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How to create a resilient Oil & Gas industry

Use Less

As part of the current crisis, oil usage is down, and storage around the world is filling up, to the point that oil has traded at negative prices.  As a reaction, many Republican lawmakers want to bailout the oil industry, by providing free access to storage or no-collateral loans.  While it would make sense to ensure oil doesn't get dumped in the ocean, the right way to do that is by producing less oil. These proposals from the Republicans undermine the motivation for the industry to do so.  Workers are important, but they have the same access to unemployment as the other 25 million Americans who are out of work.

What this crisis should illustrate is something that has been illustrated many times before, the oil industry is a fragile thing.  In the past this fragility has been demonstrated by massive spikes in prices and fears of shortage, in this case it's the inverse.  Why the fragility?  The simplest explanation is, we use too much.  

In a world where oil consumption was half of what it is normally, storage tanks would take twice as long to empty, and so it would be safer to hold at 60% capacity rather than 80%.  Then, in a situation like today, the time to fill from 60% to 100% would be four times longer, as production would be half, and available capacity double.  

The Strategic Reserve has capacity for 727 million barrels.  Normal usage is about 20 million barrels per day.  So if storage is 80% full, that is about 28 days equivalent before empty.  However, only 4.4 million barrels could actually be removed per day.  Doesn't look good for a crisis.  But if our normal usage was 10 million barrels per day, things would look less bad.

It's also clear how that 20% fills up so fast.  Drop from usage of 20 mb/d to 16 mb/d, and don't change production, and it's overflowing in 36 days.  However, if normal was 10 mb/d, 60% full would last 100 days and provide 50% of normal usage.  On the flip side, a 20% drop in usage, without any production change would take 144 days to overflow.

The Trump administration has done everything in it's power to make this current situation more likely, by attacking fuel economy rules, while also supporting oil production through lax rules, beneficial leases and more.

What we should be doing

Support higher mileage standards

Lowering standards at this moment helps no-one, except maybe oil speculators who had bet on more oil use.  There is no reason to help them in any way in which we wouldn't help any other American.  They made their bets, and would have gladly run off with profits.  They should thus pay their debts.

Lower mileage standards don't help the average American.  The vehicles that would be produced, would be in the future, not now, and even if they were made a little cheaper, they'd cost more in the long run by using more gas.

It wouldn't help factory workers.  If it makes producing vehicles less expensive, it does so by employing less labor in their production.  In a time when few Americans will be buying new vehicles, it makes sense to do each one right.

It won't help American car manufacturers.  The world everywhere is demanding higher mileage from vehicles, or electrification.  Making the US market a limited microcosm stuck in the past forces US automakers, who see this as the first and primary market, to adopt strategies that make them completely noncompetitive globally.  Protectionism is generally a losing game, but if you're going to pursue it, there are at least better routes than encouraging more pollution, more dependence on oil and less innovation.

Promote electrification of homes

Wind and solar production continue to scale up.  Between that and natural gas use, the coal industry has become noncompetitive.  As wind and solar scale farther, natural gas will also become less competitive.  Since natural gas and oil production are loosely linked, reductions in usage for one are best accompanied by reductions in the other.

Natural gas isn't much different than oil in that it's limited by storage.  And storage is about the same, a maximum capacity of 36 days of normal winter peak usage (which is about 20% more than summer valley).

Reducing our usage of natural gas will create a stability on both ends.  Prices will fluctuate less, the risk of running out, or overflowing is less.

And the environment might be spared.


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