Yet we know that it will take many decades to transition most of our infrastructure to electricity, and that if that electricity isn’t generated by renewables, it will be powered primarily by coal and natural gas. . . until they too run out.

The fact is, 40 years probably isn’t enough time to make that transition. As I discussed last November, we really needed to begin it 40 years ago. We will probably wind up drilling everything anyway because we’ll need the oil to rebuild our infrastructure, having started on the transition so late. But maximizing our production now to satisfy a short-term political need, or to temporarily plug a structural trade and budget deficit, would be stupid and counter-productive and foreshorten our already too-short window for transition.

Our remaining prospects aren’t a fresh full pint of beer, and drilling them is no solution to peak oil. If we were to achieve the energy independence production rate we might feel better for a decade or so, but it would come at the price of decades more of greatly diminished domestic production later on—at the very time when global oil exports are declining fastest and becoming intolerably expensive.

So that’s your real choice, America. You can slug down that last swallow and go home early, or you can linger awhile, sip it slowly, and stick around ’til closing time.

Photo by Chris Nelder

A persistent myth about the challenges of integrating renewable power into the grid is that because solar and wind are intermittent, grid operators need to maintain full generation capacity from “baseload” plants powered by coal and nuclear. Recent real-world data and research shows that not only is this not true, but that baseload capacity is fundamentally incompatible with renewables, and that as renewables provide a greater portion of the grid’s power, baseload generation will need to be phased out.

But before we get into the details, some background information is in order.

Types of power plants

“Baseload” power generators are typically large units that operate more or less continuously at 70 to 90 percent of their rated capacity, and do not shut down except for maintenance. These include nuclear, coal, and combined-cycle natural gas plants which capture and recycle the exhaust heat of traditional gas turbines. Coal and nuclear plants can take from one to three days to start up, and take a long time to shut down.

“Load-following” power generators can increase or reduce their output based upon demand, and typically run at 30 to 50 percent of capacity. They are typically traditional gas turbine units, and may be shut down on a daily or weekly basis as needed. Older coal plants, combined-cycle natural gas plants, and some nuclear plants can operate in a load-following mode, but their ability to do so is limited. For example, newer nuclear plants can cut output by as much as 20 percent in an hour, but need as much as eight hours to ramp back up to full capacity.

“Peaking units” typically run for a few hours at a time at low capacity factors when demand reaches unusually high peak levels, like in the middle of a hot summer day. These units are typically simple gas turbines.

The grid today

In the U.S., there are three main grids: one in the east, one in the west, and one in Texas. Some utilities are regulated while others are not, some are publicly owned while others are private, and although they are interconnected within the three main grids, they operate with a certain amount of autonomy. Grid power comes from about 5,800 utility-scale power plants, comprising some 18,000 generating units. A patchwork quilt of agencies with overlapping jurisdictions regulate the grid, including Federal Energy Regulatory Commission (FERC) and the North American Electricity Reliability Corporation (NERC) at the federal level, a range of Regional Transmission Operators (RTO) and Independent System Operators (ISO) at the regional level, and Public Utility Commissions (PUC) at the state level. Ten major RTOs and ISOs serve about two-thirds of consumers in the U.S. and more than half in Canada, with the remainder served by smaller regional operators.

The grid’s architecture developed in a fairly ad-hoc way. As the country was built up, more generation capacity was added, and the grid was extended. Technologically speaking, most of the grid is old and “dumb”: Power gets generated somewhere, and transmitted somewhere else, but there is very little in the way of sensors, storage buffers, switches, or security mechanisms along the way. It’s more like plumbing than an iPhone. This is why it was possible for one overloaded transmission line in Ohio take down much of the grid in Ontario, the Northeast and the Midwest in the blackout of August 14, 2003.

Grid operators have one overriding, fearsome task: They must maintain enough supply from this very complex system, within a narrow range of frequencies and voltages, to meet constantly fluctuating demand at all times. Therefore they tend to be risk-averse, preferring to stick with what they know to be reliable, and avoiding innovation.

Enter renewables

Before the advent of renewables, generating power was a pretty straightforward task: When demand increased, you just added more fuel to an engine. With renewables, the task is reversed: The engines (wind turbines and solar collectors) ramp up and down of their own accord, and grid operators must adjust to accommodate their output.

The growth of renewables in the U.S. has been driven primarily by state Renewable Portfolio Standards (RPS) requiring a certain percentage of power to be generated from renewables by a certain date. According to an April 2011 MIT report just released this month, 29 states have RPS mandates which typically require 15 to 25 percent renewables by 2015 to 2025. Many of these states mandate that grid operators give the renewably-generated power priority, so when wind generation spikes, for example, they must ramp down other generating units. In other areas of the U.S. and in parts of Europe, operators may instead curtail peak production from renewables to accommodate their baseload generation—for example, forcing a wind farm operator to furl their blades or apply brakes to their turbines.

