Loading...
Symbols:
Authors:

Bush's New Drilling Proposal: Fixing a Hole

by: Paul Ausick June 20, 2008 | about stocks: CVX / DBO / IEO / OIL / USO / XOM / XOP    

Paul Ausick

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

Now that President Bush has formally called on Congress to lift its ban on off-shore drilling and on-shore drilling in previously restricted areas such as the Alaska National Wildlife Refuge, the big argument can officially begin. On one side, E&P companies will argue that US national security depends on producing oil from US holes, thereby making the US less dependent on foreign oil. On the other side, the argument is that the US can not drill itself out of the current supply/demand imbalance.

Around the nucleus of these two arguments other important issues will be spun like so many electrons: OPEC's power, speculation, global warming. Let's examine each of these briefly.

OPEC countries supply about 40% of the world's crude oil. That is not a monopoly. If it were, OPEC could simply set the price of oil at whatever level it chose and everyone would have to pay that price. The coming meeting between producer and consumer countries is evidence that OPEC believes that crude prices are too high and are permanently destroying demand for the cartel's only asset. OPEC's claim that the market is well-supplied is mostly true, but it's not the whole story.

Many commentators blame speculation for the dramatic run-up in crude prices over the past year. The big price moves do not indicate monopoly pricing. Crude prices are moving up because demand growth is outstripping supply growth. It is likely that non-commerical traders are contributing to high crude prices, but barring evidence of significant market manipulation, it's hard to see how speculation alone caused prices to double in a year.

Current opinion polls indicate that between 60% and 80% of the American public believes the US should eliminate all, or most, restrictions on exploration for new sources of US crude oil. Exxon (NYSE:XOM) and Chevron (NYSE:CVX) executives have recently urged the Congress to do just that. New drilling might help, but not for at least ten years; and by then, demand will likely have overtaken supply by an even wider margin.

Still, the US might want to consider opening up restricted areas to new drilling, but not under the same rules that have been in place for the past hundred years. If US lawmakers can bring themselves to force drillers to internalize the full cost of crude oil, then it might make sense to allow new drilling. The largest change would be to include the now externalized cost of carbon emissions. Such a change would demonstrate that the US does not expect the rest of the world to assume the cost of increasing greenhouse gas emissions. Furthermore, the funds collected, either through a cap-and-trade scheme or a carbon tax, should be spent on developing renewable sources of energy.

None of this does much to reduce gasoline pump prices in the short term. In fact, prices probably won’t fall even in the long term. But by allowing more drilling at full cost, and by increasing development of new and cleaner fuels, the US puts itself in a strong leadership position from which it can encourage other consuming nations to adopt similar policies.
 

Related Articles

This article has 16 comments:

  •  
    Jun 20 07:34 AM
    That's one of the Beatles' best songs by far...nice reference.
    Reply
  •  
    Jun 20 09:14 AM
    Most members of OPEC (namely Saudi Arabia and Kuwait) are smart enough to know that high oil prices are not in their self-interest. Their ideal price for oil is around $100/bl, which is high enough to allow the royal families to keep up their lavish lifestyles, but at the same time low enough to discourage investment and research in alternative energy technology.

    Current oil prices have very little to do with speculation.
    The simpliest explaination is the correct one: Constrained supplies, growing demand and an inelastic commodity.

    If you look at EIA (Energy Information Agency) data, it clears show supplies growing prior to 2003 and then plateauing at 85 mbl/day.
    At the same time the plateau occured, oil prices (in USD) shot up 6 fold.
    Reply
  •  
    Jun 20 09:15 AM
    10 years to realize oil? Where does this data come from? Given the shallow depth a more realistic figure is 2-3 years max, quicker given the incentive. Also - how about the reinvestment of the oil dollars into the US economy versus others....
    Reply
  •  
    Jun 20 10:39 AM
    The obstructionist "Dim-wit-O-craps&... object to more drilling saying it will not help. Just what do they think occurred that enabled us to have oil and gas supplies that we now enjoy and utilize. Could it have been the only thing that finds and provides us with oil, the drillers bit?

