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America's untapped oil
Lawmakers lay into big oil for leaving million of acres untouched while at the same time asking to drill in Alaska and off the coasts.
By Steve Hargreaves, CNNMoney.com staff writer
Last Updated: June 25, 2008: 3:08 PM EDT


NEW YORK (CNNMoney.com) -- Oil companies and many lawmakers are pressing to open up more U.S. areas for drilling. But the industry is drilling on just a fraction of areas it already has access to.

Of the 90 million offshore acres the industry has leases to, mostly in the Gulf of Mexico, it is estimated that upwards of 70 million are not producing oil, according to both Democrats and oil-industry sources.

One Democrat staffer said if all these existing areas were being drilled, U.S. oil production could be boosted by nearly 5 million barrels a day, although the oil industry said that number is far too high and one government agency said it was impossible to estimate production.

Recent proposals to open up offshore coastal areas near Florida and California, as well as Alaska's Arctic National Wildlife Refuge, might yield 2 million additional barrels, according to estimates from various government sources that also stressed the difficulty in making forecasts. The United States currently produces 8 million barrels of oil and other petroleum liquids a day and consumes about 21 million.

Oil companies "should finish what's on their plate before they go back in line," said Oppenheimer analyst Fadel Gheit.

Some Democrats also charge that oil companies are deliberately not drilling on the land to limit supply and drive up oil prices.

"Big Oil is more interested in pumping up prices and pumping up their own profits rather than pumping more oil," said Rep. Edward Markey (D-Mass), who has co-sponsored a bill to charge oil companies a fee for land they hold that's not producing oil. "We should not even begin discussing handing over more public land to the oil companies until they first use [the land] they already hold."

But the oil industry says it pays millions of dollars for these leases, and that it would not make sense to purposely leave the areas untapped.

Rather, years of exploration is required before drilling can even begin. In some cases, no oil is found on leases they hold. In others, drilling the wells and building the pipelines takes years. It is especially hard now that a worldwide boom in oil exploration has pushed up the prices - and timelines - for skilled workers and specialized equipment.

"No one is sitting on leases these days," said Rayola Dougher, senior economic advisor for the American Petroleum Institute. "Those making those assertions don't understand the bidding and leasing process."

Gheit agrees that it's unlikely that hoarding is going on.

With prices at $135 dollars a barrel, everyone is trying to pump as much as they can, he said. But fearing oil prices will eventually fall, the industry is leery about making too many investments in the fields it has - many of which are in deepwater areas that can be pricey to develop.

Instead, they're holding out, hoping the government will open areas closer to shore that would be cheaper to work on.

The presumptive Republican candidate John McCain has come out in favor of lifting bans on oil-drilling off most of the East and West coasts of the United States. Added supply, the thinking goes, would ultimately bring down the price of oil. The bans were enacted in the 1970s following several coastal oil spills.

Critics say lifting the bans would do little to ease the nation's energy crisis in part because it would take years to produce meaningful amounts of oil, noting how much is currently going untapped.

Gheit hasn't seen the legislation proposed by Markey and others, but he thinks the government should revise the leasing process to encourage more drilling on existing areas before it puts more acres up for bid.

Drilling our way out of rising oil prices
Oil executives and some lawmakers believe it's one of the only ways to help calm skyrocketing prices, but others say it takes us further away from a long term solution.
By Steve Hargreaves, CNNMoney.com staff writer
Last Updated: May 30, 2008: 11:33 AM EDT


NEW YORK (CNNMoney.com) -- The U.S. has huge amounts of untapped oil, but pesky politicians and environmentalists won't let us get it.

That's a common cry heard from some lawmakers and nearly everyone working at an oil and gas company. If the U.S. wants to help keep the market adequately supplied with oil and perhaps lower prices they say, it needs to open up vast sections of the country currently off-limits to oil and gas exploration.

But given the amount of time it would take to get new drilling projects up and running, and the relatively small amount of oil they'd likely yield, most analysts say more drilling in the U.S. would do little to help solve the world's dual energy challenge of meeting rising demand while cutting greenhouse gasses.

Some 60% of all federal land as well as most of the East and West coasts are currently subject to drilling bans - many were put in place after a big oil spill off the coast of Santa Barbara, Calif., in 1969.

If these areas are not opened, it certainly won't be for lack of trying.

Oil industry executives harped on these drilling bans in testimony before Congress last week, telling lawmakers lifting them was one of the few things they could do that might have a prayer of lowering oil prices.

