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

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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?

an oil well in the South Cuyama Oil Field.
The United States may have a low percentage of the world's oil reserves, but is efficient in extracting the oil that it can

David McNew/Newsmakers/Getty Images.

Rising gasoline prices are hurting President Obama’s re-election campaign, and like most politicians grappling with a complicated, unpopular issue the president has opted to torture some numbers in his quest for a snappy talking point. Last week during a press conference in the Rose Garden at which he called for more policing of oil-trading markets, the president said “we use more than 20 percent of the world’s oil and we only have 2 percent of the world’s oil reserves.”

That’s almost identical to a statement he made last month, when he said that no matter how much drilling is done here, domestic reserves won’t “get much above 3 percent. So we're still going to have this huge shortfall.”

Obama has the numbers right. But he’s wrong about what those percentages mean, and his wrongness reflects a fundamental misunderstanding of the oil and gas industry.

While it’s true that America’s share of total global oil reserves is just 2.2 percent, the United States produces about 9 percent of the world’s oil, making us the world’s third-biggest oil producer, behind only Russia and Saudi Arabia. How can we have relatively little reserves on paper, yet continue to produce so much oil? The answer is both simple and somewhat confounding: The more oil we find, the more oil we find.

In 2010, America’s proved oil reserves stood at 31 billion barrels, just slightly below the 33.8 billion barrels of proved reserves the United States had in 1990. But over that two-decade period, the domestic oil sector produced about 52 billion barrels of oil. In other words, between 1990 and 2010, the United States produced nearly twice as much oil as we believed the whole country had in 1990, and yet at the end of that period, we still had about the same amount in proven reserves. What’s going on? In a word: innovation. And few industries on the planet have been as innovative as the American oil and gas sector.

It’s not the size of your reserves that counts, it’s what you do with them. And the U.S. oil and gas sector has been remarkably proficient at exploiting this country’s vast mineral wealth. Over the past century or so, oil and gas drilling has gone from a business dominated by wildcatters armed mainly with a hunch and a prayer to one where the latest seismic and “geosteering” technologies allow drillers to steer their bits so accurately that they can arrive within inches of their target zone two miles (or more) beneath the Earth’s surface.

Add in ongoing improvements in horizontal drilling—and yes, in hydraulic fracturing, the bugaboo of many environmental groups—and the changes are easily seen. For instance, over the last five years, Southwestern Energy, a Houston-based company drilling in the Fayetteville Shale in Arkansas, has halved the number of days it takes to drill an average well while nearly tripling the amount of gas it gets during the initial phase of production. Southwestern has done it by tweaking the fracturing process while more than doubling the length of the horizontal segments, so that more of the well is in contact with the source rock.

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.

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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