May 02, 2010
Where would we be without offshore oil?
As oil continues to pour into the Gulf of Mexico, I thought it might be helpful to review how we got where we are today.
The graph below shows total U.S. consumption of petroleum products (in red) and oil production from U.S. fields (in green). Consumption has been growing pretty steadily since 1981 while production has been declining. About 3-1/2 million barrels per day of the gap between these two lines is made up by refinery process gain, natural gas plant liquids, and other liquids. But most of the gap must be met by U.S. imports. Each year that our consumption grows and production declines, imports have to go up. Those rising U.S. oil imports could be the single most important factor determining the price of oil, global trade imbalances, and geopolitics today.
The next graph shows that although total U.S. production has been falling, U.S. offshore field production (in blue) has been rising, so that offshore oil now represents a third of our total field production. Without offshore oil, the decline in U.S. production would have been even more dramatic. Production from the Gulf of Mexico represents about 3/4 of total U.S. offshore production.
BP was apparently about to announce they'd hit a gusher in the Gulf of Mexico. Somehow that's not quite as favorable a news release under the present circumstances. Here's one plan to stop oil from pouring out from a well that's under 5000 feet of water:
Industry scientists say the permanent solution is to close the entire well. To do that, they must drill another hole-- through 13,000 feet of rock a mile under the ocean's floor-- that will intercept the leaking well. They can then pump in cement to try to plug the leaks.
Not your run-of-the-mill repair job. So why in the world were we trying to get oil out of the ground under such inherently difficult-to-control circumstances?
The answer, I'm afraid, is because that's where the U.S.'s remaining oil is to be found.
Maybe you have a notion that if we just did X, we could get by without oil produced from offshore sources. To that my response is, looks to me like we'll need both offshore oil and X to get through the next decade.
Posted by James Hamilton at May 2, 2010 07:20 AMdigg this | reddit
Oil is a fungible global commodity.
U.S. Gulf of Mexico production is less than 3% of global production (1.7 m bbl/day vs. 85 m bbl/day). Even if we doubled it, the effect on U.S. prices would be pretty small. Most of the additional oil would either a) substitute for other supplies as other countries drew down their reserves more slowly (supply elasticity) or b) be used in other nations as they increased their consumption (demand elasticity).
You've researched this. What would be your best estimate of the long run effect on U.S. gasoline prices of an aggressive "drain America first" strategy that managed to double Gulf production? Less than 5%?
Posted by: Erik Brynjolfsson at May 2, 2010 07:59 AM
As I read this argument, it is that (1) buying oil from abroad is bad, (2) domestic oil production is declining, (3) offshore oil is an increasing proportion of domestic oil production, therefore (4) we have to keep expanding offshore oil production.
I don't find it convincing because it is not enough to say that offshore oil is an increasing proportion of domestic oil production. Obviously, increasing drilling will increase domestic production (relative to where it would be without the drilling, though not necessarily relative to where it is now). The big question is: will it increase it by enough to make a meaningful dent in our dependence on oil imports?
The post doesn't speak to this, but the graphs in it suggest that the answer is no. We appear to produce about a quarter of what we consume. What proportion of our consumption would have to be domestic before we could say that we had significantly reduced our demand on foreign oil relative to today? Let us say 50%, though that seems very low. For drilling to make a meaning dent in energy independence, then, eyeballing the graphs and assuming everything else remains constant, we'd need an increase in off-shore oil production roughly equal to three times current off-shore production to have an impact on energy independence. To make the case for drilling, you have to start with an estimate of the feasibility of achieving such an increase in production via offshore drilling ("they'd hit a gusher" doesn't count). To clinch the argument, you then have to show that the risk of vast environmental destruction (being played out all too vividly at the moment) is worth less than the energy independence gained from the increased production. I doubt you can make that argument.
Posted by: Charles at May 2, 2010 08:16 AM
"they must drill another hole-- through 13,000 feet of rock a mile under the ocean's floor-- that will intercept the leaking well. They can then pump in cement to try to plug the leaks."
