Thursday, June 19, 2008

Offshore Drilling Might Reduce Prices Sooner Than You Think

If McCain and Bush get their way, oil companies will be able to start drilling in places that have been off limits since the 1980’s — the coastlines of states like California and Florida.

Critics have stated that offshore drilling will not reduce prices in the short term, but that may not be entirely true. The markets, by their nature, try to anticipate the future. If a disruption in the oil supply is expected, prices will climb. If the supply is expected to be stable, prices will be stable. Even if new offshore wells take five years to become operational, the markets will take the expectation of any new supply into account long before it actually comes available, which should bring prices down. More drilling would almost certainly reduce the risk that there would be an economy-crippling disruption to the oil supply in the not-too-distant future. In other words, it would lower risk to the oil supply caused by political instability in oil-producing regions.

Critics also say that the amount of offshore oil would not add much to our supply. McCain stated that there are 21 billion barrels of oil that could be recovered from the continental shelf. Others say there are only 19 billion barrels. Regardless, it’s easy to do a quick calculation using the average daily oil consumption in the US: about 20.6 million barrels. The coastal oil translates to about 2.5-3 years worth of supply.

But throwing out a number like 3 years worth of supply and discounting it for being so small is a just a straw man. It’s easy to dismiss and does not accurately portray the role that the new oil would play. Under no circumstances would the offshore oil be replacing the entire US oil supply. It would replace a fraction of it — say, the amount we import from OPEC nations. (OPEC accounts for about 27 percent of our supply.) Or maybe the goal could be to replace a reasonable fraction of the OPEC imports. Let’s say we want to reduce our dependence on OPEC oil by 50%. That ought to be enough to ease prices somewhat, and it gives us 20 years to make alternatives more viable. If we can do it in less than 20 years, all the better.

(Full disclosure: My family has a small oil company in — of all places — Kansas. If you know anything about Kansas, it’s not exactly a coastal paradise. Suffice it to say that neither my family nor I stand to gain anything from offshore drilling, except maybe to benefit from a little less animosity toward the “oil man” if prices come down.)

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