Offshore Oil Drilling and the Oil Rig Disaster in the Gulf

[RiversideGator]

Steve Forbes believes that the vast majority of the run up in fuel prices has been Fed induced.  Hard to argue with his logic.  Drilling would still help in any event.  I agree with all of his policy prescriptions.

Oil and the Feeble Greenback

07/29/2008

There are three reasons why oil prices have soared: the weak dollar, Iran and the booming global economy.

The big villain is the feeble greenback. Commodities like oil are priced in dollars. So when the dollar becomes weak, the dollar price of commodities goes up. And when the greenback is strong, the dollar price of commodities goes down.

In 2004 Alan Greenspan, Chairman of the Federal Reserve, made a fateful miscalculation. The maestro, as he was then affectionately called by an adoring media, miscalculated the strength of the U.S. economy. He thought it weak. He was fearful that prices would collapse in America as they did in Japan during the 1990s and the early part of this decade. So to goose the economy, Greenspan created excessive amounts of money. Interest rates were kept artificially low.

But the economy was not weak. In fact, between 2003 and the summer of 2007, the growth alone of the U.S. economy exceeded the entire size of the Chinese economy. In other words, we grew the equivalent of the economy of China in little more than four years. China’s growth rates are higher, but they’re coming off a much lower base.

Yet Greenspan made sure the Fed’s printing presses worked overtime. Thus for the first time since the 1970s and early 1980s, we are faced with a serious inflation problem. Thanks to Greenspan’s blunder, all commodities shot up -- oil, cooper, lumber, steel, even the price of mud.

While Greenspan begat the inflationary blunder, Ben Bernanke, the maestro’s successor, perpetuated it. In 2003 the price of oil was around $25 a barrel. A year ago when the credit crisis hit, oil was around $70. Then Bernanke ginned up the printing presses again, this time to deal with the fallout of the busts of sub prime mortgages and other exotic financial instruments and the threats they posed to the banking system. The U.S. economy has crawled to a virtual halt since August 2007 and yet the price of oil has almost doubled. That’s not supply and demand, that’s classic inflation.

Not since the days of Jimmy Carter has an administration been so passive about inflation as this one. So why isn’t President Bush doing something as Ronald Reagan did in circumstances far more difficult than those of today and promptly kill this inflation? Why doesn’t Mr. Bush understand that just as we need a strong military for national security, so too we need a strong dollar for economic strength and security?

Alas, President Bush’s Treasury Department actually likes a weak dollar. These bureaucrats think it helps our trade balance while ignoring the hundreds of billions of dollars more we pay for oil and the havoc that weak money wreaks on the domestic economy. Treasury Chief Henry Paulson is, unfortunately, a captive of this kind of “thinking.”

Another big factor in rising energy costs -- one that will become red hot after the November elections -- is Iran. The ruling murderous mullahs are hell-bent to get the Bomb and the means to deliver it. Israeli intelligence calculates Iran will cross the threshold in being able to create a nuclear weapon by the end of 2009. Iran recently conducted missile tests that demonstrate that it can deliver such a bomb to Israel not to mention all of Europe. Iran could also use a shipping platform to lob a weapon onto the U.S.

The U.S. has been engaged in fruitless diplomacy with Iran for almost four years. The Israelis feel the window of opportunity to destroy or seriously disrupt Iran’s nuclear ambitions is fast closing. Thus there is a very real possibility that if Barack Obama wins in November, the Israelis will take action before he is inaugurated on January 20. If McCain wins, the Jewish state will probably wait a few months longer to see what will unfold with his administration.

To get to energy: The possibility of a war against Iran has not escaped the oil markets. The futures price of oil spikes upward in early November. The market is thus betting that military action against Iran may well happen -- and that would, at least short term, seriously disrupt oil flows. This helps explain why the price of oil in terms of gold has moved up in recent months. Normally the ratio of oil/gold price is fairly constant.

The third reason people are paying so much at the gas pump -- and soon with their heating bills -- is the global boom which has increased substantially the demand for commodities, including oil. Most oil reserves are controlled by governments not private companies such as Exxon-Mobil. So the ramp up in supply to this increased demand is taking longer than it normally would. Another delaying factor here: The inexcusable unwillingness of Congress to permit exploration and drilling offshore and to do the same in all of ANWAR in Alaska. Tens of billions of barrels of oil and the equivalent amount of natural gas thus remain underground. This is truly a monumental self-inflected wound.

Bottom line: If the Fed ever got its act together and produced a stable dollar the price of oil would drop by at least $50 a barrel. If Iran ceased its nuclear bomb program, oil would drop another $40 a barrel. The remaining $20-$25 increase in oil since 2003 is your traditional supply and demand pressures of the marketplace.