Does anyone know how long this takes? What if we find out that Bruce Willis is unavailable for the role, and there is no way to "cap" the hole anytime soon?
Posted by: Cedric Regula at May 2, 2010 08:38 AM
As Jim the Realtor says, there's nothing price can't fix.
Everybody ready for $6 gas?
Posted by: W.C. Varones at May 2, 2010 09:00 AM
The other thing to think about when evaluating what supply we (meaning the entire world) may have from offshore oil, is that this 5000ft depth is nothing compared to the very deepwater finds that are being touted lately by Brazil and Mexico. The PBR deepwater "discoveries" are supposed to be 4 miles under water before you even start drilling. Then you have a 4 mile tube to worry about when pumping it out. See prospectus and annual report to check if this is "proven and probable" reserves.
Posted by: Cedric Regula at May 2, 2010 09:03 AM
A 'drain america first' strategy would have little effect on gasoline prices because we don't have the refining capacity to handle increased production.
I think the best policy response to rising energy prices is a 'do nothing' approach. The higher the price of oil, the esier it is to move to alternate energy sources. 'Do nothing' is much preferable to mandating/subsidizing XX billion gallons of ethanol production or increasing the ethanol content of gasoline to the point where it fouls engines.
Do nothing is preferable to implementing a cap and trade system that will make domestic coal powered energy more expensive.
Instead, let's take any subsidies/tax breaks that exist for crude oil exploration/development and redirect it to alternative energy research and development.
Posted by: tj at May 2, 2010 09:33 AM
I am sorry that my Nation is addicted and therefore we all are to blame?
Posted by: jim e at May 2, 2010 10:13 AM
"...you then have to show that the risk of vast environmental destruction (being played out all too vividly at the moment) is worth less than the energy independence gained from the increased production. I doubt you can make that argument."
I think I can be a little more certain. You can't make that argument yet. If BP can't shut off the flow of oil within the next month the amount of oil released into the Gulf will be larger than any spill in human history. We're talking about oil slicks stretching from New Orleans to the East Coast of Florida. For Florida's economy, that puts at risk $57 billion, not counting the effect on real estate and fishing.
If, in a true worst-case scenario, oil lingers near an urban area like Mobile or New Orleans for weeks it will make the experience of living in those places unbearable. Residents in New Orleans are already complaining of respiratory problems related to a slick that is still more than 70 miles from the city.
In addition, we've never been confronted with a situation where gallons and gallons of chemical dispersants are dumped into the ocean for weeks and weeks. These chemicals create what are called PAHs, which are consumed by fish and marine life. These chemicals, which were not widely used in Prince William Sound, were found to be a grave risk to human health if you consume seafood that has ingested them. For BP's containment efforts to be successful at this scale, the entire world's existing supply of dispersant will have to be used in the Gulf.
The real comparison is something like Chernobyl. There will be deaths related to this disaster over the long run. You can't place chemicals that are so toxic next to human habitation for such an extended period of time without endangering human health. Is there any industrial activity that can be sustained if the risks to human health and other economic endeavors is so large? Does the oil industry have the right to unilaterally endanger the profits of every other industry on the Gulf Coast?
No one should have allowed these wells to be built if the worst-case scenario could turn out to be so horrific. If you can't reasonably prevent this scenario from occurring, than no, there is no justifiable benefit.
Posted by: Braden at May 2, 2010 10:26 AM
I went ahead and ran some back-of-the-envelope numbers on my blog (http://www.economicsofinformation.com/). It looks like even 50% increase in Gulf Oil production might lower U.S. gasoline prices by on the order of 1% in the long run.
Demand-side strategies and alternative energy supplies strike me as much more promising.
Posted by: Erik Brynjolfsson at May 2, 2010 10:43 AM
We got where we are today for a variety of reasons. Refusal to increase taxes on gasoline is one of the very important reasons - perhaps the most important.
Posted by: ReformerRay at May 2, 2010 11:14 AM
Finally read the link to the wsj article. Answered my question about how long. Up to 3 months they estimate.
