Why a "Drill Here, Drill Now" Approach Will Help America Pay Less at the Pump

Is more drilling for American oil an essential part of lowering energy costs and freeing us from dependence on foreign sources of energy? The typical response of critics is a resounding “NO!” and includes several common arguments, which are not supported by the facts.

MYTH: Oil companies currently have 68 million acres of leased public lands that contain large amounts of economically recoverable oil available. Drilling in these areas could generate 4.8 million barrels a day so opening up more land is not necessary.

FACT: The estimates on the amount of oil available in those 68 million acres have been derived by assuming that the unused acres can produce the same amount as those acres being used. However, much of the land leased to oil companies has already been explored and determined not to carry enough recoverable oil to justify drilling. This is in stark contrast to the other 97% of currently banned offshore resources and areas with shale oil, where enormous quantities are known to exist.

That opponents to greater U.S. exploration believe they understand better than petroleum engineers how we obtain oil from drilling is absolutely ridiculous.

MYTH: Drilling will not provide any short-term relief in the price of oil because it will take many years before new drilling will lead to new supplies.

FACT: This same argument has been used for the past several decades to prevent us from using more of our American oil, leading to our current dependence on foreign oil and the supply crunch we are currently experiencing. Does this mean critics of greater American energy exploration were wrong 10 years ago, 20 years ago, and 30 years ago but are suddenly right today now?

Drilling more now will increase supplies in the future. And higher supplies lead to lower prices. Currently, the world is operating at or near full capacity, so there is very little slack in the system, and any disruption causes spike in price. This is partly why commodities and other investors have invested so heavily in oil, driving up prices. They recognize demand will continue to increase and that current supply has artificial limits, especially in the United States.

Opening up new oil fields in the U.S., even if new supplies won’t actually reach our gas tank for several years, would immediately impact the amount of upward speculation on long-term commodity investment in oil. Oil speculators will see a greater supply ahead and will see that the future of oil is less constrained on the supply side. Moreover, fears of Middle Eastern turmoil or South American unrest that could disrupt supply shipments will be much less of a reason to drive up the price of crude if a stable U.S. can supply millions of barrels of additional oil. Which represents a more stable source of oil, Colorado or Caracas?

Finally, nobody is suggesting that our nation’s energy strategy should be solely dependent on domestic production of oil. We all recognize that alternative energy sources – such as wind and solar - need to be developed. But more American oil must be a part of an American energy solution.

MYTH: The U.S. only has a small percentage (from 2-6%) of the world’s oil supplies, and since oil is a global commodity, our increased production won’t affect prices much if at all.

FACT: This estimate of 2-6% of the world’s oil supplies does not hold up to scrutiny.

In oil shale alone, found in the Green River Formation in parts of Utah, Colorado, and Wyoming, the U.S. has approximately 800 billion barrels of recoverable oil, or over three times the proven reserves of Saudi Arabia. This comes from a midpoint estimate in a 2005 RAND study done at the request of the Department of Energy, and a higher end estimate puts the number at over one trillion barrels.

Furthermore, there are vast areas of the United States and its outer continental shelf where it is illegal to even look for oil. Exploration routinely yields additional resources far larger than initial estimates.

Resources from oil shale and additional oil resources that are likely to be discovered are not included in the estimates of American oil supplies.

MYTH: Drilling offshore will lead to ocean spillage, damaging wildlife and beaches.

FACT: In fact, virtually all of the pollution and “spillage” comes from large tankers transporting oil from other countries and natural seepages. Thus, drilling for our American oil would actually reduce the risk of oil pollution by reducing the number of international oil tankers entering our ports.

Offshore spills have occurred, but offshore drilling companies have an exceptional record of preventing spills and minimizing environmental damage, due primarily to technological innovation. Norway, which is a major exporter of oil and acquires all of it from offshore, also has an outstanding record of drilling in the sea, and there’s no reason why we would take fewer precautions than the Norwegians. Everyone promoting offshore drilling wants to do it in compliance with environmental safeguards, which in the United States are some of the most stringent in the world.

