Will offshore drilling lower oil prices?

John W. Schoen Senior Producer • Profile • E-mail

With oil prices showing no signs of easing, the White House has proposed increased oil drilling in the U.S. Increasing oil production is a great idea. Unfortunately, it won’t provide any relief at the pump for millions of Americans trying to stretch their budgets so they can top off their gas tanks.

How is increasing American production by 1 million barrels a day, which is about 1.5 percent of daily global oil consumption, going to bring about the 25 percent drop in oil prices that many proponents of increased Alaskan and offshore drilling have suggested? … Shouldn't that just be one of many plans to increase supply and decrease demand that will really bring a drop in prices?
— Jon, Memphis, TN

It won’t. And, yes.

Every barrel of oil is going to be needed to meet growing global demand, and technology today allows oil producers to find and extract oil in places that until recently were not profitable or technically feasible. But there’s little evidence that there’s enough untapped oil within U.S. federal waters to make much of a difference in oil prices. Even if the oil is there, it would take a decade or longer until it can be tapped — offering little relief from the recent surge in oil prices.

Roughly 80 percent of U.S. proven reserves — and daily production — is clustered in just four states: Louisiana, Texas, Alaska and California. There’s likely more oil to be found offshore both U.S. coasts, especially in deep water where it has only relatively recently become technically possible and economically viable to extract. But it’s highly unlikely there’s enough there to make much of a difference in oil prices. Even if new discoveries were made, it would be decades before it began flowing and the price impact would be would be minimal.

The biggest known, untapped reserves are in the Arctic National Wildlife Refuge in Alaska. (Current multinational negotiations over rights to oil under the Arctic Sea may bring additional reserves under U.S. control, but any potential production lies even further into the future.)

Even if Congress approved drilling in ANWR today, production would not begin for at least a decade, according to Energy Department estimates. The eventual impact on prices depends on exactly how much oil is under ANWR. Answering that question is an inexact science — you can’t stick a dipstick in the ground and determine how many barrels you’re dealing with.

So petroleum engineers like to talk in terms of low, mean and high estimates.  The low estimate means there’s a 95 percent probability you’ll find so many barrels, the odds for the mean estimate are 50-50 and the high estimate comes with only a 5 percent chance you’ll eventually find that number of barrels. According to current estimates, the total volume of recoverable crude in ANWR is 5.7 billion barrels for the low estimate, 10.4 billion barrels for the mean estimate and 16.0 billion barrels for the high estimate.

But even in the best case, the price impact — decades from now — would amount to about 1 percent of current market prices. If work started today, production would peak in 2027 — when increased production would have the biggest impact on prices. According to Department of Energy projections, that impact would cut the prices of light sweet crude (in 2006 dollars) by 41 cents per barrel in 2026 for the low estimate, 75 cents per barrel in 2025 for the mean oil resource case, and $1.44 per barrel in 2027 for the high estimate.

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