Would Offshore Drilling Bring Down Gas Prices?

With gasoline prices nationally surpassing $4.00 per gallon, politicians are revisiting the idea of allowing oil companies to drill off the coasts of the continental U.S. as well as the National Wildlife Refuge in Alaska.

Alaska is probably not going to happen for environmental reasons, but what about the idea of allowing the states to decide if they want to allow offshore drilling in their areas or not? I think that plan has some merit, since it takes into consideration the potential negative impact on tourism and other issues in certain areas. States that feel the benefit will be outweighed by the costs can take a pass, but other states can allow it if they see fit. Localized decision making on this issue seems better than a federal mandate.

That said, just how much benefit would be gained from such drilling? Unfortunately, not much.

From the AP:

“The 574 million acres of federal coastal water that are off-limits are believed to hold nearly 18 billion barrels of undiscovered, recoverable oil and 77 trillion cubic feet of natural gas, according to the Interior Department.”

If we assume it will take 5 years to get the first drop of oil out of the ground and into our gas tanks, that the fields discovered have a useful life of 20 or 30 years from that point, and that we will be able to collect every single barrel of oil that is projected to be there (not a certainty by any means), we are looking at an incremental increase in domestic production of ~700 million barrels per year, on average. The U.S. is expected to consumer 7.45 billion barrels of oil in 2008, so 700 million represents about 9% of our consumption.

Given that world demand for oil is rising so much, the offshore oil we may be able to drill out of the ground would have little impact on gas prices because the oil market is a worldwide exchange. If we just had a U.S. oil market, then yes, it would have a decent impact, but that is simply not the case.

As a result, it is hard to see how more offshore drilling would impact gas prices at the pump in any measurable way. Even if world oil consumption was held constant, we could potentially increase global supply by about 2%. An equal drop in price would bring $4.09 gasoline down to $4.00 per gallon. It just does not help solve the real problem.

That said, it would certainly prevent our energy dollars from being shipped to the Middle Eastern oil-rich countries, so we could keep that money here. Of course, that means our oil companies in the U.S. will make even more money than they are right now, and people are already complaining about record profits for the energy industry even without offshore drilling.

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4 Thoughts on “Would Offshore Drilling Bring Down Gas Prices?

  1. Rubens on June 18, 2008 at 11:10 AM said:

    The real problem is that Americans are used to a lifestyle that depends on cheap oil. Is $4 per gallon expensive? Yes, compared to last year’s prices. Not at all if you compare to gas prices in other developed countries that are net oil importers. Gasoline is not subsidized in the strict sense, but has artificially low taxes. A couple of weeks ago I paid the equivalent of $8 a gallon in the South of France; prices in the UK are even higher. It’s about time Americans stop wasting fuel and the government starts taxing gasoline like it should!

  2. Bobby on June 19, 2008 at 2:13 AM said:

    Right on the spot!

    American people have nobody else to blame but themselves and their government for what’s been and what is going on.

  3. Anonymous on June 26, 2008 at 8:52 AM said:

    Chad, saying that drilling offshore won’t have an effect is missing the point.

    1. “It won’t have any measurable impact.” Best estimates are 200,000 bbls/day from ANWR, for instance. How do you think markets would react if 200K/day in current supply went offline, due to a hurricane at a Mexican or Venezuelan field, or further unrest in Nigeria? The reaction would be at least a few dollars. So you can’t have it both ways.

    2. “It won’t come online soon enough to matter.” Then let’s just stop sending our kids to school. Kindergarten won’t help them until they’re 18, so why bother? We invest for the future, which is further away than the Nov. 4 election (though much of the country seems to think otherwise).

  4. Al&Bea on July 4, 2008 at 11:51 AM said:

    You are going on the assumption that we are in a classic supply demand situation. That is ludicrous. Speculators impact both spot and, particularly, futures prices. The impact on pricing would be that supplies will increases at some point. Therefore, let’s short oil!!!

    A 200,000 bbl per day change has an extraordinary impact on pricing.

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