Mr. Forbes is president and chief executive officer as well as Editor-in-Chief of Forbes magazine and author of "Flat Tax Revolution."

http://www.humanevents.com/article.php?id=27731

[alta]

The specualators haven driven up the price of oil based on the fact that demand will not keep up with supply.  If the US approves drilling some speculators will back out based on the fact that the United States has billions of barrels of untapped oil reserves

[alta]

Oops.  Supply will not keep up with demand!

[RiversideGator]

Exactly.  Speculators serve a useful purpose in bringing current prices to a level designed to accommodate future supply and demand.  So, if a shortage is seen on the horizon, speculators drive up prices now which results in more production and less consumption before the problem strikes.  Conversely, if speculators (or traders depending on your preferred terminology) foresee a glut in the future, prices will decline.  It really is Economics 101.

[Midway ®]

Advise you to take Economics 101.

If you remember, 6 months ago I explained that because oil is denominated in dollars and the dollar is being devalued, the price of oil rises. You disagreed and blamed it on speculators.

Perhaps you have been reeducated?

Or maybe reality has changed?

Or you have just become more aware of it (reality)?

I guess you have just received a new set of talking points from the "boss".

I deal in supply and demand all day. Hungry obese citizens demand burgers, and I supply 'em. So I know all about it.

Ha Ha. Quoting Newt. LOL. Drill here, drill now another great follow up to the contract with America.

[BridgeTroll]

Advise you to take Economics 101.

If you remember, 6 months ago I explained that because oil is denominated in dollars and the dollar is being devalued, the price of oil rises. You disagreed and blamed it on speculators.

Perhaps you have been reeducated?

Or maybe reality has changed?

Or you have just become more aware of it (reality)?

I guess you have just received a new set of talking points from the "boss".

I deal in supply and demand all day. Hungry obese citizens demand burgers, and I supply 'em. So I know all about it.

Ha Ha. Quoting Newt. LOL. Drill here, drill now another great follow up to the contract with America.

Suppose you could only provide 50 hamburgers and 100 people showed up to order one... I suppose the price might go up...

[rjp2008]

Gas down to $3.80 in some areas.

[BridgeTroll]

$3.79... Normandy walmart...

[Midway ®]

Advise you to take Economics 101.

If you remember, 6 months ago I explained that because oil is denominated in dollars and the dollar is being devalued, the price of oil rises. You disagreed and blamed it on speculators.

Perhaps you have been reeducated?

Or maybe reality has changed?

Or you have just become more aware of it (reality)?

I guess you have just received a new set of talking points from the "boss".

I deal in supply and demand all day. Hungry obese citizens demand burgers, and I supply 'em. So I know all about it.

Ha Ha. Quoting Newt. LOL. Drill here, drill now another great follow up to the contract with America.

Suppose you could only provide 50 hamburgers and 100 people showed up to order one... I suppose the price might go up...

No, we would get more cows and kill here kill now! Then the price would go down in response to greater demand, and everyone would be fat and happy!

[RiversideGator]

Advise you to take Economics 101.

If you remember, 6 months ago I explained that because oil is denominated in dollars and the dollar is being devalued, the price of oil rises. You disagreed and blamed it on speculators.

Perhaps you have been reeducated?

Or maybe reality has changed?

Or you have just become more aware of it (reality)?

I guess you have just received a new set of talking points from the "boss".

I deal in supply and demand all day. Hungry obese citizens demand burgers, and I supply 'em. So I know all about it.

Ha Ha. Quoting Newt. LOL. Drill here, drill now another great follow up to the contract with America.

Wrong again, midway.  While the depreciation of the dollar relative to other currencies has played a small role in the increase in prices, the price of oil has also gone up in euros, yen, pounds, etc.  The key reason for this increase is increasing demand and stagnant supply.  Read below for a little education:

The chart above shows oil prices, net oil exports (data here) and world GDP, quarterly from 2002:Q1 to 2008:QII. The data for OECD world GDP and oil prices are from Global Financial Data (subscription required). Oil prices are on the right scale in $/bbl., and world GDP and net oil exports are on the left scale, both expressed as an index equal to 100 in 2002:QI.

The graph above was inspired by the CFTC report and graph of world GDP and oil production, featured on this CD post. I added oil prices and used net oil exports (from Net Oil Exports) instead of oil production.

Bottom Line: The graph shows that world GDP, net oil exports and oil prices were all increasing at about the same rate from 2002 to early 2006. Starting in about mid-2006, the three series started to diverge as world GDP continued to increase, but net oil exports started to decline. It was at that point of departure in 2006 between global output (GDP) and the global supply of oil that oil prices started to rise significantly (see shaded area).

