The "drill here, drill now, pay less" crowd went into a tizzy when oil prices dropped this past week on word that oil demand is forecast to drop as a result of the shaky economy.
See, we told you so, the bloggers and bloviators crowed. Oil prices fell on a projected decrease in demand. Projected increases in supply tied to, say, lifting the ban on oil drilling in the Arctic National Wildlife Refuge, would accomplish the same thing. So let's get to drilling everywhere and stop listening to the hippie-dippie greenies moan about their precious caribou.
The premise of the argument is that opening protected areas to drilling would influence oil market psychology favorably. Maybe, but there are no guarantees.
In April, Brazil announced that undersea formations off its coast may hold a monster oilfield, perhaps 33 billion barrels -- enough to supply all global demand for more than one year. Brazil is a stable, friendly country whose state-owned Petrobras oil company knows a thing or two about deepwater oil production. The news should have electrified the oil market. Yet prices barely budged.
Perhaps traders know that demand reductions can hit the market a lot faster than new supplies. Opening a new oilfield requires many steps, none of them trivial undertakings. You have to find oil by searching promising locations. Exploratory wells must be drilled, flow tested, and evaluated.
Not every promising location is guaranteed to become a profitable oilfield. For example, the costs of getting deepwater fields into production can hit 10 digits. Even with prices at $130 to $140 per barrel, oil companies will pick their spots in order to keep their service costs down.
Once oilmen decide to open a production field, financing must be arranged and logistical details sorted out. Production wells must be drilled and prepared. That requires rigs and skilled crews, which are stretched to the limit around the world. Shipyards that build deepwater drilling rigs are fully booked. If you want one, take a number and get on the waiting list. You may have to wait two to four years for your drill ship to come in. And it won't be cheap.
Even more time will be necessary for the "unconventional" resources that the drill here, drill now crowd says are hydrocarbon cornucopias just around the corner. Rigging and producing oil sands and shale fields in the central Rockies will be highly capital and energy-intensive.
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