Producing more US oil offers benefits beyond price, experts say

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Mar. 17 -- Increased US oil production won’t have an immediate effect on global prices, but it could potentially supply other important US economic benefits, experts told the US House Energy and Natural Resources Committee on Mar. 17.

Richard G. Newell, US Energy Information Administration administrator, warned against expecting greater access to federally controlled resources to immediately result in increased production. “The impact of greater access on market prices depends in part on actual production flows, on differences in the extent of global integration in oil and natural gas markets, and on how a decision to increase access might affect market expectations—a factor that is very difficult to assess in today’s supply environment,” he said.

Global oil markets react to many competing influences in the short term, Newell said, citing a price decline the previous day resulting from expected lower demand in Japan because of extensive damage from the recent earthquake. In the long run, EIA does not expect additional crude production possibly resulting from greater access to federally controlled acreage to have much impact on world prices, he continued in his written statement.

Instead, Newell said, more US crude production “no matter the cause—increased development on federal lands, higher resource potential in current known fields, or wider application of advanced technology—would impact local economic activity, net oil imports, and the associated US international trade balance resulting from oil imports.”

Michelle M. Foss, chief energy economist and director of the Center for Energy Economics at the University of Texas, said, “Prevailing views are that US sensitivity to higher oil and petroleum fuels prices is a consequence of our own fiscal house not being in order. To the extent that we continue to incur deficits in our current international trade accounts and deficits and debt in our national fiscal accounts, we are much more likely to suffer consequences.”

‘Direct contributions’
Foss continued, “Strong connections exist between oil prices, the relative value of our dollar, inflation, interest rates, and fiscal and monetary policies associated with these measures. Competitiveness of the domestic oil and gas industry is tied to overall health of the US pocketbook and economy. Likewise, a competitive domestic industry and production can make direct contributions toward improved economic and fiscal health by making our energy system more resilient, reliable, and cost effective.” She also cautioned, later in the hearing, against underestimating the oil and gas industry’s capacity to replace its domestic production.

Noting that political unrest across the Middle East and North Africa and lost nuclear power capacity in Japan potentially will make near-term global oil prices volatile, Guy F. Caruso, a senior advisor in the Center for Strategic and International Studies’ energy and national security program, suggested that US policymakers will need to find ways to mitigate immediate economic damage and to be prepared for the uncertainty of a potentially worse supply disruption.

“In the medium to longer term the challenges are broader and deeper as we face a global energy system in major transition,” he said. “Energy demand is shifting away from the industrialized countries to emerging economies. Major new supplies of oil will require massive investments increasingly dominated by national oil companies which have different objectives and ways of operating. Emerging new players are flexing their political and economic muscle. In short, the above-the-ground risks to adequate, affordable and timely oil supplies are increasing.”

Committee Democrats, in their questions, followed the lead of Ranking Minority Member Edward J. Markey (D-Mass.), who said in his opening statement that the country was in an energy horserace between subsidized traditional fossil fuels and underfunded new technologies which have been trapped in the starting gate. Republicans criticized the Obama administration for not moving aggressively to encourage more domestic exploration and production to reduce reliance on imports from unreliable foreign sources and improve the US trade balance.

Contact Nick Snow at nicks@pennwell.com.

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