So now seafood is the next problem.
I lost my taste for seafood years ago. One reason is a few years back I visited Biloxi on the coast and was on the beach looking at the pretty blue water and reading the "Danger-Do not swim in the ocean" signs everywhere. I asked a local why that is and he said the water is polluted and dangerous for humans. I then asked where do gulf shrimp come from, and he pointed out towards the breakwater and said "thar".
I then learned about what PCBs really do when I read Neal Stephenson's first novel, Zodiac. These are of a chemical class called "organic chlorine". They are very much more dangerous than the inorganic chlorine found in your Clorox. In fact, Agent Orange is made from them. They act like a weed whacker on your DNA, which makes cancerous cell division much more likely. When dumping this stuff and it finds its way into the ocean, it gets retained in the bodies of shellfish.
So I might dig around a bit and see what PAHs do, but I like my burgers just fine.
Posted by: Cedric Regula at May 2, 2010 11:20 AM
"but I like my burgers just fine."
do you have any idea how dependent on petrochemicals that cheap ground flesh you eat is?
Posted by: yuan at May 2, 2010 12:29 PM
I realize Hotelling-type models are irrelevant for real-world pricing, but they surely have some relevance for thinking about optimal policy. By not pumping offshore oil today, we are leaving it under the seabed for our heirs. They will live in a world with far less fossil fuel reserves. Assuming we can stabilize the carbon cycle and contain climate change, this resource may be extremely valuable some day. Moreover, the technology for safe extraction is likely to evolve. So why do we not factor in user cost when we argue about the appropriate pace of oil depletion?
Posted by: Peter Dorman at May 2, 2010 12:31 PM
On seafood, the most likely ones to be hardest hit will be shrimp and crabs.
Posted by: Barkley Rosser at May 2, 2010 01:07 PM
JH says: "looks to me like we'll need both offshore oil and X to get through the next decade."
If "get through the next decade" means "maintain business as usual" (AKA maintain the non-negotiable American way of life), then I don't think even offshore oil and X will be able to to do it--as I'm sure you, JH, suspect. I'd appreciate it if you would spread the word on your influential blog: the american way of life is in deep trouble because oil is going to get more expensive! Anyway, thanks for your efforts. Keep it up.
Best hopes for X (and Y and Z). --eric
Posted by: eric at May 2, 2010 02:23 PM
Re: Those rising U.S. oil imports could be the single most important factor determining the price of oil
I can understand why rising global demand would increase prices, ceteris paribus, but considering that oil is a fungible commodity priced in a global market, why would it matter where the oil comes from -- oil imports as opposed to domestic production?
Also, along the lines of Erik's comment, below is from the EIA:
the projections in the OCS access case indicate that access to the Pacific, Atlantic, and eastern Gulf regions would not have a significant impact on domestic crude oil and natural gas production or prices before 2030. Leasing would begin no sooner than 2012, and production would not be expected to start before 2017. Total domestic production of crude oil from 2012 through 2030 in the OCS access case is projected to be 1.6 percent higher than in the reference case, and 3 percent higher in 2030 alone, at 5.6 million barrels per day. For the lower 48 OCS, annual crude oil production in 2030 is projected to be 7 percent higher—2.4 million barrels per day in the OCS access case compared with 2.2 million barrels per day in the reference case (Figure 20). Because oil prices are determined on the international market, however, any impact on average wellhead prices is expected to be insignificant. http://www.eia.doe.gov/oiaf/ae.../ongr.html
So it seems that (1) how much we import vs. produce domestically doesn't have much/any effect on oil (and gasoline) prices, and (2) more OCS drilling wouldn't have a significant impact on prices now or even twenty years from now. Correct?
Posted by: Brooks at May 2, 2010 02:40 PM
I am curious what will happen in the oil markets over the next few weeks. If the price of oil rises significantly and it is attributed to "concerns" about oil supply in light of possible policy changes in response to this tragedy... how does that square with saying that the ability of offshore oil production to lower gasoline prices is nil? Hmmm?
