As we wait for the results of yet another effort to plug the leaking Gulf oil well, it is a good time to review the forces that are impacting on the energy markets and ultimately the cost and availability of our oil.
A new factor on the world scene is a possible revival of some form of hostilities in the Korea peninsula after nearly 60 years of truce. Our old friends, however, are still in play – a burgeoning European debt crisis; a struggling U.S. economy; China and India growing to beat the band; and Beijing still buying up every last smidgeon of oil that anyone in the world will sell. While the struggling economies in the OECD countries tend to push prices down, relentless Chinese and Indian economic growth, threats of war in Korea and the Middle East, and now threats of heavier regulation on offshore drilling will push prices up.
It is the net of all these forces will determine what we pay for our oil the next three or four years after which the great decline in global production is likely to be upon us. This will set off a whole new round of pressures as the developed countries will be forced to bid against the burgeoning economies of the East – provided they are still growing — for ever declining supplies of oil.
The immediate question however is what the regulation of offshore drilling will look like in the years ahead. Right now there is sort of a balance between outrage over what the spill might do to the Gulf seafood and tourist industries and the need to preserve jobs in these troubled times. U.S. Senators from the offshore drilling states have already written President Obama asking the moratorium on new shallow water drilling be lifted. This is apparently based on the idea that a shallow water blowout could be capped relatively quickly and that the offshore drillers are going to be ultra-cautious for awhile.
Deepwater wells which may be providing the bulk of whatever oil production is left in the next decade are another matter. This week the President is scheduled to announce a new series of regulations for offshore drilling – how these regulations are accepted by the industry and how they are enforced will tell us much about offshore drilling in the years to come.
First, it is obvious that with BP facing fines and clean-up expenses running into the $10s of billions and some senior executives likely facing early retirement, no one in the oil industry wants another Deepwater Horizon. The problem is that deep water drilling is so horribly expensive – about $1 million a day to lease and operate a deepwater rig – that managers in the field will feel constant pressure from Headquarters to get the job done as quickly as possible and move on to the next drilling site.
It would not be surprising if the Presidential Investigating Commission concludes that pressure from above was a factor in the decision to declare the well sealed and pull out the protective drilling mud, despite indications that all was not well.
It is not yet clear whether the drilling industry, or the government for that matter, wants government inspectors aboard every drilling rig participating in critical operational decisions that could result in a blowout. With a million dollars a day at stake, it is unlikely that the industry wants relatively low level inspectors deciding that the cement needs another day or so to dry properly. The upside of course is that should the unthinkable happen, the industry is in a good position to pass the liability on to the government if it signed off on the procedure.
There are obviously billions of dollars and the fate of nations involved in this question, for if offshore drilling takes substantially longer and becomes substantially more expensive, then so does our oil.
With a deepwater well costing about $1 million a day and taking three months to complete, we can easily see where the $100 million oil well comes from. As an increasing share of our oil comes from $100 million or perhaps even more expensive oil wells (just think what the insurance on these things is going to be), $3, $4, or $5 gasoline will soon be but a distant memory.