    In their infinite stupidity, the "Dim-wit-O-craps&... whine that "big oil" is not utilizing the federal leases they now have. For starters, not all if these tracts are economically productive. Off set acreage may have proven barren, which is not a favorable indicator that there is a good chance for potential production in the vicinity. Completed wells may be waiting for pipe lines or on shore facilities to be constructed so the oil or gas can be transported to market. Exploration (seismic or otherwise) may not have been completed, thus delaying drilling on the most favorable location. Off shore drilling rigs are in high demand, and there is a waiting period before they can be engaged and brought to location. Even if all the definitive exploration, evaluation, permitting, and equipment was in place, off shore drilling requires massive amounts of money. Even the largest oil corporations in the world could not afford to drill all of their leased acreage at the same time. Like any other business, they must budget their funds to the most likely prospects, and the ones where a return on investment is the quickest.
    Reply
  •  
    Jun 20 10:52 AM
    So, may I assume your conclusion is to not utilize our existing domestic energy resouces...? All well and good. Maybe the Greens and their fellow travelers in the Congress can subsidize our use of gasoline, perhaps even make it "free" like their plan for health care.

    The only problem is we're sending nearly a trillion dollars overseas each year TODAY to import energy. As a result we'll go BROKE long before any dreams of a world of clean energy come to fruition. Or hadn't you thought of that...?
    Reply
  •  
    Jun 20 10:55 AM
    Mixter--as one who works in E&P, you are right that just because you own a lease doesn't mean you have the capacity to drill right away. It's as true of leases of private land as with government leases.

    But since this is true, I don't see any problem with the government getting the best deal possible, and charging for undrilled leases, as opposed to letting E&P companies just park on them for (potentially) the entire lease period. This is not a deal that could have been struck in, say, 1997, when oil was cheap. But now that it's expensive, lease-holders--includi... the U.S. government--have a leverage to negotiate (or re-negotiate) a "put-up-or-shut-u... lease. Certainly I'd do that if I were a private landowner negotiating a lease.
    Reply
  •  
    Jun 20 11:12 AM
    RWB: here's the deal. The oil companies and the government signed contracts related to the terms of the leases. For the government to go back and modify these leases is in essence a breach of contract. How is it that the government can add the drill or lose clauses to a contract that was previously agreed to? I believe that's called a "takings" and could put the government in court with the oil companies for many years. Further delaying drilling on these properties not to mention making it less likely that the companies will do anything.

    One thing I do know: oil companies are looking for all of the drilling inventory that can find tht meets economic hurdles. They are not just sitting and waiting because they can; they are sitting because either the are
    1) studying the acreage to decide where to drill
    2) waiting on permits from governments which take forever
    3) waiting on surface owners to give them surface use permits if its in the Rockies and the federal land is split between a surface user and a minerals/oil lessee
    4) the property isn't economic at today's prices/costs
    Reply
  •  
    Jun 20 12:00 PM
    Mmarrkk: Contract renegotiation doesn't happen? Hell, if we were to open ANWR and the continental shelves to E&P (and I think we should) I, if I were negotiating the leases on behalf of the government, would make renegotiating old leases a pre-condition to bidding on new leases. I guess what I'm saying is that the government should be tough in lease negotiations--just like a private landowner should. Especially now.

    I think I was clear that I understand (from direct personal experience) why and E&P company doesn't drill on a lease right away. In fact, there are more reasons than those you state, including inability to marshal enough resources right now (due to capital costs and labor availability) and desire to "tie up" a lease to prevent a competitor from getting it.
    Reply
  •  
    Jun 20 12:14 PM
    paul, you are right we are going broke. drilling will never fix that problem. alternative energy solutions will. likewise, taxing oil interests rather than giving them subsidies should be done. this will of course drive up the price of fuel, but we need to change our thinking and that is what it will take to do it.
    Reply
  •  
    Jun 20 01:49 PM
    "...New drilling might help, but not for at least ten years; and by then, demand will likely have overtaken supply by an even wider margin...."

    What an amazing bit of logic- because something can't help short term, do nothing!! That is the exact same logic used 10 years ago that helped get us right where we are today. Amazingly short-sighted...and now we are paying for those decades of always doing nothing, because it won't help "right now". Seriously stupid policy, IMHO.
    Reply
  •  
    Jun 20 03:08 PM
    Seems to me any addition to the supply, now or later, 2 years or 10, will make the price lower than it would have been otherwise... we can't reduce demand enough to lower the price, and besides, the lowering of the price would itself cause an increase in demand.