Posted by: Doc at the Radar Station at May 2, 2010 04:23 PM
Sorry to be off subject, but...In a rambling lecture recently at Heritage (available at their website)Robert Mundell argued that the time lag between money supply change and real world impact is no longer 18 months but 18 minutes! If true, the implications seem pretty dramatic. I wonder if you agree; and, if so, what are the ramifications for the Fed's exit strategy.
Posted by: Qingdao at May 2, 2010 06:55 PM
Doc at the Radar Station: In the long run, refiners, utility, transportation, etc can find and adapt to other sources of oil, and to some extent, even other sources of energy. As a result, a small change in supply from the Gulf will lead to adjustments in supply elsewhere, as well as adjustments to demand.
However, in the short run, demand and supply are much more inelastic. As a result prices can spike significantly.
Posted by: Erik Brynjolfsson at May 2, 2010 07:05 PM
The big question is "why did BP cut corners on the gear for this well when it would be required to invest much more in safety in the waters of other nations where deep water drilling is occurring?"
If the cheap alternative was chosen because the price of oil isn't high enough, then deep water drilling in the Gulf should not be attempted until the price of oil rises further.
If the price of oil is high enough to justify the costs of robust and aggressive safety measures, then I can only assume US law and its enforcement creates great rewards for private profit and socialized risk.
Unless capitalism is defined as short term profit at the expense of long term sustainable profits, the BP seems to have it down based on other problems of this sort.
On the other hand, if capitalism is all about long term investment in productive capital as Warren Buffett has done, then BP fails at capitalism and is probably run by plunderers.
If BP is run by plunderers, does anyone think BP is really different from the rest. At some point the plunder comes to an end, and probably abruptly with consequences for oil energy like those for credit profit plundering which took down the world economy.
Posted by: mulp at May 2, 2010 09:29 PM
I have a little experience working on drilling rigs but only those that extract nat. gas (Barnett Shale). My experience though is very limited but I do know that the gas comes up out of the ground mixed with saltwater. This saltwater(hot)and the nat. gas and sometimes oil come up through the well-head and then go through a 'separator'. The nat. gas is then diverted into a pipeline while the saltwater and the oil are each diverted to separate holding tanks to be hauled away by tanker-trucks and the saltwater is then put back in the ground at depths of many thousands of feet via what are called 'disposals'(wells in reverse).
Why then, would ships not be outfitted with separators (many, or bigger versions) so that the oil is not simply pumped up along with some ocean-saltwater and then pumped into an oil-tanker?(of course the ocean-saltwater could simply be diverted right back into the ocean)
I suppose this all sounds 'to good to be true', but... collecting fluids with extremely powerful pumps, and separating them, and transporting those separated fluids is what is done 24/7 in the oilfields. Why not out on the oceans?
Posted by: ray l love at May 2, 2010 09:50 PM
My prediction is that this will all be forgotten by September, when gas is back at $4/gal.
There is actually nothing here to debate. The USA is broke, busted, buddy can you spare a dime? We can drill all the oil we can find here or we can walk. Some of you may favor walking. Good for you. Those of us with kids and jobs and lives in fly-over country need to drive.
Here is something to help you rationalize the situation. The well is leaking 5000 bbl/day. At ~160 l/bbl that is 800,000 l. A km^2 is 1,000,000 m^2. A prism with a base of 1 m and a height of 1 mm has a volume of 1 l. Therefore, the days leakage cannot cover 1 km^2 to a depth of 1 mm. Further, within a couple of days, half or more of the leakage will evaporate.
Posted by: Fat Man at May 2, 2010 09:56 PM
JDH: I know you know this stuff, but some of your audience doesn't:
If you use the monthly data from EIA instead of the annual, the series continues thru Feb 2010 instead of truncating in 2008. If you include the total series (going backwards) instead of stopping with the policy changes in the Reagan years, you see consumption growing at a quicker rate in the early years, significant reduction in consumption associated with both price and policy, and then a resumption of consuption growth at a reduced rate (your graph), and then a substantial leg down driven by price and recession over the past 2 years.
