"Nothing is more fungible than a good idea" (U.S. as global high-tech oil/gas leader)

In 2008, Candidate Obama campaigned against Republican-era high gasoline prices. Now that pump prices are high with a presidential election looming, President Obama disclaims responsibility. “We cannot drill our way to lower gas prices,” he says.

Crude oil is a fungible commodity, the argument goes. So why should we Drill, Baby, Drill when any domestic supply we might add is a relative drop in the bucket? Nice argument, except that it could be used against having any new production. (And U.S. CO2 emissions at the margin are a drop in the bucket, right Mr. President? ) And as the economic revolution of the 1870s taught, economic value and thus prices are set at the margin.

Marginal Economics

The United States is the world’s #3 oil producer. Domestic policy decisions in the U.S. can impact the global supply/demand picture, which in reality is quite narrowly balanced.

Every barrel of domestic production clearly benefits energy security, but lately the debate has shifted to whether U.S. drilling can impact the globally set price.

But whether or not our incremental production can move the market, the U.S. is the world leader in petroleum technology. We have incubated and nurtured new and innovative drilling and production methods that are used worldwide. We are one big petroleum laboratory: new ideas often get their first test in our oil fields. Our technology advances unlock reserves worldwide.

The takeaway: Nothing is more fungible than a good idea.

It has happened before. In the 1970s, discoveries in the North Sea helped blunt the influence of the OPEC cartel. Those discoveries depended heavily on marine engineering and other offshore technologies pioneered in the Gulf of Mexico.

Development of oil from shale is a more current example. Working in North Dakota’s Bakken Shale formation, independent operators using horizontal drilling and multistage hydraulic fracturing proved that oil can be recovered profitably from shale formations once thought to be of little value. Now the idea is spreading worldwide:

* “Ryder Scott confirms major Argentina oil shale play”, (Reservoir Solutions, Ryder Scott Co. [consulting petroleum engineers] newsletter March 2012;pdflink). The potential in that large shale play led Argentina to nationalize the 50% owned by Spanish oil giant Repsol, S.A.

* “PetroChina in talks with Shell, Hess about shale oil [Joint Venture]”, (World Oil, April 5, 2012;link)

* “Exxon Expands Rosneft Alliance to Siberian Shale”, (Wall Street Journal, June 15, 2012; link may require subscription)

Global Tech Leader

What are the factors which make the U.S. the world leader in petroleum technology?

A mature resource base. Three-quarters of all the oil and gas wells ever drilled are in North America. Most of our easily accessible and easily producible reserves were exhausted long ago. Consequently, the domestic search for hydrocarbons by necessity turned to hostile geography — the oceans and the Arctic — and into less prolific “tight” rock layers. At the economic margin, profitability depends on ingenuity and the judicious application of new technologies.

As the potential for conventional resources waned in North America, the international major companies largely turned their attention overseas. Driven by an entrepreneurial spirit, smaller independent companies assumed the lead. New technologies emerged, not from government research labs, but from the field, in places like the Fort Worth Basin, the Pinedale Anticline of Wyoming and the Williston Basin of North Dakota.

Infrastructure. Our modern highways and railroads afford easy access to equipment, supplies, and personnel, keeping the cost of operations low compared to the international arena. All critical energy services, like drilling, pumping and cementing, are readily available. We also have an existing infrastructure of pipelines and refineries for oil and gas transportation and distribution, and ready markets for the product.

Beyond physical infrastructure, the U.S. has a prodigious “human infrastructure.” Ideas for unlocking mineral resources come from engineers, geoscientists, and technologists who, if they are not American by birth, are mostly American by education. Petroleum education and research in our colleges and universities still leads the world.

Private property rights. Businesses can flourish in the U.S. because of our tradition of respect for the rule of law and property rights, including intellectual property. Oil companies can operate without fear of expropriation by some government entity. Mineral law is well settled and the states regulate drilling and production in an orderly and predictable way.

When all else fails, our court system stands ready to settle disputes.

Home Oil Potential

All that means that the U.S. provides a hospitable environment for innovation. The barriers to entry are relatively low. Innovators own their inventions and risk takers can reasonably expect to profit from their successes.

During the last 40 years, ownership of a large proportion of the world’s reserves has shifted from the major oil companies to the National Oil Companies. It would be a mistake to assume that these large, non-competitive behemoths can effectively innovate. Policy makers in the U.S. need to recognize the critical role that our nation plays as an incubator for innovation and the world’s working laboratory for new petroleum technologies.

Oil and gas may not offer infinite supply, but Malthusian fears of the end of the hydrocarbon age say more about our limited imaginations than they do about true resource limits. Even as we develop renewable energy sources, the U.S. Energy Information Administration forecasts a greater demand for oil and gas thirty years out.

We must face the reality that ours is a hydrocarbon-dependent economy, and it will continue to be for most of our lifetimes. We must continue to push the technology envelope into the frontier of marginally economic resources to keep energy available and affordable.

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Steve Maley is Operations Manager for Badger Oil Corporation, a small exploration and production company based in Lafayette, LA. He is Contributing Editor to RedState.com focusing on energy and environmental issues.