Southwest Airlines' Herb Kelleher: Energy Independence, As You Understand It, Is A Myth

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Southwest Airlines co-founder Herb Kelleher and a gaggle of other titans, from former U.S. Spec Ops commanders to Sam Gilliland, chief executive officer of Dallas-based Sabre Holdings, reject outright the idea that we can drill our way to energy independence. In an Energy Security Leadership Council report unveiled Tuesday at the SMU Bush Institute, they attempt to dispel a few myths.

Independence from foreign oil lies not in domestic oil production, they conclude, but in independence from oil, period.

"While the new oil boom will alleviate our trade deficit and be an important source of domestic employment growth, unfortunately it won't break our nation's dependence on the highly price-volatile global oil market," Kelleher said during the report's release at SMU. "'Energy independence' for the United States is an admirable goal, but even if the U.S. were to produce enough oil to meet our demand, the domestic price is still set on the global market, meaning a potential supply disruption anywhere can impact the price of oil everywhere."

Take the current state of domestic energy, for example. Contrary to campaign-season distortions that President Obama has somehow hamstrung energy companies, the United States is in the midst of a fossil-fuel renaissance. The last three years represented the longest consecutive yearly growth in production since the mid-'80s. Crude oil production increased 14 percent between 2008 and 2011 -- the biggest increase since the '60s. Domestic liquid fuels have reached 8.8 million barrels a day, the most in 20 years. By any metric, this is a boom.

It happened for a few reasons. Oil prices have marched ever upward over the last decade. A "perfect storm," the report says, of the right technology and the right price at the right time ignited a natural gas bonanza in places like North Texas' Barnett Shale. And even when natural gas prices collapsed, the technology we developed in the shale translated to unconventional oil plays.

In the short term, it may give the economy a shot in the arm. But it won't lower gasoline prices. That is, of course, the opposite of what we're so often told -- that if we just drill enough, prices at the pump will fall. The idea is nothing new. In fact, it's been a centerpiece of political discourse for decades anytime gas prices rise. Yet it's a fiction. We've spent $800 billion annually on oil for the last five years. Our economy is inextricably bound to its price. Oil is basically the only thing that fuels our cars, trucks, airplanes and ships. When oil prices rise, we don't get to balk. We have no choice but to pay up, and that usually comes at the expense of paying for other things, sending a growth-stifling shudder through the rest of the economy.

The forces that push and pull the price of this one, true currency are beyond us. It is pretty easy to ship, so its market is global. It's a commodity whose value is shaped by the fortunes and conflicts of oil producing and consuming countries -- or even by countries that control important shipping channels, the report says (think OPEC, Iran). "The key consequence of this dynamic is that changes in oil supply or demand anywhere tend to affect prices everywhere."

When we say we seek energy independence through domestic energy production, we're thinking about the external forces pushing the price of oil all wrong. Our exposure to oil price volatility isn't a function of how much oil we produce. It's all about how much we consume. And its our utter dependence on it to move this country that has nearly derailed our economic recovery over the last few years. Think of the cost to each of us. We've spent as much as $4,000 a year on gas while earning a stagnant median income of $49,000 a year.

It's tempting to point to other success stories like, say, the shale gas boom and the glut that drove prices into the basement. But there's a fundamental difference. There isn't really a global market for natural gas. Drill, baby, drill may be catchy, but that doesn't work on oil prices. It ignores (or is willfully ignorant of) the realities of a global oil market. Take Canada and Norway: They're net exporters of oil these days. Bet they got real cheap gas, right? Nope. Their retail fuel prices track global oil prices.

This isn't to say there aren't benefits to domestic energy production, the report concludes. It wouldn't hurt to reduce our yawning trade deficit. And we've taken a few, meager steps to reduce our dependence on oil. The rise of mass-production electric cars helps. And recent fuel-economy regulations will reduce demand for gasoline and diesel by 3.7 million barrels a day by 2030.

But until we don't depend solely on oil to move us, that nearly $4-a-gallon gas will remain a fact of life, no matter how many wells we drill, baby.

