Ukraine Crisis Means Drill, Baby, Drill

Russia’s invasion of Crimea is a tipping point eventthat will further spur the American oil boom. The European Union (EU) and United States in 2008 threatened to slap economicsanctions on Russia for invading Georgia. But after a while the criticism faded and threats of sanctions were quietlydropped, because the EU is almost entirely reliant on Russia for energy supplies. 

A similar situation is unfolding today as theEU and U.S. are again making empty threats that they will stop exports of Russianoil and gas as punishment for invading the Ukraine. But due to the latest humiliation by theRussians, a consensus is emerging that will demand the United States and itsNorth 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 supplied35% 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 was highly successful in generating greater economic cooperation toprioritize and develop North America’s vast energy resources.

The United States since the 1950s was known to have theworld’s largest potential oil reserves with over 900 billion barrels. But the cost of production with traditional techniquesmade the bulk of drilling opportunities uneconomical. But U.S. oil production has more than doubledsince 1994, due almost entirely to the success of the shale revolution’s advancedextraction techniques that revitalized mature oil fields and opened upunconventional plays. While oil productioncut America’s trade deficit by hundreds of billions of dollars, the greatestboon has been in tapping America’s immense natural gas reserves. The 50% increase in supply led to a 60% cut innatural gas prices and put the U.S. on the path to become the world’s largestglobal exporter of liquefied natural gas.

After a two decade effort to unlock Canada’s unconventionaloil sands deposit, the nation’s production has more than doubled. Canada is now thesixth-largest global oil producer. Closeto two-thirds of Canada’s 3.8 million barrels per day (BPD) of oil is exportedvia pipeline to the U.S., making Canada by far the largest supplier of crude toAmerica. Canadian tar sands production isconstrained by a lack of low cost pipeline capacity for export to the U.S. It is estimated that within 5 years ofapproval of the Keystone XL Pipeline, Canada could increase production by another2 million BPD.

Mexico was slow to join the energy boom but intends to catchup fast. Since the nationalization ofoil in 1938, production from vast oil reserves has faltered due to lack ofinvestment, corruption, and incompetent management. The Mexican Constitution made it nearlyimpossible for foreign companies to participate in any part of the energysupply chain, leading to technological stagnation and decreasing production. Mexico’s production today is about 3 million BPD,after the nation dropped since 1970 from the 5th to the 10thlargest producer. But Mexican constitutionalreforms passed in 2013 now allow foreign joint ventures. U.S. corporations are expected to dominate theprocess since they command the best technical expertise for deep-water offshoreand unconventional onshore production that could add another 2 million BPD within 10years.

Influential liberals are becoming incensed that the Ukraine humiliationmay be a tipping point event that will spur oil and gas drilling. Apple CEO Tim Cook became so unhinged regardingNorth American oil and gas drilling he threatened to commit corporate “hara-kiri” by suggesting: “Climate change deniers should get out ofApple Stock.” 

After ultra-liberal Cooktook over Apple from founder Steve Jobs three years ago, he hired LisaJackson, former head of the EPA, to lead the company’s “sustainability” efforts. More thanthree-quarters of Apple’s worldwide facilities, including all of itsdata centers and Cupertino, CA headquarters are now run on solar, wind,geothermal, or hydro power. But whileCook focused on liberal political correctness, his legacy is largely comprisedof incremental improvements in established products, tweaks to the supplychain, and more corporate transparency. Apple’sstock price seems to have recognized Cook’s leadership by dropping $179 from itsSeptember 2012 high of $705 to $526 today.

Russian President Vladimir Putin humiliated President BarackObama by grabbing Crimea, in spite of Obama’s threats that “we will stand with the internationalcommunity.” As JoelPollack at Breitbart wrote: “It ishard to recall a more complete setback for American power. Jimmy Carter’sresponse to the Soviet invasion of Afghanistan was more convincing.” The only option that the President and his Democratallies have for redeeming themselves before the November mid-term elections isto declare “drill, baby, drill” for national security.

The author welcomes feedback @ chriss@chrissstreetandcompany.com.

Chriss Street is teaching microeconomic at University of California, Irvinethis spring from March 31 – June 8, 2014. Call Student Services at (949) 824-5414 or visit http://unex.uci.edu/courses to enroll!