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Get Out Your Waders

… because the guano is too deep for boots.

The CNN Money site put out a relatively sane article on America’s untapped oil

NEW YORK (CNNMoney.com) — Oil companies and many lawmakers are pressing to open up more U.S. land for drilling. But the industry is drilling on just a fraction of offshore areas it already has access to.

Of the 90 million offshore acres the industry has leases to, it is estimated that upwards of 70 million are not producing oil, according to both Democrats and oil-industry sources.

If all these areas were being drilled, U.S. oil production could be boosted by nearly 5 million barrels a day, up from about 8 million barrels a day currently.

That compares to an increase of maybe 2 million barrels a day experts say opening up other coastal areas and the Alaska’s Arctic National Wildlife Refuge might yield.

The oil industry says it pays millions of dollars for these leases, and not producing oil on them is something they would not intentionally do.

The oil industry is correct about not hoarding oil, said Oppenheimer analyst Fadel Gheit. With prices at $135 dollars a barrel, everyone is trying to pump as much as they can, he said.

But fearing oil prices will eventually fall, the industry is leery about making too many investments in the fields it has – many of which are in deepwater areas that can be pricey to develop.

Instead, they’re holding out, hoping the government will open areas closer to shore that would be cheaper to work on.

I would like the names of the people who think, with China and India coming into their own as major consumers, that oil is going to get cheaper. The two most populous nations on the planet has discovered the joys of the internal combustion engine, and these “people” think there’s a big chance of the price of oil dropping‽

People are probably not aware that untapped reserves are carried on the oil companies’ books as assets and boost stock prices. Management salaries are based on stock price, not the true health of the company. Oil companies are recording record profits with what they are pumping, so there is no pressure to spend money on more production. The value of the untapped reserves goes up with the price of oil.

The oil companies want the additional leases to increase their untapped reserves, not to increase production. An increase in production would increase supply and reduce the price, so it isn’t going to happen.

8 comments

1 Michael { 06.23.08 at 5:27 pm }

Well, I think we can expect to see some drop, yes. While China and India have discovered the joys of the internal combustion engine, it’s not exactly the case that all their billions of citizens have access to such things yet. I think a fair amount of the large spike we’ve seen in the price of crude (and almost all of the wild fluctuations we’ve seen this year so far) have far more to do with commodity traders and speculators than with actual supply-vs-demand worries.

2 Bryan { 06.23.08 at 7:28 pm }

Actually it has more to do with the price of diesel and insurance in shipping. Diesel and fuel oil have been going up faster than gasoline, and insurance rates have been going up faster than that.

The cost of distributing fuel gets ignored, but ships and trucks are move expensive than ever, and every time the Hedgemony threatens another oil producing nation, be it Iran or Venezuela, the insurance companies up their rates.

Until there is a real reduction in demand the price is going to be high.

3 Badtux { 06.23.08 at 7:29 pm }

There is also the problem that every deep-sea drilling rig on the planet — or under construction for the next ten years — is already committed. You can’t drill without a rig, and there are only limited number of shipyards in the world (none in the United States) with the capability to build a deep-sea drilling rig.

Note the pathetic point that the U.S. has no shipyards capable of building a deep-sea drilling rig. The only shipyards left in the USA today are either naval shipyards or pleasure boat shipyards. That’s it. We exported the rest of our ship building to Japan and, later, to South Korea. We don’t built diddly here in America anymore.

– Badtux the Oil Penguin

4 Bryan { 06.23.08 at 7:50 pm }

I don’t see anyone ready to build an oil rig on spec. Hell, the Gulf was out of of production for weeks longer than necessary waiting for specialized vessels to come from other places.

Well, the North Sea has peaked, so those platforms will be available in future.

5 Kryten42 { 06.23.08 at 9:13 pm }

And yet, Saudi King Abdullah ordered petrol prices in his Kingdom slashed by 30% in 2006 to about US17c/litre. 🙂

Guess who’s paying for that?

Depending on the oil field in question, the cost of extraction for many has been too great. One main reason that oil prices have been rising, it to make it economically feasible to get the oil from those areas once deemed not cost effective. 🙂 It’s always been a sham.

6 Bryan { 06.23.08 at 9:56 pm }

If you have your “papers” in order, you can zip down to Mexico and buy it for $2.55/gallon, less if you pay in pesos. There’s nothing like subsidized gasoline to distort the market.

