Wednesday, September 06, 2006

Oil Find in Gulf of Mexico Good News, But....

It's good news any time a significant oil find is found these days, as long as that good news is kept in perspective. James M. Pethokoukis of US News has the story on the oil find:
Preliminary drilling tests of a deep-water well in the Gulf of Mexico indicate that the site could boost U.S. oil and natural gas reserves by 50 percent. The Jack 2 well was drilled by San Ramon, Calif.-based Chevron, along with Devon Energy of Oklahoma City and Norway's Statoil.

"The results of the Jack test are very encouraging," said Stephen Hadden, senior vice president of exploration and production. "They further support our positive view of the lower Tertiary trend and demonstrate the growth potential of our high-impact exploration strategy on long-term production, reserves, and value."

According to published reports, the Gulf of Mexico's lower-Tertiary formations could hold up to 15 billion barrels' worth of oil and gas reserves. By comparison, Alaska's Prudhoe Bay, the largest U.S. oil field, has produced 13 billion barrels of oil since 1977, with an estimated 3 billion recoverable barrels remaining. Alaska's Arctic National Wildlife Refuge--not yet in production due to opposition from environmental activists--has an estimated 10 billion barrels of recoverable oil. Statistics from the Energy Information Administration peg current U.S. oil and gas reserves at around 30 billion barrels. Currently, the United States consumes about 20 million barrels a day.

There are several caveats to keep in mind about the oil find. First, the operative phrase is "up to" 15 billion barrels. There is a very long ways to go to prove that amount of reserve.

Second, 15 billion barrels sounds like a lot but that's equivalent to a little more than two years of consumption by the United States; that's something that needs to be taken into account when thinking about the long term. The United States has been finding oil all along but usually in smaller and smaller amounts over the last thirty years; this would be a welcome but otherwise rare event.

Third, this is not cheap oil. This is an expensive project noted for breaking several records in terms of depths and new technology.

Fourth, the location is out in very deep waters in the Gulf of Mexico. This is the kind of area that large category 5 hurricanes will probably hit sooner than later in years to come if theories about global warming and increasing hurricanes are correct. I should add that depending on the kindness of the weather too much may lead to a boom and bust environment that doesn't exactly smooth out our energy problems if too much of our oil is coming from the Gulf of Mexico.

Fifth, I think one has to take some of these announcements with a grain of salt. There has been a tendency of late to inflate oil finds and their potential to relieve what is clearly some kind of oil crunch. I also am uneasy about the sudden drop in oil prices just two months before an election but it's possible tensions with Iran are seen as temporarily on the back burner and the danger of hurricanes, or at least the perception of the danger is lessening. Long term issues, however, have not gone away. The bottom line is that some good news on oil should not distract from the necessity to continue to develop alternative sources of energy.

Heading Out of The Oil Drum has more thoughts on the oil find.

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