Several Republican-led efforts to lift the drilling bans have emerged in Congress, but they have all failed so far.

"We're the only developed country that methodically restricts access to resources," said Richard Ranger, senior policy advisor at the American Petroleum Institute. "We can't conserve our way out of this. We're going to need a mix of policies, but increasing production is going to be part of that mix."

It's hard to say how much oil lifting the bans would provide - very little exploratory drilling has been done in most of these areas.

But using estimates based on the limited information available from the Minerals Management Service, the Bureau of Land Management and the Energy Information Administration, lifting the bans might boost the nation's oil production by 1 or 2 million barrels a day by sometime next decade.

These estimates are for conventional crude oil. They do not take into account the vast amounts of oil shale or tar sands that do exist in the country, but are either very expensive to develop or come with significant environmental costs.

Either way, 2 million barrels of oil is not an insignificant amount. It's roughly equal to the amount of oil currently pumped in Nigeria, and would increase the current U.S. output of 8.5 million barrels a day by over 20%.

But the projects would take a long time to come online. Places like the Atlantic coast, thought to be rich in natural gas, lack drilling platforms, pipelines, terminals, storage facilities, and other energy infrastructure. EIA estimates that if Alaska's Arctic National Wildlife Refuge were opened for drilling tomorrow, oil wouldn't flow at full tilt until 2025.

Plus, oil is a global market. It's true that oil pumped in the U.S. could stay in the U.S. But prices will be determined by international, not national, supply and demand.

By 2025, world consumption, currently at about 85 million barrels a day, is expected to swell to well over 100 million barrels a day. That makes 2 million barrels a day look pretty small.

"I wouldn't say it's a drop in the bucket," said Greg Priddy, a global energy analyst at the Eurasia group. "But it changes things only marginally over the long term."

Priddy said these 2 million barrels a day would need to be balanced against steep production declines expected in many non-OPEC areas like Russia, Mexico and the North Sea over the next several years. Non-OPEC production is expected to peak within the next decade or two, regardless of what the U.S. does, he said.

"It really just delays the day of reckoning a bit," he said.

Environmentalists, of course, hate the idea of more drilling rigs in the wilderness or offshore on continental shelves rich in marine life.

They say spills will happen regardless of how careful the industry is, although numbers from the Minerals Management Service show the industry has greatly improved their environmental record. Also, countries like Canada and Norway, hardly known for being environmental mavericks, pursue aggressive offshore drilling plans.

The larger argument put forth by the environmental community is that more oil will not solve the world's energy challenge.

"When you're addicted, the first thing you want to do is stop drinking," said Adam Kolton, director of congressional affairs for the National Wildlife Federation, referring to President Bush's State of the Union speech when he said the nation was addicted to oil. "What the American people want is an end to dependency on oil and a focus on alternatives."

Kolton said more and cheaper oil will only foster the same culture of big cars and sprawling houses we've become accustomed to, and leave us even more dependent on OPEC 20 or 30 years out.

"This is just more of the failed policies of the past," he said.

Environmentalists also push for focusing more on conservation.

If the U.S. switched to plug-in hybrid electric vehicles, the country would save 3.8 million barrels of oil a day - roughly twice what new drilling would provide - according to the Natural Resources Defense Council.

Most analysts agree that conservation will play a greater role in meeting energy demand than drilling in the U.S.

"It's not a comprehensive solution to the energy problem," Newedge brokerage Deputy Head of Research Antoine Halff said, referring to lifting the drilling ban. "If you want to design energy policy, you have to think about demand." 

Why oil prices will tank
Arguments that $4-a-gallon gas (or even higher) is here to stay are dead wrong.
Housing's boom-and-bust cycle tells you why.
By Shawn Tully, editor at large


NEW YORK (Fortune) -- High-flying tech stocks crashed. The roaring housing market crumbled. And oil, rest assured, will follow the same path down.

Not everyone agrees. In an echo of our most recent market frenzies, some experts pronounce that the "world has changed," and that the demand spikes, supply disruptions, and government bungling we face now will saddle us with a future of $4, $5 or even $10 a gallon gasoline.

But if you stick to basic economics, it's clear that the only question is when - not if - prices will succumb.

