One Reason Offshore Drilling Won't Lower Gas Prices: OPEC

Originally posted at The Seminal.

At maximum production, after more than ten years, we'll see 200,000 barrels per day (corrected, h/t A. Siegel) coming from new offshore rigs. OPEC is currently producing 33.2 million barrels per day, over 40% of global production.

OPEC is poised to reduce oil production by as much as two million barrels per day at an emergency meeting in Vienna on Friday.

"There will be a reduction in production at the next extraordinary meeting of OPEC, and it will have to be a substantial one to get the balance right between supply and demand," current OPEC chief Chakib Khelil said. "If it has to be 1.5 million barrels per day, or two million barrels per day, that's what it will be."

OPEC is acting to immediately stabilize prices in the neighborhood of $70-$90 per barrel, with some hawks such as Venezuela and Iran publicly calling for prices to rebound even more. Just eight years ago OPEC tried to keep prices in the $22-$28 range. As the statements below make clear, they will not allow prices to spend significant time cheaper than they want them to be.

Ecuador's Oil and Mines Minister Derlis Palacios:

'Let's wait for the start of winter, the OPEC meeting and the stabilisation of demand, which should help (prices) recover some,' the minister said. 'It would be ideal if they stabilised over $80.'

Qatar's Oil Minister Abdullah al-Attiyah:

"I personally believe that it (the cut) will be 1 million (bpd) or more ... These are only personal expectations that I cannot confirm,' he said on Al Jazeera television.

Iraq's oil minister:

'In Iraq, we think the fair price is $100. When it was $140, it was too high and could have had negative effects on some economies ... but the fall to below $100 will put pressure on the budgets to countries like Iraq which needs lots of money for reconstruction after years of wars,'

Iran's OPEC Governor:

"The best way to resolve the current crisis in the oil market is cooperation between producers to create balance between demand and supply."

Lee Drolles of the Center for Global Energy Studies explains the bottom line:

"Some countries like Venezuela and Iran need prices above $80 a barrel. The Saudis have a bottom price of about $65 a barrel, but they might go ahead with a cut to keep solidarity within OPEC."

There is nothing we can do supply-wise to lower gas prices. Ending our addiction on all oil, not just foreign oil, is the only legitimate path to energy independence.

Follow Josh Nelson on Twitter: www.twitter.com/josh_nelson

Comments

[KenGirard]

Why does OPEc need to reduce production? All they need to do is say $100 a barrel, and not drop the price for anything. Yes, folks will buy all the oil that everyone else offers at a cheaper rate, but OPEC will still get it's $100 per. No other supplier can up production enough to cover all the demand.

How much oil is not getting bought today?
Is there an extra couple of thousand extra barrels a day just sitting in a oil company's warehouse?

[KillTheMessenger]

"Why does OPEc need to reduce production?"

Because KSA does not want to stress its oil fields too hard. Total extractable oil volume depends on how fast it is extracted. If they can cut production now, they will not only get more now and even more later but they will also be able to produce longer and more in total.

It's a win-win-win-win for them, just as not cutting would be a complete loser proposition.

[JPHR]

Counter-intuitive as it may seem Europe has been heavily taxing oil since the 80'.

Note that the US with some 5% of world population is using 25% of the world's energy supply. Only within the national context citizens can agree that an oligopoly is illegal. No such agreement is in place with respect to nations. So the US is not entitled to oil of other countries.

The US has ignored that at some point in the future we will need an alternative to fossil fuels and by the way simply burning those fuels now is loosing much needed and very valuable base materials for all kinds of synthetic products in the future.

Some advantages:
The high price has forced the economy to adjust to a less energy intensive economy. Over the last two decades all investments have been made with those higher prices in mind.
Alternative sources (initially heavily subsidized) are on the way to become real alternatives (wind).
The economy has become less sensitive to a rise in energy prices.

The US has chosen another path and kept energy prices low. Now it in an already difficult economic environment (albeit by its own making too) it is forced to adjustments some two decades overdue. That's guaranteed to be painful.

[JPHR]

Big oil is perfectly aware of this, but while it does not solve much domestically, more domestic drilling will guarantee even more profit from those domestic wells. Note that the US still structures its leases as a kind of PSA, while nearly every other country taxes away additional profit from rising prices.
Why would a country leave that all additional profit to the company? All over the world Big Oil is reduced to a service company role except in the US?

[TxAggie]

Domestic production will have limited impact on world prices to the extent that domestic production is limited. If domestic prosuction is increased it will have a greater effect on commodity prices but more importantly, the royalties paid to the US Treasury increase with price and volume. Yes oil companies make more profit with higher prices as does the govenrment's share increase. That "assitional profit" increases for the government as well in the form of royaties, job creation, MMS fees etc. If the govenrment wants a piece of the profits perhaps the government should take a piece of the risk . (this was tried a number of years ago with net profit share leases where Uncle Sam would receive a net profits interest when projects were operating in the black- the gov't didn't have the stomach for risk).

[ImagesAndAdjectives]

This is the truth about offshore drilling and the "drill here drill now" mentality. Thank you for posting this.

The other issue is that oil is an international commodity, so getting 200,000 barrels a day doesn't mean it's all for U.S. use. It goes into the international pool of oil. The U.S. has not (yet) nationalized oil, and until it does, any oil discoveries will be sold on the international market and not just to US consumers.

[KillTheMessenger]

Almost no domestic oil gets sold into the international market. We sell refined products derived from oil which we do not need (like heave, sulfur rich fractions and carbon black that is the end product of the cracking and distillation process).