Although the decline of the dollar and the increase in speculative activity might have played relatively minor roles in the run-up of oil prices, the main contributing factor to high oil prices over the last two years appears to be the supply-demand imbalance that started in mid-2006. With the significant increase in world output and the accompanying increase world demand for oil and energy interacting with a flat and/or falling world supply of oil, there was only one direction for oil prices to go. Up. Nothing mysterious, nothing nefarious, and nothing to do with speculators. Simple supply and demand. Period. In other words, Occam's razor.

http://mjperry.blogspot.com/

[RiversideGator]

Oh and also read this.  Sure looks to me like the price of oil has increased in all major currencies in a similar trajectory:

Charts above are from the July 2008 Interim Report on Crude Oil, from the Interagency Task Force on Commodity Markets. From the Executive Summary:

The Task Force’s preliminary assessment is that current oil prices and the increase in oil prices between January 2003 and June 2008 are largely due to fundamental supply and demand factors. During this same period, activity on the crude oil futures market â€" as measured by the number of contracts outstanding, trading activity, and the number of traders â€" has increased significantly. While these increases broadly coincided with the run-up in crude oil prices, the Task Force’s preliminary analysis to date does not support the proposition that speculative activity has systematically driven changes in oil prices.

The world economy has expanded at its fastest pace in decades, and that strong growth has translated into substantial increases in the demand for oil, particularly from emerging market countries. On the supply side, the production of oil has responded sluggishly, compounded by production shortfalls associated with geopolitical unrest in countries with large oil reserves. As it is very difficult to rely on substitutes for oil in the short term, very large price increases have occurred as the market balances supply and demand (see top two charts above).

If a group of market participants has systematically driven prices, detailed daily position data should show that that group’s position changes preceded price changes. The Task Force’s preliminary analysis, based on the evidence available to date, suggests that changes in futures market participation by speculators have not systematically preceded price changes. On the contrary, most speculative traders typically alter their positions following price changes, suggesting that they are responding to new information â€" just as one would expect in an efficiently operating market.

From p. 14 of the report: The depreciation of the dollar since 2002 has contributed to the rise of the dollar price of oil, but can explain only a portion of the overall run-up. This point is also evident in the bottom chart above, which graphs the spot price of West Texas Intermediate crude oil in several currencies. Clearly, oil prices have risen sharply regardless of the currency of denomination. Moreover, from mid-March through June 2008, the dollar was stable, whereas oil prices increased appreciably.

MP: I think the top chart above says it all. Since 2002, world GDP increased by about 30% and world oil production increased by about 12%. Demand for oil increased significantly, oil supplies were tight, and oil prices rose significantly.

http://mjperry.blogspot.com/

Case closed.  Supply and demand are guilty as charged.

[Ocklawaha]

The worst part of off shore oil drilling can be experienced at most any Southern California Beach, where the little racks are not full of doggie doo bags, rather handi-wipes with a kerosene sort of oil wipe. It's because a by-product of the active off shore wells and fields is tar bubbles. Get a couple of tiny ones on your legs, hair or nether regions and "HAVE FUN". All you are missing is the feathers.

Have you seen the drilling show, BLACK GOLD? Seen the occasional shot in the main offices? One of those "guys" is my son.

IF it would really make a difference, I'd say, okay, I'll wipe the crap off for $1.00 gas. HA! My youngest son is head of Sunbelt Drilling... In FACT he supplies the guys on the rigs on TV. His area is now Oklahoma-N. Texas-Kansas. He told me frankly, "Dad, the oil is there, all the oil we could ever want in my opinion, but we CAN'T afford to get at it! Burkburnett, Whizbang, Texaco 9, Navina all came in gushers at 8,000 feet back in the day, Dad, we're going 20 and 30,000 feet now. Nobody can afford it, even on good wells..."

OCKLAWAHA

[alta]

I haven't seen the Black Gold show yet but it looks like the land version of Deadliest Catch.  I love that show.  Where is there offshore drilling near Southern California?  Mexico?  It is not allowed offshore in California.  I'm sure we would hear from the enviromental wackos in California if they had to wipe oil of their skin evertime they went to the beach.  We have been drilling in Prudho Bay for thirty years.  The infrastructure is already in place to transport that oil.  Drilling offshore is safe.  Combined with conservation and alternative energy we might be able to reduce the 12 million barrels a day the U.S. consumes in foreign oil.  Wouldn't it be great to independent of the rougue oil nations of the world (Iran, Venezuala, Saudia Arabia)?     

[RiversideGator]

This excellent piece by Deroy Murdock demolishes the Democrats' arguments against offshore drilling:

Offshore Drilling: Cleaner Than Mother Nature
Fear of oil spills is a poor Democratic excuse for energy poverty.

