Recall that "drill baby, drill" mantra the Republican Party spoke of? Well apparently, in order to drill our Gulf of Mexico we will need triple digit oil prices (meaning $4 a gallon gasoline) in order to afford the return on investment to purchase new drilling platforms/obtain new leases/drill exploratory wells. All of these activities are now significantly more expensive due to inflation and higher energy prices drive the cost close to a billion dollars to build a new rig. As stated in previous blog posts, The Deep Water horizon drill that exploded back in May cost $350 million to construct in 2001, in today's inflated economy it would cost $700 million. You're not going to invest $700 million into a new drilling well if oil is selling for $40 a barrel and you may not get enough oil out of the ground to cover those costs. It just isn't happening. The best bet is to sit around until it hits a plateau of $100 per barrel (roughly $4 a gallon).
Meanwhile, Alaska's National Petroleum Reserve has been downgraded in volume. It was first reported by the U.S. Geological survey in 2002 that there were upwards of 10.6 billion barrels of oil in the National Petroleum Reserve in Alaska. Recently, that survey has been downgraded by 90% to a total of 896 million barrels of oil. Recall that one billion is one thousand million. Quite a large change, no?
What is even more disturbing is Prudhoe Bay's oil production is declining year after year. At some point the engineering specs won't be met for the Alaska pipeline for flow rates. In order to keep the pipeline from freezing we constantly have to flow over 350,000 barrels every day or it freezes up and becomes useless. In the very near future that is a certainty of happening. Just the way things physically work when you depend on finite resources of a fossilized condensed sunlight. To put into a better perspective, that amount of oil is enough to run the entire American economy for roughly 10-12 days. But in order to claim that oil companies would have to invest billions of dollars before a drop ever flowed out of the reservoirs. This means that within the decade Alaska's 0il supply will shut down for periods of time.
This article appears in Nov 11-17, 2010.