Market Analysis

There’s More Offshore

Record oil prices have intensified calls to expand offshore drilling in the US. But even if legislation is passed to allow it, drilling won't impact oil prices anytime soon.

Story Highlights:

  • High prices encourage the search for more oil, and there's probably billions of barrels right off our coastline.
  • But most of the Outer Continental Shelf is currently off limits for drilling.
  • Legislation to reverse the drilling ban likely won't pass.
  • Even if it does, it will take years to bring production online and won't impact prices anytime soon.


Every day brings new suggestions for what to do about high oil prices. Bike to work? Buy a hybrid? Switch to solar/wind/corn/switch grass/cheesesteak power? Lately, it's offshore drilling. Thar she blows!

President Bush Presses Congress to Lift Offshore Drilling Ban
By Henry J. Pulizzi, The Wall Street Journal

Alternate energy sources are years from overtaking crude oil, and changes in behavior can only accomplish so much, so it may seem the logical approach to combating prices is to just drill for more oil. Yet production in the US has actually fallen over recent decades. US production peaked in 1970, and over the last ten years has fallen from 6.5 million barrels per day to 5 million. With today's fields becoming depleted (the worldwide decline rate is about 4% annually), one would think the search for new ones would be intense, especially in a world of record oil prices. What gives? It turns out it's not just about the search—it's also about our willingness to use what's already found. Many say the big problem is the US's inability—or unwillingness—to exploit its own energy resources and are calling for renewed production right here at home.

As long as energy prices stay high, exploration previously not financially feasible is starting to make sense. And the low hanging fruit, especially for the US, seems to be right off our shores. It's hard to know how much is really out there, because 85% of our Outer Continental Shelf is currently off limits, but estimates hover around the 18 billion barrel mark. With current US reserves estimated at about 20 billion barrels, that seems like a heck of a lot of oil!

Other regions are taking advantage of offshore finds. Recent discoveries off the coasts of West Africa and China, though still being evaluated, hold lots of promise. The largest discovery since 2000 (conservatively estimated to be 5 to 8 billion barrels) was just off the coast of Rio de Janeiro (a nice place if you haven't been). But some might say it's one thing for developing nations to trash remote coastlines, and quite another to muck up our own. Tell that to uber-eco-conscious Brits who've been drilling in the North Sea for years, right off the coast of Europe (which has its charms as well).

Yet, new discoveries are not a silver bullet for lower oil prices. When the discovery off the coast of Brazil was recently announced, oil prices hardly budged. How can this be? First of all, bringing new crude online from discovery to production takes years. And this is especially true for offshore sources. Today, all deepwater rigs off US shores are under contract. Building new ones will take time. We'll leave the battle of where and when to drill to others—but the point is oil prices, though likely to bounce around from day to day, will likely stay high for the foreseeable future because new supply is costly and time-consuming to create.

So why all the headlines today? Could it be, ahem, political? It is an election year, and with an incensed public looking for someone to blame for high gas prices, you can expect some gamesmanship on this issue. Those in office will need to show they're doing something. And if trotting out energy executives for their traditional summer grilling is losing its zing, what better way to put the heat right back on opponents than by making them squirm over their ban on offshore drilling? Interestingly, restrictions on drilling in the US were politically motivated in the first place—so the problems the politicians are saying they want to solve are self-created to begin with. Go figure.

It's hard to know the motivation behind the recent calls for offshore drilling, but one thing's for sure: All ashore who's goin' ashore, because the campaign for the general election is about to set sail.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.