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rpm3145
rpm3145

Bet on Kelleher. He understands the United States represents just 5% of the world's population yet uses more than 26% of the world's energy. He understands China represents 20% of the world's population and was only using 7% of the world's energy but now its using 15% and China's consumption number is rapidly going up.

scottindallas
scottindallas

 I have great respect for Robert Bryce.  He may be hurt by writing in Forbes.

pak152
pak152

one thing that few point out is that oil and natural gas are used not just for fuel but are also used as feedstock for a variety of chemical processes

mark zero (Jason)
mark zero (Jason)

And fertilizer. Due to soil-amendment-intensive monoculture farming techniques, we've been eating oil for the last couple of decades. That also has to stop.

pak152
pak152

 then we would have to go back to mining guano. organic farming techniques can not provide enough food to feed the world. Since time immemorial man has sought out ways to improve crop yields. 3 crop rotation was but one way to improve the soil's condition but that took time and forced one third of a farmer's land to lie fallow instead of being in productionhttp://www.madehow.com/Volume-...http://www1.american.edu/TED/g...

because of the monopoly that surrounded the guano trade scientists sought out ways to manufacture fertilizers

pak152
pak152

 "Shale discoveries “have given North America really inexpensive access to raw materials,” said PolyOne Chairman, President and CEO Stephen Newlin. “It’s made us more competitive.""http://mjperry.blogspot.com/20...

pak152
pak152

"Contrary to campaign-season distortions that President Obama has somehow hamstrung energy companies, the United States is in the midst of a fossil-fuel renaissance."

well once again Brantley tells only part of the story. The renaissance is taking place on lands not controlled by the federal government such as North Dakota and Texas. Exploration and production on federal lands has been and continues to be on a down trend.http://energytomorrow.org/blog...

http://www.instituteforenergyr...

http://energytomorrow.org/blog...

"There isn't really a global market for natural gas." Always love a reporter/blogger who makes a statement without providing any backup for statements like this one.

"TOKYO: Japan's Mitsubishi and Mitsui said Wednesday they will import liquefied natural gas (LNG) from the United States, amid a push to boost energy sources after last year's nuclear crisis.The country's two largest trading companies said they would each order 4.0 million tonnes of the gas annually from Cameron LNG, a unit of Sempra Energy, as early as 2016, reportedly the first such deal between Japan and the US."http://www.channelnewsasia.com... if there is no global market for natural gas why are LNG terminals on the East and Gulf Coasts being converted for export? Why would any company expend millions for something for which there is no need that would be like the federal government loaning hundreds of millions to companies that shortly go into bankruptcy."And we've taken a few, meager steps to reduce our dependence on oil. The rise of mass-production electric cars helps"

sorry but the production of electric cars has had a negligible effect on our dependence on oil. "Only 17,425 electric vehicles sold in 2012 — less than 0.1 percent of the U.S. market. So how come automakers continue to build electrics — including by introducing a dozen new offerings this year into a market that doesn’t want them?"http://www.nationalreview.com/..."The auto website Edmunds.com predicts 40,000 electric vehicles will be sold this year, with 70,000 sold in 2013. The projection for 2017 rises to 250,000 cars — about 1.5 percent of the market.From The Detroit News: http://www.detroitnews.com/art..."at the annual Society of Automotive Engineers World Congress, senior auto-industry executives in charge of technology strategy, research, and regulatory issues delivered the same message: Barring an unforeseen breakthrough that significantly drops the cost of automotive batteries, fully electric cars and plug-in hybrid vehicles are likely to remain confined to a niche of under 10% of the market through 2025 and beyond."http://online.wsj.com/article/...

primi_timpano
primi_timpano

It is all well and good to prefer clean energy but we are long way from achieving it.

The only clean electricity outside of hydro is wind and solar.  Both of these will require massive and inexpensive storage systems before they can become a reliable source of power.

Long haul truckers will always need stronger motors with economic fueling ranges greater than current alternative technologies permit.  The options for these and other applications like them will require energy dense fuels, such as gasoline, diesel and natural gas.

And electric cars, they are only as clean as the fuel generating the electricity, which for the most part is going to be natural gas and coal.  I am sure Pickens has his own book to talk up but natural gas is the solution for vehicles and utilities until our technologies improve.  Fortunately we have lots of gas, and the fracking technologies are going to make available a lot more oil.  No, we can't drill our way to independence, but between Canada, the US and Mexico we can generate enough oil and gas so that our imports will be limited to our North American neighbors.

