Thursday, August 14, 2008

The Drill Now Myths

I'll preface this post by saying that this is not a political commentary. I don't do politics. I'll leave that to the rest of the blogosphere (btw - anyone hate that word as much as I do?). However, I do have an opinion on markets and supply/demand issues and the drill now nonsense is clearly an economic falsehood that needs to be exposed.

So without further delay here are the facts:

1) Drilling might eventually add 200,000 barrels/day. The Energy Information Administration (EIA) estimated that is the amount of oil we could produce on the Outer Continental Shelf (OCS) if the drilling ban were lifted. The EIA estimated this to be approximately 200,000 barrels per day. Global oil demand is forecast to be 87.7 mil next year. So we are talking about a 0.2% of global demand. To call that amount a drop in the bucket might be generous.

2) OPEC's Reactions - If for some reason that 0.2% increase in supply did actually impact prices can you guess what will happen? OPEC - 70%+ of global supply - would simply cut back on their production by a very small amount and we'll be right back at square one.

3) It's not OUR Oil - This is probably the most pervasive myth. "We need to get our oil" is the popular refrain across Washington. Well, unless tWashington want to nationalize ExxonMobil, our country does not have a national oil company. We have lots of private companies in the US that like to drill and pump in the US (Exxon, Chevron, etc). When that oil comes out of the ground it becomes part of the global oil supply and can be sold to anyone. There is no guarantee that that oil would even stay in the US unless Congress mandates it again. In the mid-90's up to 4-7% Alaskan oil was shipped to Asian countries until Congress banned that activity.

4) Price can destroy demand - The combination of high prices and a weaker US economy have finally impacted demand. In 2008, daily US consumption of oil is down almost 800,000 barrels/day or a 3.8% decline in daily demand. Remember that 200,000 number from increased drilling? Well that pales in comparison to this number. This decline in demand has 16 times the influence on prices that our prospective drilling does. In fact, this is the great fear of OPEC. If price stay above their natural level ($70) you can expect global demand destruction and oil prices could reverse to an unnatural level of $50 or lower. Unfortunately, the recent fall in prices at the pump (I paid $3.50/gallon pretty consistently up and down the east coast this weekend) is likely to push oil demand back up and with it prices.

So, should we drill? IF it can be done safely and economically, then sure, but we should stop kidding ourselves that it will have any impact on global oil prices.

To paraphrase Tom Freidman - The answer to breaking a crack addict's addition isn't cheaper crack and the answer to our oil addiction isn't cheaper oil.

Cheers!

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