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