The baseload fallacy

The notion that renewables cannot provide baseload power is really an artifact of the way the grid and its regulators have evolved. If all generators were able to ramp up and down on demand, and if grid operators were able to predict reliably when and where the sun would be shining and the wind would be blowing, accommodating any amount of power from renewables would be no problem.

A 2010 study called “The Base Load Fallacy” by Australian researcher Dr. Mark Diesendorf, an expert on integrating wind into power grids, fingers the “operational inflexibility of base-load power stations” as the main obstacle to further integration of renewables. “The renewable electricity system could be just as reliable as the dirty, fossil-fuelled system that it replaces,” he observes, if demand were more efficient and intelligent, and supply were made up of a wide variety of renewable sources plus a small amount of gas-fired capacity to cover the peaks. The perpetrators of the baseload fallacy, he argues, are mainly the industries who benefit from the status quo: coal, oil and gas companies, the nuclear industry, power generators, and industries who depend on them like aluminum and cement manufacturers.

Claims that renewables could never generate more than a few percent of grid power without taking down the grid have been given the lie by the real-world experience of areas that deliberately adapted their grids.

The best example in the U.S. is Texas. By virtue of having its own grid (technically, an “interconnection”), it is generally outside the purview of federal regulation by FERC. The entire grid is operated by a single ISO, ERCOT, so it has a lot of control over its generation mix and grid planning. Texas decided long ago to pursue its wind potential vigorously, and now has the largest installed wind capacity in the States at over 10 gigawatts (GW).

On March 7, ERCOT used a record 7,599 MW of wind power, constituting 22 percent of the load and representing over 77 percent of its nameplate wind capacity. The previous day it had met 24 percent of the load with wind. Baseload proponents had said that such levels of integration were flatly impossible. But ERCOT had made it possible with the help of a new modeling tool that analyzes real-time conditions every half-hour, giving grid technicians greater ability to match generation with demand and control transmission more discretely. The National Renewable Energy Laboratory has found that if other grid operators adopted similar tools, over one third of U.S. power could be generated from renewables.

All that ERCOT needed to accommodate more wind power was some sensors, a better flow of information, and better modeling tools. As the MIT report notes, the hardware to provide better grid information already exists, but few operators have employed it in their control and dispatch operations. The obstacle is not technology, but “the industry’s culture of resistance to new and experimental projects.”

That’s not a problem for China, however. The MIT report mentions that China is piloting a program that will allow it to monitor the national grid in real-time and control it automatically. The system eventually could allow China’s grid to uptake a far greater percentage of renewably-generated power than the antiquated and obsolete U.S. grid can, although the former is still the world’s top consumer of coal for power generation.

Another 2010 study by the German Renewable Energies Agency turned conventional baseload logic on its head, finding that due to their relatively inflexible ability to adjust to changing demand, “nuclear power plants are incompatible with renewable energies.” To meet forecasted wind production in Germany, conventional baseload operation would be cut in half by 2020, assuming renewable generation continues to enjoy priority dispatch. As renewables gradually replace conventional baseload capacity, only more flexible gas generators that can operate at under 50 percent of their capacity will still have a role to play.

The European example

Europe serves as another model of why good grid planning and management are key to integrating renewables into the grid. If baseload proponents were correct, then we would expect the countries with the highest levels of renewable penetration to have the most trouble in managing their grids, but the reality is quite the opposite.

A comprehensive new report on renewables integration by European consultancy eclareon GmbH surveyed the policies and grid functions of the 27 member states of the European Union, and found that “large quantities [of renewable generation] can be effectively managed on the grid.” Countries that planned for adequate grid capacity generally didn’t have a problem with accommodating renewables, and unsurprisingly, those are the same countries that have pushed for more renewable generation.

Solar and wind generation as a percentage of electricity consumption in 27 European Union countries in 2010 (first bar) and 2020 (second bar). Grid integration designated by color: green = positive, yellow = neutral, red = negative. Source: RES Integration Final Report, eclareon GmbH.

Countries where the share of renewable power is greatest—Germany, Denmark, Spain, Ireland, and Portugal—offer “positive conditions for grid operations,” although some barriers to integration were identified, including the potential for curtailment in Germany, challenges to priority dispatching in Ireland, and strict distribution parameters in Portugal. Identified barriers for grid development in those countries revolve around public policy issues, permitting, regulatory regimes, cost distribution, and the obligation (or lack thereof) of grid operators to beef up their grids to accommodate more renewable power.

