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General News    H4'ed 3/31/10

Obama Debunks The Nonsensical "Drill Here, Drill Now, Pay Less"

Message David Fiderer

The merits of Obama's decision to allow drilling off parts of the East Coast and Alaska can be debated at length. But it will soon expose the dirty little secret known to everyone in the oil industry, that Newt Gingrich's mantra "Dill Here, Drill Now, Pay Less" was a sham.

First, no one knows where "here" is. Before anyone drills anywhere, oil companies must first examine seismic studies, which have not been conducted in that region in more than 25 years. Back then the technology was, by today's standards, quite primitive.

The idea that any oil company would drill "now" is also a joke. There's a multi-year lag between the date when an oil company first secures a lease on a streamer vessel for a seismic survey, followed by its decision to secure the winning bid on a lease for drilling rights on specific acreage, followed by drilling to prove up the existence and volume of the reserves, followed by the fabrication and installation the infrastructure necessary to bring those offshore reserves into production. No significant new oil production will come on line, as a result of Obama's decision, during his first term.

Finally, no one in the oil industry expects that new U.S. offshore drilling will enable consumers to "pay less" for the price of oil in any noticeable way. The price of oil is set on global markets, based on the balance between global production and global consumption. In order for new U.S. production to materially impact the global supply, the new oil discoveries would need to be huge. That's not beyond the realm of all possibility, but there's no evidence yet that the U.S. will stumble on to such a huge windfall. In 2000, the Mineral Management Service estimated that the potential reserves discoverable in the East Coast offshore regions subject to drilling moratoria, and now opened up, to be about 3.5 billion barrels. That sounds like a lot, though it represents about 0.3% of global provedreserves. And by the time that potential increased production comes on line, well past 2016, other factors--such as electric cars, Saudi Arabia's plan to delink its currency from the dollar, or China's economic policies--could easily have a bigger impact on U.S. oil prices.

The impact on natural gas may be different matter, since prices are largely set by North American production and consumption. If the new offshore drilling yields significant new natural gas production, then a lower price of gas may help reduce the price of electricity on the East Coast, where gas is a favored fuel for power plants. But at this point, any expectation of any impact on oil or gas prices is entirely speculative. The Minerals Management Service estimated that the potential gas reserves of East Coast regions now being opened up would be about 19 trillion cubic feet, less than 1% of proved North American reserves.

Finally, the idea that offshore oil drilling will eliminate our dependence on foreign oil is pretty fanciful. The U.S. has been consuming more oil than it produces since at least the early 1960s. At current levels of consumption, U.S. oil production would need to triple. No one believes that's going to happen. In terms of energy independence, the biggest bang for the buck is derived by reduced consumption.

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For over 20 years, David has been a banker covering the energy industry for several global banks in New York. Currently, he is working on several journalism projects dealing with corporate and political corruption that, so far, have escaped serious (more...)
 
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