The Gulf of Mexico oil disaster has drawn a great deal of attention to the often-overlooked subject of where our energy comes from, and how difficult it is to obtain.
The long-term fallout from the incident could be significant for the rest of the US offshore drilling industry. And from Sarah Palin to The New York Times to peak oil bloggers, the point has been made that the US shouldn’t rush to cut back its drilling in the Gulf, because of its importance as a growing source of US oil production. But the fact that oil is heavily traded makes its provenance less important than is often assumed.
Economist James Hamilton does the numbers on US oil production and points out that GoM now represents three quarters of US offshore oil production, which in itself accounts for a third of the country’s total oil production.
Pointing to the difficulty of fixing the leak, Hamilton raises the question: why try producing oil in such inherently difficult circumstances?
The answer, I’m afraid, is because that’s where the U.S.’s remaining oil is to be found.
Maybe you have a notion that if we just did X, we could get by without oil produced from offshore sources. To that my response is, looks to me like we’ll need both offshore oil and X to get through the next decade.
Securing energy supplies — even renewables — usually involves some or other form of trade-off. However Erik Brynjolfsson, another economist, argues against some of energy security reasoning used in the GoM debate. He writes that even a 50 per cent rise in GoM production would only generate a 2.5 per cent reduction in US gasoline prices, at best. He also points out an EIA report finding that Outer Continental Shelf drilling would make little difference to global oil prices.
More importantly, Brynjolfsson highlights the problems with the ‘energy security’ argument for US oil production: oil is fungible and it is traded widely. Though it’s true that different regions produce different grades of oil, which in turn has implications for the types of refining capacity available, the overall point is correct.
Oil being produced in GoM doesn’t by definition make it cheaper for the US; like the vast majority of the world’s crude oil, it will be sold at whatever is the going market rate. And at just a few per cent of the world’s oil supply, the quantity alone won’t make much different to prices either. Nor does it mean the US will be a preferred destination for the oil; US oil companies operating in GoM are publicly listed and under no obligation to sell their oil to a particular buyer. If the US wanted to guarantee preference of supply from its own reserves it would need to nationalise its oil sector, which is about as likely as the GoM oil slick being completely cleaned up by this time tomorrow.
Related links:
In Depth: BP oil spill – FT
BP spill moves closer to shore, raising profile in adminstration - FT Energy Source
Industry wants more from Obama on offshore drilling - FT Energy Source
Offshore drilling plans could be risky for climate bill (FT Energy Source)
The obstacles for a climate bill: the 10 anti-drilling senators and more (FT Energy Source)