The Credible Hulk
The Credible Hulk

Why is it that you presuppose that our imports will be limited to our NA neighbors? That makes absolutely no sense in a global fuel market.

Do you think that suddenly somehow the speculators in the market will overnight become patriotic altruists with the advent of cheap, plentiful North American petroleum reserves?

Dream on.

primi_timpano
primi_timpano

The price will still be market driven but you are already seeing a differentiation in pricing between Brent and WTI.  In the event USA does become an exporter, in theory the domestic price should be less the export price to reflect lower transportation charges.  Besides Brent/WTI, you see this differentiation in gas prices all over America.  Wellhead gas does not sell at Henry Hub pricing, it trades at HH less the cost of transportation and processing.  Just like grapefruits in the valley.  They are cheaper in the valley than in Dallas because you have to pay the transportation.

primi_timpano
primi_timpano

 Maybe not "limited to" meaning zero elsewhere, but the vast majority of our imports will come from NAm.  The transportation expenses will be much less with respect to pipelines from Canada and Mexico versus tankers from the North Sea or the Middle East

Steve T
Steve T

The easy to produce (cheap) oil has been found and is being depleted; that's why the world has turned to difficult to find/extract/refine conventional oil (deep water, the arctic, no less; and  shale formations) and unconventional oil like tar sands and kerogen (sometimes called oil shale-which extracting would be basically strip-mining the Rocky Mountains). 

The twilight of the oil age is in view folks, but apparently not before we burn enough to wreck our climate.  Great job, humanity!

pak152
pak152

 actually we have not even begun to touch the available reserves in this country. right now no drilling is allowed off the Atlantic Coast, the West Coast and the Florida gulf coastthe majority of federal lands west of the 100th meridian are blocked from E&P, for over 10 years we've argued about drilling on 2,000 acres of land in ANWR.

Driller
Driller

 Well, you might want to look at the resource base first.

The reserves base off of the Atlantic Coast is not that great though the structure indicates some large traps that may hold sufficient reserves to justify the cost.  The big impediment is the cost of the production structure as the Atlantic Coast weather does get fairly violent from time to time.

The Florida Gulf Coast is considered to be primarily a dry gas province.  While the reserves potential is significant enough to justify the effort, Florida has more than sufficient  political clout to essentially have a 30+ mile exclusion zone from its Gulf shores.  Additionally, there is a question of whether or not the gas will be a sour gas much as it is in offshore Texas.

Drilling offshore California is a tough climate both geologically and politically.  Despite the evidence that points to the significance of naturally occurring oil seeps, offshore E&P companies have the burden of proof to show that any oil found is not due to their operations.  There is a former Occidental platform in the SoCal basin that is so clean that you can eat off the drilling floor, yet they still get scrutinized for any tar balls that wash up nearby.

phe_75034
phe_75034

Depressing, but demonstrably true.

And, I don't want to get all Al Gore on ya, but it's got to be said: Fossil fuels are killing us. Slowly, yes, but killing us none the less.

I'm one of those guys who thinks rising oil prices are ultimately good for us. Something has to spur the search for a real alternative - something more realistic than all this wind and solar and what-have-you we're trying to pass off as sustainable energy now.

I know, I know. The transition off oil to the as-yet-undiscovered alternative will be painful as hell, with massive economic dislocation. But we're going to have to do it sooner or later. Do we want to leave it for our kids or theirs? Or do we want to be remembered as the generation that sucked it up and did what had to be done?

Colin
Colin

I don't think the US should actively be trying to drill/produce more domestic oil now while the price is still relatively low and the world is relatively peaceful. We should be hoarding our domestic oil for several decades from now when oil is over $200 a barrel (inflation adjusted) and we really need it as an economical bridge to more sustainable energy resources. 

RTGolden
RTGolden

One big problem with that idea.  When world-wide oil market prices reach $200/barrel, what do you think US crude is going to sell at?  $200/barrel you say?  exactly right.