Ripe for innovation

The real issues around the integration of renewables into the grid have to do with human arrangements, not technology. As the MIT report concluded, “There is a clear need for a statement on national goals for the electricity sector to streamline the US regulatory structure, which currently is complex and fragmented.” We need smart policy, and an intelligent approach to planning the grid of the future that is not simply beholden to the vested interests of the status quo.

This will run directly at odds with the free-market ideologies that have brought us this far. As the EU project THINK observed, “the main shortcomings of the conventional regulatory framework are that grid companies have disincentives to innovate.” A firm regulatory hand, like that in the most renewably-powered countries of Europe, will be necessary to integrate more power from solar and wind onto the grid.

Renewables should be able to meet at least 20 percent of electricity demand without disrupting the grid just about anywhere in the world with good grid planning and management. As geothermal and marine power technologies mature, they will become a much less intermittent, natural substitute for the baseload technologies of the past. A host of other technologies will even out the bumps in renewable generation by adding storage (batteries for distributed storage, and pumped hydro and solar thermal for utility scale); increasing the connections between grids (allowing better transmission between sunny and cloudy, or windy and still areas); and transitioning to on-demand natural gas-fired peaking generators. Over the next decade, the current assumptions about the need for traditional baseload capacity will begin to fade as new storage, interconnection, and smart grid management strategies come into play, and ultimately, a combination of these technologies might raise the limit on renewables to 100 percent.

The attachment to our antiquated architecture of power generation and grid management is simply a failure of imagination and innovation. Those who benefit from its arrangement today hold it up in too-precious reverence, not unlike the those who, one hundred years ago, protested the banning of the ancient Chinese practice of foot-binding depicted in the photo at top. It may be beautiful to them, but to those with modern sensibilities, it’s an ugly, even grotesque fetish that should be consigned to the dust bin of history, and one that one hundred years from now will seem unbearably dumb, quaint, and cruel. The problem is not that the feet are too big; it’s that the shoes are too small.

Photo: Feet of Chinese woman, bound, compared with tea cup and American woman’s shoe, World War 1 era. (otisarchives/Flickr)

Election-year politics have bombarded the American public with conflicting stories about President Obama’s energy policies. The president takes credit for increasing fossil fuel production under his administration, while the fossil fuel industry blames him for falling production. So what’s the truth?

As always, I’ll begin with the data.

Consider this chart of U.S. fossil fuel production from 2003 through 2011:

Most of our domestic fossil fuel production is on private and state lands, however. Federal regulations do affect production on private lands to a limited extent, but on the whole that production is the result of market demand for those fuels.

Where federal policies have more influence is on production from federal lands, which is what draws most of the criticism about the president’s policies. Here’s a chart of production on federal and Indian lands:

Of that production, the vast majority is oil, and nearly all of it comes from offshore:

With those charts in mind, let’s score the rhetoric about the president’s policies.

President Obama’s rhetoric

As an example of President Obama’s rhetoric, I’ll use his weekly address to the nation on March 17.

“The truth is, the price of gas depends on a lot of factors that are often beyond our control. Unrest in the Middle East can tighten global oil supply.”

True. There is no real dispute there.

“Growing nations like China or India, adding cars to the road, increases demand.”

True. I explored the data on this issue two weeks ago.

The president then went on to discuss the influence of speculators on the price of oil. While speculators do influence the oil market, they are probably responsible for only the last 10 to 15 percent of the price in an upward or a downward spike, as I explained three weeks ago. Speculators do not completely control the oil markets; they only come in when there is a tradeable opportunity, and they are probably seeing one now as spare capacity has fallen to critically low levels. However, regulators have been extremely tentative about implementing restrictions on speculation even in the aftermath of the crushing volatility of 2008. Despite the president’s boasts about implementing policies to “bring energy markets out of the shadows and under real oversight,” they have hardly closed the door on speculators. On the other hand, I agree with the president that rolling back his reforms would be a mistake. I’ll score the point about speculators as Political Pandering — not false, but not entirely true, nor particularly relevant.

The president next discussed his ambition to eliminate the $4 billion in annual subsidies to the oil and gas industry. I support this initiative. An industry that’s been around for 150 years should be able to stand on its own two feet and compete without any public support. However, those subsidies are really rather irrelevant. As I explained in October, that $4 billion is barely a rounding error on the structural subsidy the oil industry receives by virtue of our commitment to a transportation regime based on cars and roads. Real reform would be transitioning transportation to rail. I’ll score this point as Valid, but Political Pandering.

