Why Oil Prices Won’t Rise, Despite the Gulf Oil Spill

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In the wake of the Gulf of Mexico oil spill, we wanted to know: How will the current disaster impact the price of oil? The answer, say leading oil industry analysts – probably not that much.

We spoke with senior oil industry analyst Phil Flynn, of PFG Best, and Allan G. Pulsipher of the Center for Energy Studies at Louisiana State University, who explained why oil prices have gone down since the spill – and what consumers should expect in the long-run.

Why haven’t oil prices gone up? Well, in part because the Deepwater Horizon rig was an exploratory well. The oil found (and now leaking across the Gulf Coast) was not oil that we consumers – or the marketplace knew existed.

In fact, since the April 20 explosion, oil prices have gone down, because, says Flynn, "the market is focused on the strength of the dollar, and the global economy. In the short run, [the spill] was not really a price-moving event."

Pulsipher agrees. "There has been some indication that there may be some drawdown of [oil] inventory because it’s taking ships longer to get to refineries in the Gulf region, but there’s ample supply."

Both Flynn and Pulsipher believe that oil price increases won’t be felt immediately. Instead, any price increase will be seen down the road.

In fact, says Flynn, "the market expectation is that it will have little impact this year, or two or three years. But in five to ten years oil prices could skyrocket, depending on how fast the international economy starts to grow."

Pulsipher disagrees: "Over the long term, it will increase somewhat the cost of drilling in the Gulf and it will have some upward pressure on some prices, but in the grand scheme of things [the spill] not going to be a major determinant."

But what could lead to an increase in oil prices?

A Shift in Public Opinion

As the Gulf disaster continues to play out, the tide of public opinion will continue to shift.

"There is a perception," says Flynn, "that the sill in the Gulf may be the offshore drilling equivalent of Three Mile Island." And that, he says, will make it much more difficult for politicians to gain public support for offshore drilling in the Gulf.

Plus, says Pulsipher, we shouldn’t forget about the regions that are directly economically impacted by the spill. "It's going to have a significant effect on the economic regions that produce gas, namely Louisiana and Texas," he says

But, says Flynn, "as bad as the spill is, the public does have a short memory. If BP caps the spill tomorrow and starts getting the cleanup done, I think that the public will forget."

Tougher Government Regulation and Legislation

The Obama administration has levied new regulations and restrictions against offshore drilling. Last week, they also rescinded previously issued drilling permits until new guidelines can be developed and a Minerals Management Service department official noted that "Until further notice we have been informed not to approve or allow any drilling," regardless of water depth.

But, says Flynn, "Until we know what the regulations are, the impact of legislation and regulation is still an open question."

One thing is clear, says Flynn: If the restrictions are incredibly tough, or last for a particularly long time, that may push some oil companies out of the region.

"If [the spill] goes on until August or December, the regulations are going to be even tighter. They’re going to make it more difficult to do anything, and they're going to freeze everything. It makes the market more nervous. They’re slowing down the process, but they’re not saying they’re getting out of the industry at all."

Greater Dependency on Foreign Oil

With greater domestic regulation of oil, some oil producers may choose to move out of the region. "If we can’t produce more oil domestically, what may happen is that we’re going to import more oil and that’s going to be more expensive. If we’re producing less [domestically], foreign producers can raise their price," explains Flynn.

Pulsipher disagrees. "The going rate for oil is an international price. It’s not going to be influenced by whether your supply is domestic or not," he says.

"Over the longer term," says Pulsipher, "the spill will increase somewhat the cost of drilling in the Gulf. It will have some upward pressure on some prices, but in the grand scheme of things it’s not going to be a major determinant."

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