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Obama’s New Drilling Plan
Can’t Soothe the Pump Pain

by | published May 16th, 2011

On Saturday, responding to a rising tide of criticism over high gas prices, President Barack Obama unveiled a new approach to U.S.-based drilling.

The approach immediately extends current leases in the Gulf of Mexico and off the coast of Alaska and schedules additional Gulf lease auctions postponed to the middle of 2012 because of the Macondo-1 blowout.

It also provides for more frequent auctions of drilling leases on federal territory in Alaska and promises to expedite environmental impact assessments and seismic studies (to determine how much oil and gas may exist off the East Coast).

Yet drilling off the coast of Virginia will not happen before 2017, and it is still not clear how much oil is actually there anyway.

Most veterans will tell you there are commercial flows in the shallower coastal water, from New Jersey down through the Gulf States (where there has been development for over 60 years).

These volumes, however, will not make any significant difference in offsetting U.S. imports from overseas.

More to the point, there is no reason to suspect that such drilling will be any cheaper than operations abroad. In fact, offshore drilling is significantly more expensive, with no guarantee that extractable levels of reserves will be found.

If the idea, therefore, is to cut the price of the gasoline processed from crude oil, it seems unlikely that will happen.

The same can certainly be said about the deeper waters of the Gulf.

There, the working capital requirements are even greater than along the coast.

However, there is a difference in this case. If reserves are located, they will be much larger than in the coastal areas.

Current opinion holds that virtually all of the very large fields yet to be discovered worldwide (those in excess of one billion barrels) are located in deep water (800 feet or more). Of the 3,000 or so wells currently producing in the Gulf of Mexico, those with the highest volume are all in deep water.

Therefore, the battle over whether the U.S. can begin producing enough domestic oil to offset the rise in imported crude is going to be fought in deep water.

Onshore, even with the addition of some drilling locations in Alaska, production will not make enough of a difference.

The reason is simple: The U.S. is the most mature oil region in the world.

Conventional Production Is Declining Steadily

According to the Energy Information Administration (EIA), annual U.S. production declined from 3.52 billion barrels in 1970 to 1.96 billion barrels in 2009.

Now, making a concerted effort to open unconventional oil deposits (such as shale, heavy oil, oil sands, and bitumen) might well increase volume significantly. But for two things…

First, unconventional exploration is not included in the President’s new proposal. And second, that would be a far more expensive proposition – defeating the idea that domestic production would lower gasoline prices (the very rationale for the plan to begin with).

So is there enough untapped oil in places like the deep water of the Gulf of Mexico to make a substantial difference at the pump? And if there might be, how long would it take to move it online, and how long would it keep flowing?

These are really the major unanswered questions.

There could be significant volume in the Gulf, and the flow could last up to two decades.

However, even if work began tomorrow, it would take at least seven years for any of that oil to come onto market. And even then – given the higher infrastructure expenses incumbent on drilling in “blue water” – there is no assurance it will save you anything at the pump. Even if the extra volume does stem the tide of imports…

If price is the primary factor (and not national security), foreign-produced oil remains less expensive, on average. And that oil is available now, allowing for the production of gasoline and other products from it today.

The time it will take to bring new oil online is a major inhibiting element in the approach, and it becomes even more so if the leases are not available for years. The further lack of assurance that the price savings will be great does not bode well, either.

There are no quick fixes to this problem. We have known this for some time.

Weaning from an oil-based economy will be the single most expensive, difficult, and frustrating move this country has ever made.

Looking for some more oil that may save us a few cents at the pump a few years down the road is not the answer. But for the next several decades, we seem to be stuck with it.

Initiatives to introduce natural gas-powered vehicles and even electric cars – if the battery and range issues can be ironed out – may well get increasing support. They make sense. After all, thanks to shale development, we have a several-centuries-long abundance of natural gas and have already left an oil product sourcing for fuel in power plants.

Of course, these solutions are not going to be introduced quickly enough to save us from the pump pain over the next several years.

