Image CreditShould the United States drill for oil in protected offshore waters?
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- Yes? But have you considered...
- No? But have you considered...
… that many experts think that offshore drilling in protected waters will have a negligible effect on gas prices over the long term?
It will likely take more than a decade to find offshore reservoirs, drill the wells and bring the oil to market. Our own government’s figures say the economic results of extracting oil from the OCS moratorium areas won’t amount to more than a drop in the global barrel.
According to a 2007 study from the U.S. Energy Information Administration (EIA), it would be at least 2030 before oil garnered from off-limits OCS areas would have a significant impact on crude oil production or prices at home. The study notes that “because oil prices are determined on the international market … any impact on average wellhead prices is expected to be insignificant.”
Historical evidence also proves that more drilling at home will not lower gasoline or crude prices. From 1999 to 2007, for example, the number of drilling permits issued to develop oil on public lands rose by more than 361 percent, yet gasoline prices rose sharply over that same period. And it happened even though we found some rather large offshore oil fields.
In September 2006, Chevron drilled a successful test well, “Jack 2,” in the Gulf of Mexico. Industry analysts touted the area as capable of producing a whopping 15 billion barrels of oil — more than two-thirds of U.S. total proven oil reserves. As the oil industry uncorked the champagne in celebration, crude oil prices, which had been trading just above $60 a barrel, went into freefall and bottomed at $54 a barrel in January of 2007. But by the end of the year, the per-barrel prices exceeded $70; the following year, they crossed the key psychological barrier of $100 per barrel. If large offshore oil fields are supposed to lower oil and gasoline prices, the Gulf of Mexico has not delivered.
The EIA stresses that oil fields off the Atlantic and Pacific coasts are likely to be smaller than those in the Gulf of Mexico, and some experts believe that the 18billion-barrel estimate is wildly inflated. Offshore drilling also may not lower oil prices because of the complexity of producing oil in deep water. Oil production costs about $5 a barrel in the Middle East, but costs more than $60 a barrel to produce from U.S. offshore drilling.
But even if billions of barrels are waiting there, they wouldn’t last more than a few years at the current rate of U.S. consumption, which is about 20 million barrels a day.
…that drilling in the OCS could lower oil prices and generate billions in state revenue?
With an estimated 18 billion barrels of oil off the Atlantic and Pacific coasts, what’s the big problem with poking around just to see what’s there? We already drill offshore in the Gulf of Mexico, and even if we get only a small fraction of estimated oil reserves from these protected OCS areas, it could have a much larger impact on prices.
Here’s how: Oil markets are highly volatile and respond to even slight jitters in production — as little as a 0.5 percent fluctuation in oil supply on the global market can push oil prices one way or the other. We've seen it with Middle East unrest, disruptions in Nigerian exports and strikes in Venezuela, all of which have triggered higher prices for crude oil.
Eighteen billion barrels of oil is a substantial amount; it’s about equal to half the reserves of Nigeria, which is one of the top five oil exporters to the United States. The National Petroleum Council estimates that drilling in protected OCS areas could eventually yield an additional 1 million barrels of crude oil per day. That’s about 5 percent of U.S. demand and approaches the amount we import from Saudi Arabia, 1.4 million barrels.
Plus there’s a chance that drilling in new OCS areas might yield more oil than current estimates indicate: In the 1970s, the Prudhoe Bay area in Alaska was thought to contain 7 billion to 9 billion barrels of oil, but by the end of 2005, the area had yielded 15 billion barrels. The U.S. government also once estimated that the Gulf of Mexico contained 9 billion barrels of oil, but that figure rose to 45 billion barrels after the industry made technological leaps with deepwater drilling and seismic testing. The EIA’s estimates are the product of decades-old guesswork; it’s time we look at the area with newer technology.
And commodities traders react to market psychology — perceptions of supply and demand. So even mere announcements that a major oil field has been found — before a drill has so much as touched ground — can rattle the cage. Oil prices slid with announcements of discoveries of massive oil fields in the Gulf of Mexico and offshore Brazil. Some have also attributed a summer 2008 drop in oil prices to President George W. Bush’s lifting the executive ban on offshore drilling in protected OCS areas.
Even if new oil fields only marginally cushion a rise in crude oil prices, the federal government and states like Florida, California and Virginia could nevertheless enjoy revenues in the billions from offshore oil leases and production. So far, in fiscal year 2007, the oil and natural gas industries paid $6.8 billion to the federal government to acquire offshore oil leases — that’s simply for the right to look for oil and gas. Another $8.7 billion came from production royalties.
Moreover, in a March 2008 auction for Gulf of Mexico oil leases, the federal government took in $3.7 billion, of which some states will receive 37.5 percent under the 2006 Gulf of Mexico Security Act. Also under that law, Louisiana stands to make $10 million a year starting in 2016 and $1 billion a year starting in 2028 from offshore oil operations.
Odds are promising that we’ll find a substantial amount of oil in protected OCS areas. But even if we don’t, isn’t offshore drilling a winning economic proposition for the U.S. Treasury and states?
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