The reason why the natural gas boom hasn't reduced our natural gas-powered electric bills is because, to make a profit on shale gas extraction, that gas has to be exported to foreign markets where it fetches a higher price.  Like the article says, fossil fuels are a world-wide commodity with a world-wide market.  Increased production here, now or in some Exxon wet-dream future of $200/barrel oil, is not going to reduce prices here.

scottindallas
scottindallas

No, that's because our electricity regulation is co-opted and compromised.  Gas prices in this hemisphere are plenty low, but that still doesn't translate to our jacked up electric system.  Further, natural gas is not exportable like crude is. NG has to be liquified or sent through pipes. LNG is very expensive--relative to simply piping it around.

Colin
Colin

I wasn't implying that we should then sell the oil to foreign countries at $200/bbl. I'm saying when the world is at the point of energy and financial instability because of sustained very high oil prices, we can extract and use our oil as a bridge to using other energy resources, and not have to exchange our currency for very expensive foreign oil.

If there are severe political and economic problems around this time, it isn't out of the realm of possibilities that we'd legislate that domestic oil couldn't be exported, or that we'd have diplomatic problems with foreign oil producers that would refuse to sell to us. Having domestic oil in the "bank" would be just as strategic as the official national strategic oil reserve. Though it is only about 30 days worth of our demand.

This is much preferred to depleting our oil reserves now while we could be purchasing relatively cheap foreign oil.

RTGolden
RTGolden

We can't even legislate that Oil Companies pay fair taxes on the profits they're taking now.  Do you really think we're going to succeed in legislating price controls and market pressure on big Oil in the future?  One big problem is that big Oil = big $$, and that is the only language politicians understand.  Another problem is our government's demonstrated lack of ability to regulate any type of commodity without it leading to shortages and price surges and black markets.  They couldn't accomplish regulated pricing on gas in the 70's.  They've been rooking us with higher than necessary grain, dairy and produce prices since the 20's.  It can be done, certainly.  But first our government, mostly our Congressmen, are going to have to realize that regulated pricing has to be transparent, above board and applied equally across all political, economic and social strata.

dallasmay
dallasmay

$4/gallon gas will not be a fact of life for a few more years to come. When oil prices hit about $120  per barrel, the US economy begins to faulter, which reduces US demand. The US consumes such a large percentage of the worldwide oil market, that when the US's demand falls, the world wide price of oil falls with it. We've seen this play out enough times now to be able to predict with a high degree of accuracy where the US's thresh hold for economic stability is.  It's at ~$120 per barrel. It'll be a few more years, maybe 2018-20, that the world wide oil demand is such that it keeps the price over $120 despite the US economies inability to keep up demand. 

scottindallas
scottindallas

 price and fundamental supply and demand are dimly related in our unregulated, speculative investment climate. 

Brantley Hargrove
Brantley Hargrove

 I think we're already there. Demand from developing economies is huge, and it will only serve to drive prices on the global market.

Anon
Anon

no, we're not already there. that's what people said in 2008 when oil kept surging despite a faltering US economy. then the floor fell out from under oil prices when people realized it wasn't true. and demand hasn't grown fast enough elsewhere since that time to make it true today. expectations of future demand growth from emerging economies is keeping prices high, but those are just that - expectations. if the US consumer stops shopping, those factories in China that are churning out the shit we buy will use less energy. again, this won't be the case forever, it just happens to be the case right now.

dallasmay
dallasmay

I knew US consumption was down this year -and your right that more efficient cars are a good bit of responsibility for that. Just look at the fleet line up this year. This year every major Auto company has at least one 40 mpg car. And Americans are more willing to buy small cars now that prices are high. That is helping to shrink demand a little in the short term, but it can't hold off China and India forever. 

I do disagree with you that we have been in an oil bubble for the past 2 years. Sure we've had micro-bubbles in that time, but if you look at the long term trend in oil prices It's been pretty stable, and growing at a fairly regular and slow rate. That says to me that oil is where it's supposed to be based on the world market, and that production and price directly matches consumption. Thus any brief fall in consumption or production has a dramatic effect on price.That said, I'm actually okay with oil speculators. Let rich people gamble their own money. Who cares. If they drive up the prices into a bubble, fine, the market will correct that and any extra you paid for gasoline on one side of the bubble will be given back to you on the other side. That's actually where the free market works best. We just need to make sure that the market punishes them appropriately and the government doesn't step in to bail them out. 

scottindallas
scottindallas

 Actual US consumption is down 7% from last year alone.  More efficient cars and engines are reducing demand in the third world as well. 

