America Has the Most Innovative Oil Industry in the World. Why Doesn’t Obama Appreciate That?

Who's winning, who's losing, and why.
April 25 2012 4:33 PM

Obama’s Oil Blindness

America has the most creative and efficient oil industry in the world. Why doesn’t the president understand that?

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These improvements are allowing drillers to extract enormous amounts of both oil and gas from rock formations (like shale) that only a few years ago were thought to be uneconomic. The result: Drillers are unlocking vast quantities of hydrocarbons and in doing so, they are adding lots of new reserves. As one veteran driller told me recently, companies are having to deal with what he calls “crappy rock.” But he quickly added the good news: “there’s a whole lot” of crappy rock that contains oil and gas.

As a result, we see the same kind of numbers when it comes to domestic production of natural gas, the cleanest of the hydrocarbons. The United States sits atop only 4.1 percent of the world’s natural gas reserves. But the United States is, by a wide margin, the world’s biggest gas producer. In 2011, the nation produced a record quantity of the fuel, some 23 trillion cubic feet, or about 20 percent of the world total. Compare that performance with Iran, a country that sits atop 16 percent of the world’s known gas reserves (only Russia’s reserves are larger) and yet produces just 4 percent of the world’s natural gas. In fact, as recently as 2009, Iran was a net natural gas importer.

Obama has repeatedly made the claim that “clean” energy is the way of the future. But the president dares not admit the obvious: Over the past few years, the oil and gas sector has out-innovated the political darlings of the moment: solar and wind energy. Four years ago this month, natural gas prices were over $10. Today, the price is about $2. Despite all of the hype—and billions of dollars in subsidies doled out to solar and wind energy projects over the past few years—the clear reality is that horizontal drilling and hydraulic fracturing and the incremental production gains that have resulted from them, have resulted in a tidal wave of new natural-gas production that is pricing wind and solar energy out of the market.

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Boone Pickens, once of the wind sector’s biggest boosters, says wind projects need $6 natural gas to be competitive. Pickens also recently said “I’ve lost my ass” in the wind business.

If anyone doubts how the shale revolution has changed the domestic oil and gas sector, they need only visit Midland, Texas, a town that is in the midst of an unprecedented boom. New construction is visible all around the city. Truck traffic is constant. And much of that construction and traffic is to support surging oil and gas production from geologic zones like the Sprayberry and Wolfcamp that were thought to be uneconomic just a few years ago.

Arlen Edgar, who’s been in the drilling business in Midland since 1973, says the previous boom back in the 1980s “was crazy, but this is crazier.” About 500 drilling rigs are now working in the Permian Basin near Midland, and that is creating lots of new jobs as well as a surge in production. In January, oil production in Texas was 1.6 million barrels per day, the highest level since 1994. Overall U.S. oil production is also climbing rapidly. Indeed, the shale revolution has so fundamentally changed the global energy equation that last month, analysts at Citigroup led by Ed Morse predicted that U.S. oil production could exceed that of Russia and Saudi Arabia within the next three years or so.

That’s an innovation story that President Obama should be celebrating, not ignoring.

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