An Expert’s Opinion on Stabilizing Energy Prices
Lori Ann LaRocco conducts the following interview:
With all this focus on energy, I decided to ask Michael Whatley Vice President, Consumer Energy Alliance [CEA] on what is needed to not only stabilize energy prices and reduce our dependence off of foreign oil.
LL: Opening the strategic oil reserves is just a temporary measure. How much can it realistically reduce the price of gasoline?
MW: Utilizing the Strategic Petroleum Reserves will not help reduce gasoline prices in a meaningful way—particularly over the long term. SPR was designed to be a stop-gap source in the event of a short-term emergency supply disruption, such as a hurricane or pipeline shut down. It was not designed to offset long-term market forces that are driving up world oil prices such as the shut-down of production in the Gulf of Mexico or events in Libya and throughout the Middle East.
LL: Every time when oil spikes we hear more and more people talking about energy security and the need to start drilling domestically.
Even if the administration changed its mind and started issuing dozens of permits, it would take years to see this production come to market. How many years would it take to see new production come on line?
MW: There are development projects in the Gulf of Mexico that were slated to bring production online in 2011, 2012 and 2013 that are currently suspended. The biggest factor determining when these projects will start producing is how long the Administration is going to keep them in suspended animation.
LL: How much of offline production do we have in the United States that could be “turned back on” and come back to market?
MW: I’d pose a different question in response. How much declining production will we fail to replace by following policies which block drilling and leasing? Our production is not a constant – it requires inputs in existing fields to enhance recovery and a steady supply of new projects to replace natural declines.
LL: How much would that reduce the price of gasoline?
MW: Because gasoline prices are pegged to the cost of crude oil (NYSE:USO), we cannot say what the price of gasoline will be at any point.
However, it is clear that having additional domestic resources online is critical to keeping the supply-demand equation in balance and not having these resources available will place further strains on supply—particularly as currently producing wells are depleted. Energy security is also involved, every barrel held out of production in North America is replaced by an import.
LL: The infrastructure also needs to be strengthened. Could our present infrastructure handle such an increase?
MW: Our current infrastructure (in terms of pipeline and refining capacity) can certainly handle the resources that will be produced when the idled rigs in the Gulf of Mexico are allowed to go back to work. The larger question is what happens with the spare capacity that will not be utilized while the rigs are idled. Experts are currently projecting supply impacts from the current shut down will last several years beyond the current moratorium.
LL: That being said, we have to start expanding our domestic drilling resources. What kind of jobs opportunity would this create?
MW: The first impacts would be seen in putting the tens of thousands of workers that have been laid off or idled due to the shut down back to work. Additional impacts would be tremendous. One recent study by ICF International projected that increased oil and gas production could create as many as 161,000.
Not moving forward will also have huge impacts on employment. The high price of oil, gasoline, diesel and jet fuel in 2008 directly affected millions of Americans on a daily basis, forced more than 5,500 trucking companies and 12 different airlines (with over 35,000 employees) to shut down. A return to the price points we saw in 2008 would send a very, very negative signal to our already fragile economy.
Lori Ann LaRocco is a Senior Talent Producer at CNBC, and author of “Thriving in the New Economy:Lessons from Today’s Top Business Minds.”
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