Sincerely,

Kent

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  1. Curtis Cerenzie
    May 16th, 2011 at 11:15 | #1

    It is astounding to me how many analysts rush to tell the American people how any extra drilling won’t help our situation.
    What happened to the American spirit of ‘nothing ventured, nothing gained’? How many times have we found that USGS estimates were extremely low? Who knows how much oil is off our coasts until we go explore it? They certainly didn’t get the Bakken right with their estimate of 4 Billion unrecoverable. So why rush to tell all of us it will be too little too late?
    It seems to me the real problem here is the attitude of government. There is no reason it should take 6 years to drill off Virginia…other than our government’s self imposed regulations. Reform the regulations, and all of a sudden, we could know within a couple of years exactly what we have along the Eastern Seaboard.
    In addition, if we were to do this in Alaska where it is expected that the USGS has grossly underestimated reserves for political reasons, we may have something.
    The facts are that between the oil sands, oil shale, off shore drilling, and the ANWR/North Alaska coastline, the US has more reserves than…Saudi Arabia. Tell the story! Get positive! Encourage government to get the hell out of the way, so we can grow some wealth in our country.

  2. Eldene Henderson
    May 16th, 2011 at 11:58 | #2

    Mr Moors: It appears that the best near term solution for coping with increasing gas prices is to try to reduce fuel usage. I would be interested hearing about any ideas you and your readers might have about how this can be done.

    In my neighborhood, there is currently the beginning stages of consideration for a model sustainable neighborhood center. This would allow members of a large residential neighborhood to choose to walk or bike to a strategically located commercial/business/educational center where they could purchase many of their day to day needs, find entertainment options, participate in healthy acvtivities in a wellness center or intergenerational center where there would be the option for community gardens, indoor/outdoor recreation and community interaction, before/after school program, adult day care, etc. Some consideration for housing include apartments, condos,and/or townhomes.
    Housing options would be senior friendly for a quickly aging population.

    I would appreciate your comments.

  3. David N
    May 16th, 2011 at 12:49 | #3

    I hope that Dr Moor will expand on this line of thought relaiting to the econoomic assitiance the U.S. is providing Brazil in developing its’ deepwater wells. I see refineries being built in the islands and the east coast of the U.S. receiving a good share of the output. My point is we will get better returns in helping our neighbors to the south develope their large pools of oil, not butimin, raising the standard of living in So America and leaving the small reservoirs until the technology and costs are more favorable.

  4. arthur menken
    May 16th, 2011 at 12:54 | #4

    You say more deepwater drilling will not reduce price of gasoline at the pump.besides it will take seven years to bring new supplies on line.Seven years fom now when gassoline is 10 to 15 dollars a gallon.do not drill because it will take 7 years etc

  5. JJM Libertarian
    May 16th, 2011 at 14:03 | #5

    I was encouraged over a year ago ago when our administration made false indications to advance our industry offshore in Alaska, the east coast and Florida GOM. True colors were shown a year ago with the deep water moratorium and shallow water defacto moratorium and continue today with the defacto permitatorium. I am surprised that all of the deepwater drilling rigs have not redeployed elsewhere. Lease extensions mean nothing if we cannot get permits to drill.
    Look out, European fuel prices can be achieved here as desired, starting with elimination of the oil subsidies.

  6. Sven J.
    May 16th, 2011 at 14:08 | #6

    @Curtis Cerenzie
    Just whose wealth are you looking to create, Curtis? Big oil receives billions annually in subsidies and they go on a deceptive marketing campaign about how cutting that is equivalent to new taxes on oil? We know this, if it was left to Big Oil, we’d all be paying twice as much, and coping with environmental disasters in perpetuity.
    Natural Gas, clumsy though we are at drawing it now, seems the proper “bridge” to the cleaner technologies of the next century. We have to get away from the dirty power of yester-year.

  7. Tib Csabai
    May 16th, 2011 at 15:57 | #7

    One of the great challenges we have in the oil industry, is the understanding of where oil comes from.

