What's next for oil prices?

John W. Schoen Senior Producer • Profile • E-mail

March 18, 2005 - With crude prices surging, pump prices setting records, and Congress on the way to approving new oil drilling in Alaska, the Answer Desk Inbox has been flooded with mail about oil. Rodney in Maryland wants to know why the U.S. doesn't just pump more of its own reserves. Gregg in Bigfork, Montana is wondering what it will take to break American's dependence on gasoline. James in Florida can't figure out why we aren't already drilling Alaskan oil. And Ron in Washington says — enough is enough: the government should just step in a keep gasoline prices from rising any further.

JUST PUMP MORE
My understanding is that the U.S. has plenty of oil in reserve. What will it take before we tap into our reserve? Why are we not using our reserve to keep gas prices down? What is the reserve for? — Rodney, Frederick, Md.

Unfortunately, the U.S. Strategic Petroleum Reserve, a government-owned stockpile of crude socked away in a series of salt domes in Texas and Louisiana, represents just a drop in the barrel of U.S. oil demand — which is running at roughly 20 million barrels a day. The Bush administration has been topping off these reserves, but they’re still less than 700 million barrels. At current levels, the reserve could replace imports for just 53 days.

As for the so-called “proven reserves” — the oil fields owned or leased by companies that develop them — no one really knows how much oil is in the ground, in the U.S. or elsewhere. But the news isn't good there either. After exploring and drilling in the U.S. for more than 100 years, most of the readily available oil has been pumped out of the ground. If you look at “proven reserves” — all the oil in the world that’s been discovered so far — the U.S. has maybe 2-3 percent of what's left. According to Energy Dept. estimates, U.S. reserves range between roughly 20 to 30 billion barrels. By contrast, total global reserves are somewhere between 1 to 1.2 trillion barrels.

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The more important question is production capacity: how fast can oil-producing countries get that oil out of the ground? Global demand is now about 82 million barrels a day — rising by about 2 million barrels per day (bpd) each year. But the only country with any real extra capacity is Saudi Arabia, and they claim to have only 1.5 million barrels or so to spare.

Over the next several years, other oil producers will gradually expand production — but there are limits to how fast that can be done. So it's very possible that demand will grow so fast there's simply not enough to go around. If and when that happens, prices could hit $80 or $100 or — who knows? Even during the “shortages” of the 1970s, the oil was there — it was just held back from the market. But at their meeting this week in Iran, for the first time in the cartel's 45-year history, some OPEC ministers admitted that they've lost control of oil prices.

WHATE ABOUT ALASKA?
From an economics standpoint, the old supply-and-demand theory is right on. However, there is some relief to everything that you fail to mention. According to all reports, the Alaska reserves are bountiful but for many years the environmentalists have fought to stifle attempts for our country to be more self efficient. Why do you not mention this … and why is there so much opposition? — James C., The Villages, Fla.

THE ANSWER DESK The archive Answers to earlier reader questions

This week’s Senate approval was a major step toward development of oil discovered in the Alaska National Wildlife Refuge — an area that’s been off limits so far to oil drilling. Though the industry’s latest technologies will certainly help minimize the impact, a green light for the project would be a major setback for opponents who have been working to preserve one of the last remaining wilderness areas in the U.S.

But don’t expect ANWR drilling to slow the rise in oil and gasoline prices. Even after the final decision has been made to develop ANWR, it will take years before the oil starts flowing. No one can say for sure, but some estimates figure it could be 10 years before we’d see significant production from these oil fields.  

And even at its peak, the oil in ANWR might generate 1.6 million barrels per day, according to DOE estimates. (A lot depends on how fast you tried to pull it out of the ground.)  If you use the mid-range estimate of 10.3 billion barrels total reserves, and spread it over 40 years of production, you get an average rate of about 700,000 barrels per day.

To put that in perspective, the U.S. consumes roughly 20 million barrels per day, of which we import something like 12 million bpd. So 700,000 bpd will help, but it won’t come close to solving the problem of U.S. dependence on shrinking supplies of foreign oil.

The other thing to remember is that oil prices rise and fall based on global demand — not just supply and demand in the U.S. So tapping ANWR would have and even smaller impact on global demand of 82 million barrels per day. It’s just not enough oil to make much of a difference.

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