06/01/2010 11:42 am ET Updated May 25, 2011

A Moratorium on Supply Growth

President Obama's recently announced moratorium on deep-water drilling in the Gulf of Mexico is effectively a freeze on growth in US oil production. And short of a huge influx of synthetic oil from tar sands, similar moratoriums around the world will have the same implications for world oil supply.

The well that the Deepwater Horizon rig was drilling wasn't a producing one, but what happened there will nevertheless have a huge impact on future production. Gulf of Mexico deep water was just about the only place in the United States where the oil industry had any realistic chance at increasing its production. Moreover, the Gulf is the location of almost a quarter of the world's deep-water supply.

Whether or not Deepwater Horizon will become for President Obama what Hurricane Katrina was for President Bush remains to be seen. But it's increasingly clear--since oil will continue to gush for the next three months at an independently estimated flow rate of between 25,000 and 50,000 barrels per day--that the catastrophe is destined to be the deep-water drilling industry's Three Mile Island.

One big difference between the nuclear power industry and the oil industry is depletion. In today's oil industry, you have to run faster to stand still--about four million barrels a day faster every year just to offset what we lose to depletion globally. In other words, we need to find some 20 million barrels per day of new oil over the next five years just so that the world can consume the same 86 million barrels a day in 2015 that it does today.

Before the Deepwater Horizon accident, the oil industry was betting heavily on deep-water drilling not only to fill the growing supply gap that depletion hollows out every year, but for actual net increases in global production. Over the last decade, oil production from deep-water drilling has grown by 4.3 million barrels per day, accounting for almost half the increase in world oil supply. Cambridge Energy Research Associates (CERA) recently predicted that the share of world oil production from deep water will double from six to 12 per cent--indeed virtually every positive outlook on global oil supply hinges on large increases in deep-water production. But in exactly whose backyard are those increases going to take place?

Prime Minister Stephen Harper isn't going to be any more eager to allow deep-water drilling in the Canadian Arctic than President Obama will be to allow it in the Gulf of Mexico. And what's the take-away for Brazil's ambitious plans to exploit its deep-water fields after it sees what's washed ashore on the US Gulf Coast during hurricane season this year?

Will any country want to face the environmental and economic costs that America is dealing with? And will any oil company be willing to risk the staggering liabilities that BP shareholders will soon have to pay?

If the answer to these questions is no, get ready for a world of shrinking oil supply.