October 5, 2008

Billions of Barrels Could Mean Trillions of Government Dollars; Media AWOL

Filed under: Business Moves,Economy,Environment,Taxes & Government — Tom @ 8:57 am

OffshoreOilRigOld Media’s coverage of the recently-lifted executive and congressional bans on offshore exploration and drilling for oil and natural gas largely overlooked an important element that should have been very relevant to the discussion.

Supporters of lifting the bans surely share much of the blame for only rarely citing it. Though they have frequently noted the hundreds of billions of dollars a years annually sent overseas to pay for oil that could have been extracted here, they have mostly missed a golden opportunity to tell the American people what over a quarter-century of drilling bans has cost the government and taxpayers. They also generally failed to tell us about the windfall that awaits if the end of the offshore and other bans finally leads to appropriately aggressive use of this country’s God-given resources.

But if we had inquisitive financial reporters in the business press who were interested in information relevant to the “Drill Baby Drill” debate instead of merely repackaging the press releases they received from those on both sides (the sole exception I found was this Wall Street Journal editorial), many more Americans would have long ago learned about what follows.

Congressman John Peterson (R-PA) has assembled information about this. The numbers are stunning.

In a PDF available at the congressman’s home page (at “Charts and Other Useful Information”), he tells us that “the United States is the only industrialized nation in the world which prohibits offshore exploration and production of domestic energy.” In other words, everyone else is talking the talk, while we’re the only ones walking the walk. Translation: We’ve been suckered by environmentalists and the “not in my back yard” crowd into doing something no one else in the rest of the world will do.

The government collects royalties on oil and natural gas when it is extracted. Peterson’s office obtained information from the Minerals Management Service and the Energy Information Agency showing that the average offshore royalty rate, which is based on market prices of the resources when extracted, is 15.17%.

Earlier this summer, the Congressman’s office prepared this summary (available in HTML format here) of how much royalty money is just sitting there offshore:


Even if you adjust Peterson’s calculations to reflect current prices of roughly $100 a barrel for oil and $8/mcf for natural gas, the royalties locked up still amount to over $1.8 trillion (about $500 billion from natural gas, and $1.3 trillion from oil).

But that’s only the beginning.

Estimates of known reserves have almost always been low. There is no reason to believe that things are any different now. For example, over twice as much oil has come out of Prudhoe Bay than was initially predicted. A repeat of that result with offshore reserves would not be at all surprising, especially because Congress has prohibited even exploring the areas involved for years. Using $100 a barrel as the current price of oil, that’s at least another $1.3 trillion in royalties.

Then there’s shale oil. This Wikipedia entry shows over two trillion barrels in estimated U.S. reserves.  Assuming that only 10% is recoverable, that’s another $3 trillion in potential royalties.

If you’re keeping score, we’re at about $6.1 trillion. That’s more than 60% of the current national debt of $9.8 trillion, which is set to shoot up to a frightening degree in the coming years thanks to Uncle Sam’s bailout binge.

The real number for potential royalties is much higher. I ignored additional royalties from offshore natural gas. I also didn’t look at royalites that might come from oil obtained from sands, oil and gas in North Dakota’s Bakken Formation, oil and gas in the Great Lakes, or future oil and gas discoveries.

On top of all that, according to a spokesman for Congressman Peterson, the federal royalty rate for land-based extraction is typically much higher than the 15%-plus off shore rate. States also collect substantial land-based extraction royalties on top of Uncle Sam’s take. The total can be as high as 50% of the market price at time of extraction, with 25% going to the Feds and 25% to the states involved.

Even beyond the royalties involved, Uncle Sam, state governments, and local governments would collect additional billions in corporate and individual income and payroll taxes because of increased business activity.

For decades, both the executive and legislative branches of our supposedly “by the people, for the people” government have mostly done all they can to keep us from using and benefiting from our own resources. By doing so, even at the much lower prices in previous years, they have caused the government to lose out on tens of billions of dollars a year. At today’s prices, if we capitalize on the recently-lifted offshore bans, annual amounts coming into the Treasury could easily run into the hundreds of billions.

Our representatives should be embarrassed by their past quarter-century of energy negligence. The American people should be infuriated, and would be demanding a full-speed-ahead on domestic exploration and drilling — if they only knew.

Cross-posted at NewsBusters.org.



  1. In the light of this now consider California asking for a $7 billion bail out for their prolific social spending. California, the state that has HALF of the US recoverable offshore oil, has sat on it’s hands, raising taxes on it’s citizens and businesses depressing economic activity but WON’T take advantage of a way to raise revenue at NO COST to it’s citizens and businesses!

    Gov. Arnold Schwarzenegger has every right just like Gov. Sarah Palin to get together with the oil and gas companies to negotiate a royalty payment. That’s what Gov. Palin did in spite of there being NO LAW mandating a sharing of royalties with the federal government. It seems that Gov. Arnold Schwarzenegger is still waiting for money to drop in his lap! Here’s a hint, this is why the Dems are claiming Palin levied a “windfall profits tax” instead of what it is, a royalty payment. If the other governors would get on the stick to negotiate we could have domestic drilling commence immediately.

    Comment by dscott — October 5, 2008 @ 9:55 am

  2. TOTAL of Potential Natural Gas and OIL Royalties– $2.576 Trillion…

    “the United States is the only industrialized nation in the world which prohibits offshore exploration and production of domestic energy.”
    Please take the time to read the information at that link.  Tom Blumer adds these facts and figures to go al…

    Trackback by Right Voices — October 5, 2008 @ 10:35 am

  3. Six weeks ago, I thought energy independence, unleashing our oil and natural gas, was going to be a winning campaign straegy. It’s mostly disappeared except when Ds slur Rs with “tax breaks for big oil.” Another reason why I question the desire of the higer-ups in the GOP/RNC and McCain campiagn to actually win this thing.

    Comment by Rob — October 5, 2008 @ 11:16 am

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