I'm not calling for a ban on all offshore drilling, but "X" where X is global and American fuel switching and efficiency initiatives is MORE important.
Posted by: benamery21 at May 3, 2010 12:37 AM
It's interesting that I haven't seen anybody link this to the Raleigh County coal mine disaster. It's the same problem, regulators who didn't think regulation was actually necessary.
Posted by: benamery21 at May 3, 2010 12:40 AM
Is this argument not just a bit more eco-colonialism. US oil is no harder to get at than much of the worlds new oil finds Brazil, Africa etc. So its OK for these poorer and less developed countries to take the risk of disaster which they are less able to cope with than for the US to actually have to face up to the real cost of what it consumes?
As for the cost benefit analysis of pushing even more of your demand offshore. I wonder if the Iraqis, Nigerians or anyone who lives under an oil price supported despot feels quite the same about your numbers. I think looking simply at the price of oil on international markets somewhat misses the point of the externalities of its supply
I should stress this isnt an anti US rant. Love the US, love the lifestyle. But this is all part of the price of your per capita energy usage. Accidents happen.
Posted by: mombab at May 3, 2010 12:55 AM
"Maybe you have a notion that if we just did X, we could get by without oil produced from offshore sources. To that my response is, looks to me like we'll need both offshore oil and X to get through the next decade."
Looking at the graphs I get the opposite message. "Drill baby drill" is unlikely to make any kind of dent in our energy problem.
1) Offshore oil provides only 8% of our total oil needs and only 2% of our total energy needs.
2) Offshore oil probably has already hit its peak and cannot go much higher.
3) Offshore oil cannot change the price of oil as Erik has pointed out.
We need a concerted strategy to develope not only X, but Y and Z. For example a number of countries, mostly in Europe, already get all (that's 100%) of their electrical needs from a combination of nuclear and renewable resources. This isn't science fiction, other nations do related things already, so why can't we?
Posted by: Mark A. Sadowski at May 3, 2010 04:34 AM
Sitting here in Houston at the Offshore Technology Conference, the mega trade show for the offshore oil and gas industry, I could comment on these topics at some length.
Just a few thoughts: Our forecasts show deepwater Gulf of Mexico (GoM) providing 25-27% of US crude production in the next several years, consistent with Jim's numbers (but sliced a different way). Just two deepwater platfroms, BP's Thunder Horse and Atlantis, provide 9% of US crude production.
The failed part appears to be a blow-out preventer (BOP) manufactured by Cameron. We don't know why it failed yet, but we will. Cameron (a client) is one of the two leading companies in its segment. It is a name brand.
TransOcean, the drilling contractor and rig owner, is again the top of the line operator in the industry, and is highly respected within it.
There is no indication currently that anyone cut corners, certainly not BP. We just don't know why the BOP failed. The industry was shocked that it did; the unit just shouldn't have failed like that. BOP's have been a standard part of kit for decades, and we haven't had a spill like this since Santa Barbara in 1969.
The criticism is that there was no Plan 'B'. There was. It's called a blow-out preventer.
Posted by: Steven Kopits at May 3, 2010 05:34 AM
There seems to be a strong consensus that a blow-out preventer costs cost about $500,000,
or about the same as it cost to lease this deep water rig for one day. Moreover, regulators in 2003 ruled that because of the expense they would not require them -- so it still seems to be Bush's fault -- and BP did not use one on this rig.
What I'm curious about is how many days it takes to drill a well like the one that is now leaking so I can calculate the cost of a blow-out preventer as a share of total drilling cost.
Stevan Kopits or anyone else can you answer this?
Posted by: spencer at May 3, 2010 07:16 AM
To drill deepwater without a blow-out preventer would be literally insane. Some of these deep wells have huge pressures, commonly 15,000 - 25,000 psi, and you want to be sure you can control the well if there's a gas kick (a big bubble of natural gas pushing up through the pipe from the seabed.) BOP's are absolutely standard and there was one in place here.