The oil companies cap and uncap wells depending on the price, that’s what Carter’s windfall profit tax was all about. Oil in the ground is still an asset for an oil company.

7 Badtux { 06.24.08 at 2:14 am }

I’d have no problem putting the Mexican “gas” into my KLR (which will burn pretty much anything that even smells like gas), but I wouldn’t want to put it into any modern vehicle. Talk about doing a number on an engine with modern electronic controls…

Bryan, nobody’s building oil rigs on spec. There’s contracts at every shipyard capable of building deep-sea oil rigs (which are *NOT* the same as the North Sea oil rigs, which are a medium-water design) for the next ten years to build the things. If you aren’t already in line, you ain’t gettin’ one. Brazil alone has has six on order, one of which is going to cost them $1.2 billion dollars. Yeppers, damned things are almost as expensive as an aircraft carrier, and about the same size. But deal is, it takes one hunkin’ shipyard to build something that big, and we done dismantled all of ours here in the United States and shipped’em overseas. Crap, we have problems building littoral cutters for the Coast Guard nowdays, much less things the size of an aircraft carrier… Newport News could probably do it, but they got their hands full building the new Nimitz-followon carriers.

So anyhow, South Korea and Japan are building as fast as they can, but if you want to get in line, you’re gonna get your delivery 10 years from now — everything else is already bought and paid for. That’s what happens when you ship your industrial base overseas… you’re just another customer then, instead of in the driver’s seat, and ya gotta wait your turn.

Regarding capping and uncapping wells, that actually doesn’t happen very often. Yes, oil wells get capped when the price goes down, because they are no longer pumping enough oil to pay for the electricity to run them. But that’s rare. Usually they get put into part-time operation on a timer, they run for an hour a day or something. But those are paid-out “stripper” wells that don’t produce much. Over the past twenty years we done gone in and re-drilled a lot of those old fields with directional drilling gear to finish sucking out the last of the oil in them, there just isn’t much “there” there anymore. Capping and uncapping those paid-out stripper wells simply doesn’t make much difference in the oil supply, the oil field next to my property in Louisiana, which was drilled in the late 1940’s, produces about 5,000 barrels of oil per month — barely enough to justify the electricity needed to run the pumps, and about 5 milliseconds supply for the United States. Do you really think that capping those wells (or cutting back production by putting them on a timer) is going to do diddly to the price of oil? Yeah right!

Finally, regarding the reserves in the ground, virtually all of those are in deep water. Meaning, you need billion-dollar deep water rigs to get to them. Deep water rigs that are not going to be available for a decade, remember? Thus far nobody has made a dime out of deep water oil, I was working with one of the outfits that invented the deep water rig 15 years ago and we figured that you’d have to hit one heaping big reservoir and spend the next 20 years exploiting it via directional drilling from one deep-water borehole before you’d even break even given the capital costs involved. In other words, they’re going to break even five years from now. Now do you see why only a miniscule amount of the deep water oil has been exploited? Which is why I don’t begrudge the oil companies the profits they’re making right now, as long as they invest those profits back into the business — deep-water drilling is one hellaciously expensive endeavor and the only way to do it is to use profits from your less expensive fields to subsidize it.

– Badtux the Oil Penguin

8 Bryan { 06.24.08 at 3:00 pm }

The big “if” in the investment in the future, and there is no indication that the oil companies are any more interested in investing in the future than the steel and shipbuilding industries were a few decades ago. American industry used up what they had to maximize profits and let all of the new plants be built in other places, while companies like Toyota and Honda were building new plants in the US.

If there really were an existential threat to the US we are screwed, because we don’t “make it here” anymore. Take out a few deep water ports and we become isolated. Hell, you can’t even buy quality nuts and bolts made in the US these days.

NASCO in San Diego used to repair tankers, but I don’t know if they are still in operation. Given their location and land prices, they may have shipped out and sold the land for an obscene profit like a lot of the heavy industries in San Diego.

We shouldn’t be talking about oil, anyway. It is going to run out, and everyone knows it. It’s time to invest in the next level, rather than propping up the past. No matter what you pay for it, it pollutes the atmosphere, so we need to find a realistic option that doesn’t.