By Deroy Murdock

Painfully high vehicle- and jet-fuel prices are propelling popular demands for extracting the estimated 18 billion barrels of petroleum that rest beneath America’s coastal waters. After rescinding previous executive-branch objections, President Bush said on July 14, “the only thing standing between the American people and these vast oil resources is action from the U.S. Congress.” Capitol Hill Democrats claim offshore drilling poses unacceptable ecological risks. This is yet another overblown worry.

Democrats and other environmental naysayers cite the 80,000 barrels that spilled six miles off of Santa Barbara, California, inundating beaches and aquatic life. This hydrocarbon Hindenburg haunts the memories of those who witnessed it.

But this genuine catastrophe occurred in January, 1969 â€" nearly 40 years ago. That era’s drilling technology has gone the way of Flower Power and black-and-white TV. Innovation has boosted the safety and environmental reliability of offshore drilling.

Santa Barbara accelerated oil companies’ efforts to prevent such disasters. Beyond compliance with 17 major permits and 90 different federal regulations, offshore operators frequently conduct accident training and safety exercises. Sensors and other instruments now help platform personnel monitor and handle temperatures and pressures of subsea oil, even as drill bits whirl.

Hurricanes are manageable, since oil lines are capped not at the surface, but at or beneath the ocean floor. Even if oil platforms snapped loose and blew away, industrial seals restrain potentially destructive petroleum hundreds or even thousands of feet below the waves. Thus, 3,050 offshore structures endured Hurricanes Katrina and Rita in August and September, 2005 without environmentally damaging petroleum spills. While 168 platforms and 55 rigs were destroyed or seriously damaged, the oil they pumped remained safely entombed, thanks to heavy underwater machinery. As the U.S. Minerals Management Service (MMS) concluded, “due to the prompt evacuation and shut-in preparations made by operating and service personnel, there was no loss of life and no major oil spills attributed to either storm.”

“The technology of the drilling industry may have improved, but offshore drilling is a dirty business, and it still leads to oil spills due to failed equipment, aberrant weather, or human error on a frequent basis,” Senator Dianne Feinstein (D., Calif.) said in July 19’s Houston Chronicle.

Feinstein is correct. U.S. offshore oil drilling is not perfectly tidy. It’s only 99.999 percent clean. Indeed, since 1980 â€" as MMS figures indicate â€" 101,997 barrels spilled from among the 11.855 billion barrels of American oil extracted offshore. This is a 0.001 percent pollution rate. While offshore drilling is not 100-percent spotless, this record should satisfy all but the terminally fastidious.

Ironically, in terms of oil contamination, Mother Nature is 95 times dirtier than man. Some 620,500 barrels of oil ooze organically from North America’s ocean floors each year. Compare this to the average 6,555 barrels that oil companies have spilled annually since 1998, according to MMS.

Thanks to the curvature of the Earth, these operations can stay out of sight. Rep. John Peterson (R., Penn.) proposes new drilling, but at least 50 miles offshore, well past the 12 miles beyond which the horizon hides oil equipment from the eyes of surfers and beachcombers. At 50 miles, moreover, spills that might occur would be as far from shore as Philadelphia is inland.

Critics also dismiss offshore development since its benefits supposedly would take ages.

“You wouldn’t see any full production out of any oil drilling off the coasts until 2030,” presumptive Democratic nominee Barack Obama claimed June 20 in Jacksonville, Florida. The Illinois senator added: “It will take a generation to reach full production.”

Currently mired in red tape, Chevron’s Destin Dome field off Florida could produce within four years. Southern California deposits could yield within five to ten years. Besides, as Confucius said: “The best time to plant a tree is 10 years ago. The second best time is now.”

America is like a vagrant who shakes a tin cup, pleads for change, and yet refuses to touch his $1 million trust fund. Before President Bush flies back to Saudi Arabia to beg sheiks to open their spigots, the United States should rely on our own offshore oil and gas. The fact we can do so more safely than ever leaves the Democratic Congress no excuse not to stand aside â€" now!

â€" Deroy Murdock is a New York-based columnist with the Scripps Howard News Service and a media fellow with the Hoover Institution.

http://article.nationalreview.com/?q=YTA1MTBlMjdhMjM4NWU4NDczN2IxM2RkNGExNWRjMDM=&w=MQ==

[BridgeTroll]

This excellent piece by Deroy Murdock demolishes the Democrats' arguments against offshore drilling:

Besides, as Confucius said: “The best time to plant a tree is 10 years ago. The second best time is now.”

http://article.nationalreview.com/?q=YTA1MTBlMjdhMjM4NWU4NDczN2IxM2RkNGExNWRjMDM=&w=MQ==

Confucius was a smart guy...