Ukraine Crisis Means Drill Baby Drill
Russia’s invasion of the Crimea is a tipping point event that will further spur the North American oil boom. The European Union (EU) and United Statesin 2008 threatened toslap economic sanctions on Russia for invading Georgia. But after a while the criticism faded and sanctions threats were quietly dropped, because the EU is almost entirely reliant on Russia for energy supplies. A similar situation is unfolding today as the EU and U.S. are again making false threats they will to stop exports of Russian oil and gas as punishment for invading the Ukraine. But due to the latest humiliation by the Russians, a consensus is emerging that will demand the United States and its North American partners “drill baby, drill” for national security.
Twenty years ago on January 1st the United States, Mexico, and Canada implemented the North American Free Trade Agreement. The volatile Persian Gulf at the time supplied 35% of U.S. oil and most “experts” argued the world was approaching “peak oil” extraction point where supply would then dwindle rapidly. Although many Americans label NAFTA a failure, it has been highly successful in generating greater economic cooperation to prioritize and develop North America’s vast energy resources.
The United States since the 1950s was known to have the world’s largest potential oil reserves with over 900 billion barrels. But the cost of production with traditional techniques made the bulk of drilling opportunities uneconomical. American oil production has more than doubled since 1994, due almost entirely to the success of the shale revolution’s advanced extraction techniques that revitalized mature oil fields and opened up unconventional plays. While oil production cut America’s trade deficit by hundreds of billions of dollars, the greatest boon has been in tapping America’s immense natural gas reserves. The 50% increase in supply led to a 60% cut in natural gas prices and put the U.S. on the path to become the world’s largest global exporter of liquefied natural gas.
After a two decade effort to unlock Canada’s unconventional oil sands deposit, the nation’s productionhas more than doubled and Canada is now the sixth-largest global oil producer. Close to two-thirds of Canada's 3.8 million barrels per day (mbpd) of oil is exported via pipeline to the U.S., making Canada by far the largest supplier of crude to America. Canadian tar sands production is constrained by a lack of low cost pipeline capacity for export to the U.S. It is estimated that within 5 years of approval of the Keystone XL Pipeline, Canada could increase production by another 2 million mbpd.
Mexico was slow to join the energy boom, but intends to catch up fast. Since the nationalization of oil in 1938, production from vast oil reserves has faltered due to lack of investment, corruption, and incompetent management. The Mexican Constitution made it nearly impossible for foreign companies to participate in any part of the energy supply chain, leading to technological stagnation and decreasing production. Mexico’s production today down to about 3 mbpd, causing the nation to drop since 1970 from the world’s 5th to the 10th largest producer.But Mexican constitutional reforms passed in 2013 now allow foreign joint ventures. U.S. corporations are expected to dominate the process, since they command the best technical expertise for deep-water offshore and unconventional onshore production that could add another 2 mbpd within 10 years.
Influential liberals are becoming incensed that the Ukraine humiliation may be a tipping point event that will spur oil and gas drilling. Apple CEO Tim Cook became so unhinged regarding North American oil and gas drilling that he threatened to commit corporate “hara-kiri” by suggesting: “Climate change deniers should get out of Apple Stock.” After ultra-liberal Cook took over Apple from founder Steve Jobs three years ago, he hired Lisa Jackson, former head of the EPA, to lead the company's “sustainability” efforts. More than three-quarters of Apple’s worldwide facilities, including all of its data centers and Cupertino, CA headquarters are now run on solar, wind, geothermal, or hydro power. But while Cook focused on liberal political correctness, his legacy is largely comprised of incremental improvements in established products, tweaks to the supply chain, and more corporate transparency. Apple’s stock price seems to have recognized Cook’s leadership by dropping $179 from its September 2012 high of $705 to $526 today.
Russian President Vladimir Putin humiliated President Barack Obama by grabbing the Crimea, in spite of Obama’s threats that “We will stand with the international community.” As Joel Pollack at Breitbart wrote: “It is hard to recall a more complete setback for American power. Jimmy Carter’s response to the Soviet invasion of Afghanistan was more convincing.” The only option that the President and his Democrat allies have for redeeming themselves before the November mid-term elections is to declare “drill baby, drill” for national security.
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Chriss Street is teaching microeconomic at University of California, Irvine this spring from March 31 – June 8, 2014. Call Student Services at (949) 824-5414 or visit http://unex.uci.edu/courses to enroll!