The president then made an oblique reference to some of the Republican presidential candidates:

“It’s easy to promise a quick fix when it comes to gas prices. There just isn’t one. Anyone who tells you otherwise – any career politician who promises some three-point plan for two-dollar gas – they’re not looking for a solution. They’re just looking for your vote.”

True. I discussed that in December.

“The answer isn’t just gonna be to drill more, because we’re already drilling more. Under my administration we’re producing more oil here at home than at any time in the last eight years.”

True, but little credit to him. As you can see from the top chart above, that’s true, if just barely. In 2011, the U.S. produced 5.67 million barrels a day (mbpd) of oil, versus 5.42 mbpd in 2004. But, our production is just about dead even with where it was nine years ago, at 5.68 mbpd. And as you can see from the second chart above, production from federal lands is slightly lower than where it was eight years ago. The credit for our increased oil production since President Obama took office owes mainly to renewed drilling in federal waters in the Gulf of Mexico, which resumed when President Bush dropped the longstanding moratorium against it near the end of his term in July 2008, right after oil prices hit a record $147 a barrel. A little over half a million barrels a day of that increased production owes to “tight oil” production from shale on private and state lands, primarily in the Bakken Shale in North Dakota.

“We’ve quadrupled the number of operating oil rigs to a record high.”

True, but nothing to brag about. As I discussed last month, the rig count is so high primarily because the productivity of shale oil wells is so low. You have to drill thousands of wells to come up with a mere half a million barrels per day. The high rig count says more about how poor the remaining prospects are than it does about a renewed vigor for domestic production.

“We’ve opened millions of acres of land, and offshore, to develop more of our domestic resources.”

True, but not pertinent. What the industry really wants is access to more of the federal waters of the Outer Continental Shelf, which I’ll discuss in a moment. Most of the onshore federal lands aren’t actually prospective. As Shell ex-CEO John Hoffmeister said on CNBC in July 2008: “The industry is pursuing the leases it has, but to be blunt, the prospective nature of many of those leases is very low. And you don’t go drill oil where you know it doesn’t exist.”

“We can’t just rely on drilling. Not when we use more than 20 percent of the world’s oil, but still only have just 2 percent of the world’s known oil reserves.”

Basically true. The president is referring here to conventional oil reserves. If one counts our unconventional resources (which are not “proved reserves”), as the oil industry likes to do, then we have significantly more than 2 percent of the world total. However, as I have discussed at length in this column, unconventional resources are not equivalent to conventional oil, and they come at much lower production rates, with significantly — perhaps intolerably — higher prices.

“If we don’t develop other sources of energy, and the technology to use less energy, we’ll continue to be dependent on foreign countries for our energy needs.”

True. The president went on to discuss his support for a transition from fossil fuels to renewable energy sources, which I believe to be of vital importance, and his push for higher fuel economy standards. However, current federal policies aren’t moving nearly quickly enough in that direction, and are aiming far too low. For example, as I explained two weeks ago, we’ll never catch up with Asia in our quest for greater fuel economy. They’ll always be able to outbid us in a future of persistently expensive oil.

“Since I took office our dependence on foreign oil has gone down every single year. In 2010, for the first time in 13 years, less than half the oil we use came from foreign countries.”

True, but nothing to brag about. Our oil imports have declined because our consumption has declined, which is almost entirely a result of the recession, not greater efficiency, and not substantially greater domestic supply.

The fossil fuel industry’s rhetoric

To represent the fossil fuel industry’s rhetoric, I’ll use a new commentary from the Institute for Energy Research, a not-for-profit organization that bills itself as an impartial, unbiased champion of unfettered free markets, but which is funded primarily by the oil industry. Its staff has ties to the Republican Party and other right-wing and libertarian organizations like the Koch Foundation, the Cato Institute, and the American Enterprise Institute. IER’s founder and CEO, Robert Bradley Jr., spent 16 years working for Enron, including seven as its director of public policy analysis, and wrote speeches for its CEO, Kenneth Lay. He is a longstanding and outspoken proponent of oil and gas, and an opponent of renewables.

IER made hay of a new report from the Energy Information Administration (EIA) which “was prepared in response to recent requests” from unnamed parties, and summarized our fossil fuel production on federal and Indian lands since 2003.

Fossil fuel (coal, oil, and natural gas) production on Federal and Indian lands is the lowest in the 9 years EIA reports data and is 6 percent less than in fiscal year 2010.