The oil bulls are correct in their explanations of why prices have jumped, to a record $138.54 a barrel on Friday. It's indisputable that worldwide demand has surged, chiefly driven by strong growth in China, India and the Middle East. It's also true that most of the world's reserves are controlled by governments in places like Russia and Venezuela that mismanage production, thus curtailing supply growth.

But rather than forming a permanent new plateau for prices - as the bulls contend - those forces are causing a classically unstable market that's destined for a steep fall.

What do you think: Is $4-a-gallon case here to stay?
In a normal oil market, the cost of producing the last, most expensive barrel of oil needed to satisfy worldwide demand sets the price for every barrel the world over. Other auction commodity markets work much the same way.

So even if Saudi Arabia produces at $4 a barrel, if the final, multi-millionth barrel required to heat houses and run cars costs $50, and is produced, for argument's sake, at a flagging field in West Texas, the world price is $50. That's what economists call the equilibrium price: It's where the price that customers are willing to pay meets the production cost, including a cushion, naturally, for profit or "the cost of capital."

But today, the sudden surge in demand and the production bottlenecks have thrown the market radically out of balance.

Almost exactly the same thing happened in the housing market. And both housing and oil supply react to a surge in demand with a long lag. In housing, the lag is caused by restrictive zoning and development laws, especially in coastal markets like California and Florida.

So when the economy roared back in 2002 and 2003, builders couldn't turn out homes fast enough for buyers armed with those cheap mortgages. As a result, prices spiked. They no longer bore any relation to the actual cost of buying and improving land, or constructing and marketing a new house (at some reasonable profit margin). Instead, frenzied buyers were setting the price.

Because builders were reaping huge windfall profits, they rushed to buy and develop land. And sure enough, those new houses were ready just as buyers were retreating to the sidelines because they could no longer afford to buy a home. That vast overhang of unsold homes is what's driving down prices today.

The story is much the same with oil, with a twist. A big swath of the market isn't really paying that $125 a barrel number you hear about seemingly every hour. In China, India and the Middle East, governments are heavily subsidizing oil for their consumers and corporations, leading to rampant over-consumption - and driving up prices even more.

But sooner or later the world won't keep paying those prices: Eventually, the price must fall back to the cost of that last barrel to clear the market.

So what does that barrel cost today? According to Stephen Brown, an economist at the Dallas Federal Reserve, that final barrel costs just $50 to produce. And when the price is $125, the incentive to pour out more oil, like homebuilders' incentive to build more two years ago, is irresistible.

It takes a while to develop new supplies of oil, but the signs of a surge are already in place. Shale oil costing around $70 a barrel is now being produced in the Dakotas. Tar sands are attracting investment in Canada, also at around $70. New technology could soon minimize the pollution caused by producing oil from our super-plentiful supplies of coal.

"History suggests that when there's this much money to be made, new supplies do get developed," says Brown.

That's just the supply side of the equation. Demand should start to decline as well, albeit gradually.

"Historically, the oil market has under-anticipated the amount of conservation brought on by high prices," says Brown. Sales of big cars are collapsing; Americans are cutting down on driving. The airlines are scaling back flights.

We've learned another important lesson from the housing market: The longer prices stay stratospheric, the worse the eventual crash - simply because the higher the prices and bigger the profit margins, the bigger the incentive to over-produce.

It's even possible that, a few years hence, we could see a sustained period of plentiful oil supplies and low prices, meaning $50 or below.

A similar scenario occurred following the price explosion in the 1970s and early 1980s. The price spike caused the world to cut back sharply on oil consumption. By the mid-80s, oil prices had fallen from almost $40 to around $15. They remained extremely low for two decades.

It's impossible to predict how the adjustment this time will take shape, just as it was in housing. There the surge in supply came in places the experts swore there was "no supply," and wouldn't be any. Builders found a way to extend vast tracts of homes into California's Inland Empire and Central Valley, and even build "in-fill" projects near the densely-populated coasts.

An earlier bubble is also instructive. In the early 1980s silver prices jumped from $10 to $50 on the theory that the world was facing a permanent shortage of silver. Suddenly ads appeared asking homeowners to bring their tea sets and jewelry to Holiday Inns for a big price. Silver supplies poured from seemingly nowhere, out of America's cupboards, of all places.

And so it will be with oil. We don't know where the new abundance will come from, from shale, or tar sands or coal or an OPEC desperate to regain market share. We just know that it will appear. With prices like these, it always does.

Is Tully right?

First Published: June 6, 2008: 8:11 AM EDT