Off-Shore Oil Drilling

I've been sick for the last few days, which has left me with the dangerous combination of being grumpy and having some time on my hands. Which brings me to the topic at hand.

President Bush has called for drilling in the outer continental shelf. Specifically, he has said the following:

In the short run, the American economy will continue to rely largely on oil. And that means we need to increase supply, especially here at home. So my administration has repeatedly called on Congress to expand domestic oil production. Unfortunately, Democrats on Capitol Hill have rejected virtually every proposal -- and now Americans are paying the price at the pump for this obstruction. Congress must face a hard reality: Unless Members are willing to accept gas prices at today's painful levels -- or even higher -- our nation must produce more oil. And we must start now. . . .

First, we should expand American oil production by increasing access to the Outer Continental Shelf, or OCS. Experts believe that the OCS could produce about 18 billion barrels of oil. That would be enough to match America's current oil production for almost ten years.

What's interesting about this statement is that the Department of Energy ran a study on drilling in the OCS just last year. The study looked at the current restrictions, which expire in 2012, and mapped out the cases where drilling is allowed and where the restrictions are renewed and no drilling takes place. It found that

access to the Pacific, Atlantic, and eastern Gulf regions would not have a significant impact on domestic crude oil and natural gas production or prices before 2030. Leasing would begin no sooner than 2012, and production would not be expected to start before 2017.

So if we suppose that Congress ends the restrictions in 2008, a good first guess is that'd accelerate the timeline by about 4 years across the board: no production sooner than 2013 and no significiant impact on prices before 2026.

The reason there's no significant impact on prices is that OCS drilling would increase domestic oil production by about 7%, but oil prices are set on an international basis. In other words, the amount of increased production domestically wouldn't be enough to have a significant impact on global oil supply. Let's assume that oil would increase supply and therefore lower prices in the U.S.. In that case, the oil companies would have the choice of selling at a lower price in the U.S. market or at a higher price to the international market. Past behavior suggests that the executives directing those companies would feel constrained by a fiduciary duty to their shareholders and would therefore sell on the international market. As a result, the domestic prices would rise to meet the international prices. Now, we could impose laws that prevent the oil companies from selling that crude overseas, which might artifically drive down domestic prices, but those sorts of trade restrictions seem out of character for Mr. Bush's administration. So the most likely result is that a goodly sized chunk of any oil drilled here will feed China's demand for it.

Earlier in the speech, Mr. Bush said, "In the long run, the solution is to reduce demand for oil by promoting alternative energy technologies." It is not clear what time frame "the long run" represents, but there are already interesting developments on the alternative energy horizon, particularly in storage of electricity. For example, Zenn Motor Company and EEstor have announced plans to ship an electric car in late 2009 that will go 80 MPH and have a range of 250 miles and that a properly equipped charger could recharge in a few minutes. Similarly, A123 Systems is currently selling a new lithium ion battery technology with dramatically better energy density. (You can currently buy their stuff in certain lines of Dewalt cordless power tools while they work on the long battery life necessary for plug-in hybrids. They are also currently selling plug-in conversions for the Toyota Prius, though at $10K they're currently a little pricey for my budget.) It's also possible--today--to produce biodiesel from algae (rather than, say, corn), something you don't need arable land to do. (Hmm. I wonder how much land you'd have to devote to algae production to remove a billion tons of carbon dioxide per year from the atmosphere, since bamboo ain't gonna cut it.)

In the meantime, higher fuel prices are having an impact on demand. Amtrak ridership continues to set records, and high gas prices are sending it way up. And Ford is scaling back production for gas guzzlers due to decreasing demand.

Bottom line? Maybe drilling the OCS is not an effective answer either to Mr. Bush's short term goal of increasing supply (beyond insignificant levels) or to his long term goal of reducing dependence on foreign oil.