    The industry is still focused on the concept oil comes from “dead dinosours” and other organic compounds, but no one has been able to replicate the process in the lab. A recent conference in Houston had the Russian scientists show their research indicating it is a chemical process akin to that for generating gas. Yet our industry is still stuck on the old idea.

    In oil exploration we give great importance not only to the trapping mechanism but also to the source … if you can’t identify the source, you “ain’t gonna find oil.” With the chemical concept of oil formation there is unbelievable amounts of oil that have not been discovered yet … and won’t be with the present approach regarding oil sourcing.

    Is this a “pipedream?” I refer the readers to the developments in the Caspian basin where decades ago it was declared “exhausted” but a new line of thinking has uncovered unbelievable reserves, which are not fully produced due to political reasons … try Afghanistan. Also, since we recognized the real source of gas formation, we have looked in areas totally out of the question decades back, like the Sakhalin region in eastern Russia.

    I suggest more open minded thinking is needed not a new batch of government restrictions on how to use oil, where to look, and as with BP ignoring the minimum good practice due to political pressure.

  8. May 16th, 2011 at 19:13 | #8

    Some of your readers apparently have plenty of gas.

  9. Ken S
    May 16th, 2011 at 21:06 | #9

    I disagree that increasing the amount of domestic oil will not reduce the price at the pump. It may take up to 7 years for the supply to come online but if the speculators see that we are serious about this they will start bidding down the futures market on crude almost immediately. Why? Because they see in the future that our supply will significantly increase. How do I know this? Because it already happened in 2008 when “Drill Baby Drill” became a famous battle cry of the Republicans during the 2008 presidential campaign. Speculators saw uncertainty in the futures of crude maintaining current supply and oil dropped from $147/barrel in July to about $35/barrel in December. Then you know who got elected and that was the end of that. To be fair, the credit crisis had something to do with that also, but those two factors together dropped the price of crude about 76%. A rough estimate would be about 20-25% drop in crude if a bill was signed into law promoting the exploration and drilling in ANWR, the Gulf, and the East Coast.

  10. Ken S
    May 16th, 2011 at 22:53 | #10

    @King Ralph
    How true. Too bad we can’t harness it.

  11. zee
    May 17th, 2011 at 04:12 | #11

    I am a subscriber to your Oil and Energy.

    Could you tell me which is the best company in Canada with the the latest technology for SAGD, to invest in?

    Thanks.

  12. Conrad Proctor
    May 22nd, 2011 at 17:26 | #12

    thank you

  13. STEPHEN ONDERCIN
    May 24th, 2011 at 10:38 | #13

    I’M JOINING TO LEARN FROM THE EXPERTS VEWS….NOT GUESS IN THE FUTURE…WHAT I THINK!!!

  14. Curtis Cerenzie
    January 29th, 2012 at 10:12 | #14

    If you do some research on the wealth creation going on in North Dakota, you’ll find it has nothing to do with BIG OIL. However, history shows that when “BIG OIL” controlled oil prices, they were lower. It’s not that I’m a big oil fan, but the facts speak for themselves. It was when they lost control in the Middle East that prices spiked in the 70s. Now that they only control a small percentage of oil in the world, look at prices go. You may need to rethink that assertion about big oil and high prices.

  15. Curtis Cerenzie
    December 27th, 2012 at 11:41 | #15

    @Sven J.
    Sven,
    Who is BIG OIL anymore? Petrobras, CNOOC, ENI? This BIG OIL you refer is likely a perceived group including Exxon, Shell, Chevron. One problem here Sven. They only control and produce about 5% of the oil. That isn’t BIG OIL as you refer. Just as you reply here, people have been trying to destroy these companies for the past few decades. It has worked. Now the oil market is controlled by others who fall into our enemy list in most cases. So keep it up with your fight against our own. Perhaps you would also like to shoot yourself in the other foot while you are it.
    I do agree with you about nat gas though. You’ll notice most of BIG OIL are buying into nat gas as well.

  16. Curtis Cerenzie
    December 27th, 2012 at 11:43 | #16

    It’s almost a year since this article was written. It has been wrong so far.

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