We've been in another oil bubble for 2 years.  It's been fueled by phony excuses over Arab instability.  But, the real reason is again an investment climate where real investment is seen as more risky, than inflating an oil bubble.  These bubbles are driven by the computerized trading, where their own volume ensures expansion.  These speculators are able to borrow on very thin margins and keep rolling their contracts over, rather than ever having to cash out.  So, they keep doubling down, and prices and supply and demand further detach.  This is directly related to "reforms" found in the Graham Leach Bliley, Commodities Futures Modernization Trading Act,  This was pushed by Phil Graham, as well as democrats and Clinton himself.  In 2000, there was $9 billion traded in oil futures, in 2007, that figure had grown to $300 billion.  I'd love to see those more current  figures.

dallasmay
dallasmay

2008 was a bit of an outlier. The excessive oil price was caused by speculators. The Big Wall Street banks had their mortgages collapse on them, but still needed to show a profit for their shareholders. So they all bought into oil as a cheap and fast way to guarantee quick growth in assets. Then that bubble burst too and the oil price collapsed too. 

Bitter, Party of One
Bitter, Party of One

He's confusing price and supply.  The US can and should produce enough oil domestically to meet its needs and have some to export.  Price would still be set by the international market but the US would have its own supply, regardless of price.

Guest
Guest

What does it matter if we're paying the same price either way?

dallasmay
dallasmay

Well, we could move away from oil... but that would just be one option.

scottindallas
scottindallas

 that's not a real option.  It's a question of not pulling your punches, but not trying to push the river of innovation.  That leads to waste. 

primi_timpano
primi_timpano

 No reason to go to war in the Middle East.

dallasmay
dallasmay

Yes, but America is one of the few countries that has a truly open and private oil market. Unless we Nationalize our oil industry, then private oil companies will sell our oil production to the highest bidders. If Americans can afford our own oil, then having our own supplies doesn't do Americans any good -except those that own oil companies. 

pak152
pak152

 'Unless we Nationalize our oil industry, then private oil companies will sell our oil production to the highest bidders."

and the countries that control their oil call in private companies to do the exploration and production since the national oil companies can't do it themselves. just look at Mexico and Pemex. what a failure.

pak152
pak152

 thanks for the clarification

dallasmay
dallasmay

For the record, I wasn't advocating for nationalizing the oil industry... Just to be clear.

Anon
Anon

is there actually another country with private oil markets like ours? I didn't think there was, at least not from a major producer.

scottindallas
scottindallas

 you introduce a funny question.  It costs SA something like $9 to produce a barrel of oil.  So, from a cost to supply, SA and other producer/refiners don't subsidize their gas.  It's only when compared to the opportunity cost of that product not going to the highest bidder is that a true subsidy.  I'm sure this would different for producers with limited refining capacity, and obviously for resource poor countries. 

pedant
pedant

*theirs (no apostrophe)

Seeing a misspelling is like nails on a blackboard for me.

pak152
pak152

 up until the mid-70s Saudi E&P was done by the Big 4 (Exxon, Mobil, Texaco & Chevron) which was Aramco. Saudis understood it was a business. and yes internal consumption is going to affect exportsWhat many don't realize is that Saudi crude is cheap to produce and Saudi Light refines out at more than 90% gasoline

primi_timpano
primi_timpano

The Saudi's have done an excellent job on the production and refining part of the business.  I didn't include them with the western countries because they subsidize their domestic gas consumption.  It is hard to fathom but I have read reports suggesting that rising Saudi energy consumption could force it to reduce exports by more than 2mm bpd.

pak152
pak152

 wasn't trying to be pedantic, but seeing a misspelling is like nails on a blackboard for me. the only reason Saudi Arabia is successful is that they operate Saudi Aramco like a real company and they use expats. full disclosure I worked for a subsidiary of their's years ago

primi_timpano
primi_timpano

 Absolutely correct.  My apologies to all Colombians out there.  Spelling correctly gets harder every year.

pak152
pak152

 that should be Colombia

primi_timpano
primi_timpano

Columbia, Australia, Great Britain, Norway.  Would you rather have a model based on Argentina, Saudi Arabia, Kuwait, Iraq, and Iran?

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