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Politics – Not Oil Prices – Are What's Behind the Deepwater Drilling Debate

Politics / Crude Oil Jan 14, 2011 - 06:04 AM GMT

By: Money_Morning

Politics

Best Financial Markets Analysis ArticleJason Simpkins writes: With oil prices rising and the Gulf oil spill fading from the forefront of the American psyche, deepwater drilling is set to emerge as a very hot, and very controversial topic in the months ahead - particularly among Republican representatives.

The GOP traditionally has been the party that supports the development of fossil fuels, while Democrats tend to push for more environmental regulation and a move toward renewable resources.


Right now, oil industry lobbyists believe higher prices warrant more drilling off the U.S. coast, but environmental groups, congressional Democrats, the Obama administration - which relaxed drilling restrictions just months before BP PLC's (NYSE ADR: BP) disastrous spill - aren't likely to agree.

In fact, lawmakers are already sniping at one another, spurred by the findings of U.S. President Obama's oil spill commission, which was tasked with investigating the Gulf oil spill.

The president's oil spill commission said the spill was an "overarching failure" of management on the part of BP, Transocean Ltd. (NYSE: RIG), and Halliburton Co. (NYSE: HAL). However, the government shares responsibility in the disaster to the extent that the Department of Interior and the Minerals Management Service (MMS) failed in their duty to oversee offshore drilling.

"The Macondo blowout was the product of several individual missteps and oversights by BP, Halliburton and Transocean, which government regulators lacked the authority, the necessary resources and the technical expertise to prevent," said former senator and commission co-chair Bob Graham.

The commission also hinted that government regulators might be too intimately involved with the industries they're charged with regulating.

Three out of every four lobbyists who represent oil and gas companies previously worked in the federal government, a Washington Post analysis showed last year. For instance, Randall Luthi, who's currently the president of the National Ocean Industries Association - a lobbying group of 23 offshore drilling concerns - was formerly the head of the MMS.

The presidential panel has called for "urgent reform," including the establishment of an independent safety agency within the Interior Department. The new agency should be headed for a fixed term by someone with a background in management and science, and it should be funded with fees from energy companies, Graham said.

Graham also recommended boosting "significantly" the $75 million cap on liability for offshore drilling accidents. Lifting the cap would require action by Congress, which seems unlikely given the Republicans sweeping takeover of the House of Representatives.

Citing rising prices for oil and gas, Republican representatives and oil industry lobbying groups have already set about berating the Obama administration for its energy policy.

Energy companies remain dissatisfied with the slow pace with which new drilling permits are being issued in the Gulf, even though the Obama administration on Jan. 3 announced it would allow 13 companies to resume deepwater oil and gas drilling in the region.

"The pattern we've seen again and again is that the Administration makes an announcement when they're under the gun, but there's no change afterwards," an industry official told The LA Times.

Meanwhile, the industry's leading lobbying group, the American Petroleum Institute (API) has warned against the elimination of any tax breaks oil and gas companies currently receive.

"What we need today - and tomorrow - are policy choices that increase, not decrease, energy production," the API said in a recent report.

Republican lawmakers agree.

"Congress needs to ensure that offshore energy production meets the highest safety standards, but as gasoline prices continue to rise we cannot allow ourselves to become increasingly dependent on hostile foreign nations for our energy needs," said House Natural Resources Committee Chairman Doc Hastings, R-WA.

The price of oil rose as high as $91.53 a barrel last week and gas prices have surged more than 12% from year ago levels according to the AAA's Daily Fuel Gauge report.

However, experts say more offshore drilling wouldn't do much to affect prices.

"We probably couldn't produce enough to affect the world price of oil," Ken Green, resident scholar at the American Enterprise Institute, told the New York Times. "People don't understand that."

Even if the United States produced 100% of the oil it uses, supply disruptions elsewhere in the world could still cause oil and gas prices to rise in the United States.

"The world price is the world price," he said.

Another analyst, energy economist Philip Vergler Jr., pointed out that the Organization of Petroleum Exporting Countries (OPEC) - which controls almost half of the world's oil supply - could easily offset any U.S. contributions to global oil production.

"Suppose the U.S. were to boost production 1 million barrels per day," he told The Times. "OPEC has the capacity to cut 1 million barrels.

Not wanting to hurt fragile demand in the depths of the financial crisis, OPEC was comfortable with crude prices of $70-$80 a barrel. But since demand has rebounded -driven mainly by emerging market growth - the cartel has shown an interest in making $100 a barrel the new standard.

Mohammad Ali Khatibi, Iran's representative at OPEC, in November said that the current price range of $70 to $90 was a "suitable" range, but noted that the global economy was capable of absorbing higher prices.

"Oil prices increasing to $100 (per barrel) would not hurt the global economy," Khatibi told the oil ministry news agency SHANA. "Not only producers, but consumers have reached this agreement that $70 to $90 is a suitable price for oil because it encourages investment and does not hurt the global economy."

In fact, prices that high are actually necessary for deepwater drilling to be a cost effective enterprise.

Whereas some onshore drilling operations in the Middle East are profitable with oil prices as low as $5-$10 a barrel, many deepwater drilling projects require oil prices of $75-$85 a barrel to stay economically viable, Matt Pickard, consulting manager at deepwater research firm Quest Offshore Resources told CNNMoney.

That shouldn't be a problem for energy companies because oil prices are poised to keep rising - regardless of what happens in the United States - because global factors continue to dictate higher prices. Demand continues to grow in emerging markets, particularly China and India, and the weaker U.S. dollar makes oil cheaper for foreign nations.

"A lot of conditions affect oil prices. But over the long term, it's safe to say that oil prices will go higher," Energy Secretary Steven Chu told CNN.

Increased demand from India and China and exploration in more difficult environments will "conspire to say that oil prices in the mid- and long-term future will be higher," said Chu. "The United States should prepare for that and take the steps necessary to use the oil we need as efficiently as possible, and also to begin to transition away from oil. For example, electrification of vehicles and things like that."

Source : http://moneymorning.com/2011/01/14/...

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