If there's a pressure surge, the BOP is supposed to slam shut, literally severing everything in the pipe at that point (for example, the drilling string). Why this didn't occur is not clear.
I'll check on the cost. You're probably in the ball park, though.
The cost-benefit ratio you suggest is absolutely correct and the single biggest driver of culture and practice in the industry.
For example, the Thunder Horse platform generates about $1 million of revenue per hour. A minor issue which reduces production for one hour--just sixty minutes--is a $1 million mistake. Sobering stuff.
And the failure of a part of comparatively trivial cost--for example, but not only, a BOP--can kill people, sink the rig, and/or cause vast environmental damage. Everyone in the industry--and it is very heavy with math-geek engineers (Menzie could be one)--is acutely and constantly aware of that. That's why the failure of the BOP--which is literally the failsafe device--was such a shock. It just wasn't supposed to happen in an industry with such an ingrained culture of safety and reliability.
Posted by: Steven Kopits at May 3, 2010 08:23 AM
It is an 'acoustic valve' that costs about $500,000 and that the rig in question did not have. Acoustic valves are typically installed on most offshore rigs although they are not required in US waters. I don't know much about this but I have read that one these valves would not have made any difference in this case.
Posted by: ray l love at May 3, 2010 09:01 AM
I think to fix the well by drilling a new well next to it and pumping cement in will take 10 weeks in a best case scenario.
Posted by: ebh at May 3, 2010 12:35 PM
Is the 10 weeks the time to drill one well or the time to drill all the wells required to intersect the problem well? In the case of the Aussie well in shallow water, it took five wells to intersect and plug the problem well.
Posted by: mulp at May 3, 2010 01:57 PM
> To get through the next decade
To my thinking, any analysis of oil that doesn't start in units at least as long as a human generation isn't worth more than the quarterly profits it can produce before going unstable.
If we increase production for 20 years, we'll just be in a deeper hole 20 years from now, with less potential reserves left to get through the 20 years that follow. Never mind through your own children's lifetime.
What exactly is the lifetime of 5000 square foot homes located 20 miles from groceries and 60 miles from work, and the rest of the inefficient infrastructure - roads, schools etc - to service it? And what happens to a nation's competitive position relative to other nations if they're built with the wrong infrastructure for a few decades hence?
I think any oil we can leave in the ground for a century will be worth more to our grandchildren's children than to us.
Posted by: Charlie at May 3, 2010 09:42 PM
A minor, but important point. The charts you are working with show petroleum production from "oil wells". It turns out that most gas wells produce some liquids curiously named "service condensate" or just "condensate" that can be treated as oil. The US produces about 3 mbpd of condensate (that seems high to me, but every time I check, that's the number), so effective US oil production is closer to 8 mbpd than 5 mbpd.
That said, the US imports about 10 mbpd of crude oil and doesn't export enough stuff to offset cost the imports. We can't do that forever.
We really do need a serious program of switching US energy usage away from petroleum -- which will take decades as the lifetime of a lot of the oil-gulping infrastructure items is 10-15 years or longer. In the meantime, there doesn't seem to be much alternative to offshore drilling.
Posted by: Don K at May 4, 2010 05:02 AM
There are strong similarities between the offshore industry and the civilian nuclear power industry.
Everyone is shocked when a reactor goes wrong: it's not supposed to happen, it shouldn't happen if things are done right.
But if you read Charles Perrow's 'Normal Accidents' you'll get a pretty good idea that these things do happen, from time to time, and probably according to Taleb's 'Black Swans' aka 'Fat Tails' of probability distribution.
The technocrats in the industry, the best money can buy, don't understand it. But complex technologies fail in new and unforeseen ways.
Therein lies the rub for the world nuclear industry. Serious accidents are a certainty, with enough time building and operating reactors. The global public relations effect is not pretty.
