More Drilling

MORE DRILLING….A reader asks:

I’d be interested in your take on what impact extra drilling would have on gas prices and on our dependence on foreign oil.

The short answer is: not much. The immediate, direct impact would, of course, be zero, since it takes years to bring new oil sources online. But what about the indirect impact that new drilling permits might have on perceptions of future supply? Might that help lower oil prices in the near term?

Maybe, but it’s unlikely. Take ANWR first. A recent EIA study took a look at the impact that drilling in ANWR would have, and they concluded that it would probably reduce oil prices by 75 cents a barrel in 2025. A change that small two decades in the future almost certainly wouldn’t have any effect on commodity traders today.

Offshore drilling is a little harder to get a handle on. Offshore reserves are larger than ANWR, which means their impact on oil prices would also be larger. The problem is uncertainty: even if the federal ban on offshore drilling were rescinded, that doesn’t automatically mean there would be any additional offshore drilling. It just means individual states would get to decide what to do. California and Florida are unlikely to allow much offshore exploration, and other states on the Atlantic and Pacific coasts are question marks too. So the question is: how would traders react to a highly uncertain new source of oil that would come online a decade in the future? Answer: there are already lots of uncertain new sources of oil that might come online a decade from now, and oil is selling for more than $130 a barrel anyway. One more uncertain future source of moderate size probably wouldn’t have a big effect.

Bottom line: opening up new drilling both offshore and in ANWR would produce more oil and result in modestly lower oil prices once production ramped up a decade from now. You can decide for yourself whether you think the environmental costs are worth it, but the likelihood of this having any impact on oil prices today is tiny.

CORRECTION: Offshore oil reserves affected by the federal ban are estimated at 18 billion barrels, which is indeed larger than ANWR. However, EIA projects that offshore production rates would be about half of ANWR production rates, which means that lifting the ban on offshore drilling would probably have an even smaller effect on future oil prices than ANWR’s 75 cents a barrel in 2025. In other words, “tiny” was probably the wrong word in my concluding sentence above. “Minuscule” is more like it.

Note also that over half of that 18 billion barrels is off the California coast and wouldn’t be available for drilling unless the California legislature approved it. That’s pretty unlikely. (Though given California’s continuing epic financial meltdown, anything is possible.)