This is unlike other nations, such as China, which announced a partnership with Cuba in 2006 to start drilling for oil in the Gulf of Mexico. That nation’s dismal environmental record should force Congress to make a decision: Do we let another nation drill for oil near us and risk major environmental catastrophe, or do we do it ourselves with better environmental protection?

MYTH: The price of oil has increased due to “over-speculation” by energy commodities traders and outlawing or heavily regulating energy trading is the best way to dramatically reduce the price of oil.

FACT: When analyzing the effect of speculators on the price of oil it is important to distinguish between the activity of a healthy commodity futures market and “over-speculation.”

A healthy commodities futures market responds to the supply and demand realities of actual commodity suppliers and consumers. As Robert Murphy from the Institute for Energy Research explains, a healthy futures market can be a stabilizing influence on oil. By buying when prices are low and selling when prices are high, speculators actually push up the low prices and push down the high prices. America wants a healthy futures market on the price of oil.

So oil speculation does play a role in the price of oil. Single-day price spikes from supply disruption fears, for example, are often the work of speculation, but the price typically readjusts. The key question, then, is if “over-speculation” is occurring. “Over-speculation” in a futures market is when activity in the speculative markets themselves cause an artificial, higher demand for a commodity that does not reflect the demand of actual consumers. This causes an artificial, real-world price increase.

So have oil speculators distorted the global demand for oil, leading to the sharp price rise?

The data suggest not. If the price of oil truly was above the natural level dictated by supply and demand, we would see an increase in global inventory of oil. This is because when prices rise, production increases and consumer demand falls. If the speculative markets were adding extra demand to the market, all that oil purchased would have to be stockpiled somewhere. However, there is no evidence of any such hoarding, meaning that commercial consumers are purchasing every barrel produced. By definition, that means that the price is in line with real-world supply and demand. Despite the rise in prices, consumers continue to buy, meaning supply and demand fundamentals are in line. This means the speculative markets are functioning as they should and are not having a distorting effect on the price of oil.

Furthermore, long-term bets that the price of oil will rise rather than fall on the New York Mercantile Exchange have dropped over four fold since the price of a barrel went above $100. Traders are now shorting oil almost as much as they are betting on its price increase in the long term. Again, this data suggests that the speculative markets are functioning as they should.

So if the energy futures markets are operating as they should, passing new laws outlawing or more heavily regulating these markets will do nothing to lower the price of oil in the intermediate or long term. In fact, it would likely have two effects that could actually drive up the price of oil.

First, new regulations would reduce the stabilizing impact futures markets play on the price of oil described above. Second, they would likely drive energy futures markets outside of the United States, where they would be even less regulated than before. The loss of this financial activity would hurt America’s already sluggish economy, weakening the dollar even more. Considering that the decline of the value of the dollar has been estimated to account for as much as 30% of the recent surge in oil prices, the long run effect of would be to raise the price of oil even more.

So if you want the price of oil to be more volatile and ensure that Dubai and Singapore become the future centers of commodities trading, passing new laws heavily regulating the energy futures trading is a great idea. However, it will not lower gas prices.

MYTH: Drilling for unconventional sources, such as tar sands or shale oil, is too costly and creates a large carbon footprint, among other environmental problems.

FACT: The aforementioned RAND study demonstrated that if the price of a barrel of oil was as “high” as $90, current technology would make oil shale competitive in the market. With a barrel of oil approaching $140, the notion that extracting oil from shale is too expensive is simply untrue.

The environmental footprint argument would make more sense were it not for recent innovations by companies like Shell Oil, which has developed an in-situ method for extracting shale oil that would use relatively little water and does not involve making creators on wide portions of land. Instead, heating rods are stuck into the earth that heat the shale and then oil falls into a pool below to be collected. It should also be noted that early research suggests this method could be competitive even if oil was as cheap as $25 per barrel.

However, opponents of oil drilling are blocking further attempts to innovate through an amendment to an omnibus spending bill from December that prevents any further leasing on public lands with oil shale.

It is telling that opponents to greater U.S. exploration would choose to block shale oil development through a rider to a several hundred page spending bill instead of through separate legislation that could be debated purely on the merits of the specific proposal.