Interesting to see how this might alter the dynamics of US policy vis a vis offshore drilling.
If the Davis-Besse reactor (shield corroded 2/3rds away, undetected until 2003) had been allowed to keep going, and a loss of coolant accident had taken place, the US 'nuclear revival' might have been stillborn.
Posted by: valuethinker at May 4, 2010 05:05 AM
America may want to keep pumping offshore oil. Or increase reliance on Alberta oilsands where the habitat damage is extensive and semi-permanent. That decision is easy.
Harnessing policy to target a 50% reduction in per capita oil use will be the hard part. There is no "need". America as a once great power could dwindle to nothing and the various Gods and earth spirits would not care an iota. America will get what America wants.
Posted by: GNP at May 4, 2010 01:54 PM
The big question is "why did BP cut corners on the gear for this well when it would be required to invest much more in safety in the waters of other nations where deep water drilling is occurring?"
How do you know that? I'm not talking about "something bad happened, therefore corners must have been cut."
As for prices, I don't any specific drilling project, or even several of them, are going to have any significant downward pressure on energy prices. That doesn't mean the oil won't be drilled. It's just too valuable to leave there. Going forward, there is probably going to be extra safety measures needed -- like having a "cap" within a week of delivery to every rig -- but the cost of that measure will be insignificant to the value of the oil down there.
Posted by: Dan Weber at May 5, 2010 09:36 AM
people seem to forget the impact in the loss of a very small percent of supply of oil to the US. IN the '70's you will recall that a five percent loss of imports from OPEC,that coincided with US peak production resulted in a 400% increase in cost of gas at the pumps. Though not permanent, prices were never as low as they had been again.
Now the world is at or approaching peak production. There are fewer sources to ask to provide more oil to us than before. An interuption in gulf of mexico oil supply could easily cause the same 400% increase. Imagine that impact on the economy. Keep in mind there are ten calories of fossil fuels used for every calorie of food produced in modern 'green revolution' farming methods. Thats your impact erik brynjolfsson. 5%? You are sadly mistaken.
Posted by: john at May 7, 2010 04:49 AM
john: If you are referring to the Arab oil embargo in 1973, you may recall that it only lasted a few months at the outside but with Arab exports/US oil imports fully restored, the price of oil kept climbing for several years. The anti-Arab sentiment lingered though and in response, Americans put in motion a series of political events that would eventually provoke the Sept. 11 attacks.
The Gulf accident will not cause a 400% increase in the price of oil. The world market is currently well supplied. That said the Gulf accident will help support current oil prices that are probably higher than they need to be to keep world markets currently supplied.
For a spike in oil prices, lobby your elected representatives to bomb Iran. Better yet, convince the Israelis to bomb Iran with promises of more US aid and cheaper US weapon systems. An end to oil leaving through the Straits of Hormuz should create a large price spike, and if the situation gets really messy, should provoke a double-dip recession for the USA.
Posted by: GNP at May 7, 2010 12:29 PM
Debt, demographics, peak oil & environmental degradation, Yep, we are done for. I'm guessing there will be a new world order sometime within the next 10 years. I think that we are going to go from globalization back to localization. Nobody said that economic growth is forever, however institutions: political, corporate & other, will try to maintain it regardless of the social or environmental costs. It is that simple.
Posted by: Witold at May 7, 2010 08:26 PM
I think we'd be suprised how much a serious drilling project affects oil prices. Signaling that we are serious about cashing in on our reserves would spur competition. Right now many producers are operating at low efficiency and aren't expanding production because they believe the price will stay high or go up. They are relying on price changes to generate income instead of good operations.
See Krugman's 2001 paper on multiple equalibria in oil prices.
I think the key is that we need to anounce that we believe that alternatives will drive down the value of oil and that we need to sell it now while it's worth something.
Posted by: aaron at May 11, 2010 05:50 AM
Posted by: aaron at May 11, 2010 05:53 AM
Not drilling says we have no confidence in alternatives.
Posted by: aaron at May 11, 2010 05:56 AM