True, but not because of President Obama. Oil and gas production on federal and Indian lands has been in long-term decline — including throughout President Bush’s term in office — due to natural depletion. Coal production is just below where it was in 2003. As I detailed in January, AppaIachian coal production has been declining since the early 1990s due to natural depletion, so the remaining coal is increasingly expensive to produce. Coal’s recent decline owes to a combination of the recession, increased requirements for emissions controls on coal-fired power plants, and being undercut by cheap natural gas.

The IER obscures these realities by aggregating all three fuels into a single line chart, and ignoring the issue of natural depletion.

Crude oil and lease condensate production on Federal and Indian lands is 13 percent lower than in fiscal year 2010.

True, but what of it? Oil production on these lands was in decline throughout the Bush years, and actually increased under the first two years of Obama’s administration. Most of the decrease was in federal offshore, and of the 104 million barrel decline there from 2010 to 2011, the vast majority owed to reduced production in the Gulf of Mexico in the aftermath of the Macondo well disaster in April 2010.

The big picture is clear that government policies undertaken by the Obama Administration have produced a significant decline in offshore oil production on federal lands in fiscal year 2011. That is certainly not a way to increase domestic production of oil and keep oil and thus gasoline prices in check.

True, but twists the facts. On the whole, as the above charts show, oil and gas production has actually been higher under the Obama administration than it was under the Bush administration, and the policies around the exploitation of federal lands have not been radically different under the Obama administration. The IER may have preferred that the Obama administration carry on like nothing had happened after the biggest oil spill in U.S. history, but that would have been neither realistic nor advisable under any environmental or political calculus. In fact, the Obama administration opened up new drilling in the Gulf of Mexico less than a year after the blowout, and recently approved 500 leases for drilling in the Arctic that were held up since 2008.

Our reality

The fossil fuel industry’s harping about limits on federal properties is couched in overblown and deliberately confusing rhetoric, but what it’s really about is access to more of the Outer Continental Shelf.

According to the EIA report, which actually counts sales and not production, offshore federal production of oil (crude plus lease condensate) in fiscal year 2011 was 514 million barrels, onshore production was 112 million barrels, and production on Indian lands was a negligible 19 million barrels. The only serious remaining prospects are in federal waters. In the usual EIA production data, federal offshore oil production was 528 million barrels in the 2011 calendar year.

To put that in perspective, 528 million barrels is equivalent to 1.45 mbpd. The U.S. consumed 18.8 mbpd of oil in 2011. Therefore, all the fuss about Obama’s policies is really about wanting to increase that portion of our supply that meets just 7.7 percent of our demand. Oil production from all federal and Indian properties, both onshore and offshore, meets just 9.4 percent of our demand. The oil and gas industry would like you to believe that if the government just got off their backs, they could hugely increase that share, even while battling the relentless toll of natural depletion. This is, quite simply, false. If we turned the remaining federal waters into a pincushion we could manage a modest increase, but it would certainly not give us energy independence.

As Steve LeVine quipped this week, what we are seeing now is “The Second Law of Petropolitics” in action: The party out of power always blames the party in power for high gasoline prices. The blame was somewhat less shrill during the Bush years, since the oil and gas industry tends to be right-wing, but as I detailed in July 2008, the Democrats were clamoring for a release of oil from the Strategic Petroleum Reserve, vowing to crack down on speculators, and even suggesting that we sue OPEC, while President Bush moaned that he couldn’t wave a magic wand and make more oil appear.

In short, there is absolutely nothing new here. The reality is dusty, dull, dour, and totally unsaleable politically. After 150 years of intensively applying the world’s best extraction technology, we have nearly sucked our land dry, and the only remaining good prospects are offshore. If all limits on drilling were removed, including in the Outer Continental Shelf and the Alaskan National Wildlife Refuge, some estimates show that we might increase US oil production by 2 or 3 mbpd at most. That new production would probably take 10 years to come online, and 15 years or more to reach maximum output. It would be hardly noticeable as it compensated for the loss of oil production due to depletion. Barring export restrictions, much of it would be sold to the highest bidder, which is Asia. If it lowered prices at all, it would be by a few pennies per gallon.

Presidents have very limited latitude on domestic oil production, and they can do next to nothing about gasoline prices. No matter which party is in power, we are always and inextricably tied to a global market for oil and gasoline. There are no real supply-side solutions, no matter how desperately we want there to be, and no matter who’s promising them. As we enter the twilight years of oil, our only serious option is to reduce our consumption.

Which brings me to the photo at top. Artist Gregory Lent took that photo in India this week and posted it on Twitter with the comment, “[A] lot of monkeys can turn on a tap but I never met one who thought to turn one off.”

Indeed.

Photo: Gregory Lent