David Woolsey

White House To Buy Up Oil Leases?

June 20, 2002

To:
Governor Gray Davis
State Capitol Building
Sacramento, CA 95814
Fax: 916-445-4633

Dear Governor Davis,

This letter is a response to the S.F. Chronicle article titled White House hints it may buy up oil leases: Letter to Simon interjects administration into governor's race By Marc Sandalow, Washington Bureau Chief. It is inspired, however, by the contents of the book titled Hubbert's Peak: The Impending World Oil Shortage by Kenneth S. Deffeyes. I strongly recommend reading this book.

The book, Hubbert's Peak: The Impending World Oil Shortage by Kenneth S. Deffeyes speaks, in detail, of an expected peak in world oil production in the year 2006, plus or minus a year or so. The coming peak in world oil production will be like the U.S. peak in production in the early '70s, only bigger and forever. The difference being that there will be no additional sources to import from. The prices of oil are thereafter expected to rise in price, never again to fall. One of the points the author makes is that anyone with oil reserves now should do whatever they can to not sell them until after the peak. This leads to a couple of observations.

The S.F. Chronicle article titled "White House hints it may buy up oil leases: Letter to Simon interjects administration into governor's race" and dated Thursday, June 20, 2002 raises a few interesting thoughts. If the government buys the leases back from the oil companies, what's to stop them from putting the rights up for lease later? Given an ever increasing price of oil after the year 2006 those sources of oil must eventually be explored. Analogously to food and hunger: starving people care little about the fact that they are eating the last of a species. In the meantime why should the government buy the leases back? Unless there is a way to permanently insure there will never be a new lease made this money is really a bribe to the oil industry to keep them from drilling temporarily. The only silver lining might be better lease terms with increased revenues for state government. Can more advantageous lease terms could be developed without the payoff? California should literally be the last place to allow any more drilling because our economy doesn't need the smaller revenues associated with drilling any earlier. In other words, the future economic gain of not drilling exceeds the immediate value of the oil.

Another interesting conclusion comes from the observations in Hubbert's Peak. While Deffeyes does not come out and say so, it should be obvious to anyone aware of world political events that the long term winners of all the current oil embargo strategies being employed against various "rogue nations" will backfire. Do we really want all the "bad guys" like Hussein, Kadaffy, and etc. to be the ones with remaining oil after the peak? If that happens, we'll be forced to drop the embargoes and buy from them at higher prices than ever before. We are, in effect, forcing them to make a long term investment in savings and resource conservation. Of course, when it's all over, they'll still hate us and seek our ruin, and they'll be in a better position to persue that goal -- and to make a large profit while they're at it. The embargoes will therefore fail to accomplish anything more than harming civilians while their leaders wait for 2006. A direct attack might be less harmful to both their civilians and, more importantly, to us in the future. You probably don't have to worry about making a direct decision about whether to attack foreign lands over oil, but it's probably a good idea to be informed about the timetables that are forcing those decisions.

For better or for worse, Oil is a hugely important commodity in the world of today and anyone living here and now really ought to read Hubbert's Peak. This is especially true for persons making energy or investment decisions spanning the next five years.

Sincerely

David Woolsey

Attachments:

URL for information on the book Hubbert's Peak:
<http://www.princeton.edu/hubbert/>

URL for the S.F. Chronicle article White House hints it may buy up oil leases: Letter to Simon interjects administration into governor's race:
<http://sfgate.com/cgi-bin/article.cgi?file=/c/a/2002/06/20/MN38980.DTL>

URL for this letter on my website:
<http://davidwoolsey.com/ideas/letters/020620-SFGate-GovDavis.html>