Bob Herbert on offshore drilling's effect on oil prices
... it would be nearly 10 years before any oil at all would be realized from new offshore leases. ...
Maximum capacity from these new leases wouldn’t be reached until 2030 ...
And even then ... the amount of oil expected to come from these leases would have little or no effect on the price of gasoline at the pump.
A... it is estimated that an additional 200,000 barrels of oil a day would come from the additional offshore drilling. That’s a tiny share of the world’s daily output of 85 million or so barrels.
Here’s what the Energy Information Administration, the statistical agency that provides official data for the federal government, had to say about the anticipated additional output from offshore drilling:
“Because oil prices are determined on the international market ... any impact on average wellhead prices is expected to be insignificant.”
Source: An empty promise.
From a Common Tragedies post titled "Oh Dear":
From Krugman in the Times:
According to one recent poll, 69 percent of Americans now favor expanded offshore drilling — and 51 percent of them believe that removing restrictions on drilling would reduce gas prices within a year.
"Oh Dear" indeed.
Let's say you have a 1000 ounces of gold. Do you sell it today or hold it? What about tommorrow?
Clearly your decision depends primarily on your expectation for the future trajectory of gold prices. If you expect the price of gold to rise in the future, you are more likely to hold it. If you expect the price of gold to fall, you will tend to sell it today.
If you hold not gold, but instead unextracted gold reserves, then the problem is even more critical. If you have actual gold, then a 40% fall in the price of gold will reduce the yield from your holdings by 40%. OTOH, if the marginal cost of extraction is 30% below the current gold price, a 40% fall in the price of gold will wipe out 100% of your entire reserve investment as profitable extraction is no longer possible. This means that any future threat to the price of gold must be met by a rapid increase in the rate of extraction, which results in a self-fulfilling prophecy as the price of gold falls as a result.
The same incentives apply to oil reserves to one degree or another.
Regards, Don
Posted by: Don Lloyd | August 12, 2008 at 12:43 PM
One thing is certain Bob Herbert is not very good at understanding markets.
This hand waving that drilling does not effect prices while oil prices drop like a rock really is amusing.
Here is a fun question: If high oil prices were a bubble based on the perception that oil was scarce would you expect the market to move on news of more drilling or not?
Posted by: Joshua Corning | August 12, 2008 at 02:48 PM
Joshua,
Did you miss the last part of the excerpt? Here is what the EIA says:
“Because oil prices are determined on the international market ... any impact on average wellhead prices is expected to be insignificant.”
Posted by: John Whitehead | August 12, 2008 at 03:09 PM
Did you miss the last part of the excerpt?
I do not confirm or deny that I might have.
Posted by: joshua corning | August 12, 2008 at 03:33 PM
Because oil prices are determined on the international market
How much of that oil is nationalized?
If there is a small number of free players in an otherwise controlled market and those free players were first constrained by regulations then later relieved of those regulations would you expect prices to drop or be unaffected?
Please John tell me how Mexico's Oil industry is pumping oil at maximum capacity? That would be a hoot.
Posted by: joshua corning | August 12, 2008 at 03:41 PM
Here is a fun question: If high oil prices were a bubble based on the perception that oil was scarce would you expect the market to move on news of more drilling or not?
That's loading the question, now isn't it ?
The problem is the answer isn't as obvious as you think it is.
More drilling doesn't mean that there can't be a net decrease in oil being pumped. if the Market sees a net decrease in oil being pumped, prices are likely to go up as purchasers bid over a smaller total quantity of oil.
Prices for oil could go up even if the quantity of oil extracted remained constant; if we keep our per capita usage constant while the population grows, the net result is that we need more oil to keep our usage constant. If oil extractors can't meet that demand, then prices will be bid up.
Prices for oil could go up even if the world added oil extracting capacity at the same rate as the population grew, if the improving economies of other countries means that more of their citizens can afford to buy cars and gas and increase the pool of oil consumers. If more drilling doesn't keep up with their demand along with our demand, then prices will be bid up.
Oil futures might be currently dropping from the late spring/early summer highs, but even so they are still about as high in real terms as they got during the oil shocks of the 70's.
Is that fun enough for you ?
Posted by: Patrick (G) | August 12, 2008 at 06:03 PM
How much of that oil is nationalized?
If there is a small number of free players in an otherwise controlled market and those free players were first constrained by regulations then later relieved of those regulations would you expect prices to drop or be unaffected?
For the last 10-20 years, the swing producers (in the Arab Gulf) have ruled. No estimates of expanded US drilling are so bold as to make us the swing producers.
Our power has always rested on the consumption side. The day we got serious about conservation we could drop prices.
That happened, at $125/bbl oil ... we'll see if prices drop far enough now that we'll think it's all happy days and fast cars.
Posted by: odograph | August 12, 2008 at 06:37 PM