    That's market economics.

    "we can't drill our way out of this addiction" is crapola. Of course we can. There's enough oil in this world to keep us going for a hundred years or more, during which research will presumably make alternatives more economically feasible. It's crazy to insist on alternatives NOW, when they need subsidies to even EXIST and that means tax dollars and economic difficulties... why not bring more oil online now, and work on economically doable alternatives all along?

    Stupid Dimocrats. They've treed themselves with this envirostuff.. their poor, whom they say they care about, are seeing the price of EVERYTHING skyrocket. "Poor, minorities hardest hit" as the papers often say about Republican policies.
    Reply
  •  
    Jun 20 05:09 PM
    I think we should put the same spirit to work that fueled the rebuilding of the Los Angeles freeways after the earthquake. Those free ways were up in running in 8 months when everyone was saying it would take 3-5 years to do.

    As for drilling not effecting prices I don't follow your logic. A large reason for the increase is futures prices. Futures will be reigned in when there is a tidal wave of American oil just over the horizon. In addition to that Just because the effect isn't instant doesn't mean we shouldn't persue it. That is like saying we shouldnt put money in a retirement accout because we won't be able to use it until we turn 55.

    The biggest reason for drilling is it will direct billions of dollars currently going to opec back to America.

    One other thing that is very important is we have to drill responsibly we have to respect the shorelines and wildlife of this country. If the oil companies screw this up they will face an angry population that just might lead to a nationalization of there assets and that would be terrible tragedy.

    by the Way I'm a shareholder of Exxon and I have every confidence the cuirrent management can break out of there highly conservative investment strategy and take advantage of this once in a century opportunity to meet the needs of the American people.
    Reply
  •  
    Jun 20 06:16 PM
    "Let's examine each of these briefly"
    This is easily the least researched/thought out article I've read on this site.
    The author doesn't state where he got ANY of his data from; the "10 years" to develop a well in areas where oil is literally bubbling out of the ground, he completely skips the trillions of gallons of natural gas which is at the ready right now on the North Slope, offshore, and in numerous other places.
    Not only has he done ZERO due dilligence on his stated topic, he has ZERO understanding of geopolitical pressures, and sadly misled on the Gorebull warming scam.
    I live in Washington State (moonbat central), and we've broken most records for cold temperatures back to the 1930's this year.
    Remember Mt. St. Helens? The glacier that caps it is growing at such high rate that it is expected to grow back to it's original height - even though it's still dribbling lava out the top.
    There's been 3,000 scientific robots plying the worlds oceans since 2003 searching the world's oceans looking for evidence the oceans are warming - can't find any, so the new theory is that the "heat is going deep" www.npr.org/templates/...
    uh huh.
    Granted, the earth has been slowly warming for many thousands of years, but there is ZERO evidence it has anything to do with us.
    The answer is to stop destroying our economy for purely political reasons, let the oil companies do their job without all this BS, and let the alternative energy companies do their business with no more or no less subsidies that any energy company would realize.
    Reply
  •  
    Jun 20 10:58 PM
    Perhaps Mr. Ausick will perform a little DD before he lays his next egg....
    energytomorrow.org/Abo.../
    Reply
  •  
    Jun 27 11:41 AM
    If we should have a high energy tax we should use that to cut the other taxes, lest the citizenry go under from high taxes, externalized or not. Then we should cut taxes some more, as the polls show that people have little respect either for the current President or the current Congress. Why should they get more money?
    Reply
  •  
    Aug 12 06:33 PM
    The most dangerous part of the article is the lemming-like assumption that carbon dioxide causes global warming. It doesn't. Carbon dioxide is plant food. Global warming is not a problem. Al Gore has done a great disservice to the world.

    There is no single solution to the U.S. energy problem. The solution will be a combination of energy conservation, more fuel efficient vehicles, more domestic drilling (including offshore and ANWR), coal to liquids, natural gas vehicles, and enhanced oil recovery (with carbon dioxide).

    Global warming is a hoax, but peak oil is real.
    Reply
More Comments on XOM ยป
More by Paul Ausick
Articles on related themes
Exploration & Production
Alternative Energy
Coal
Ethanol