Why "Drill Baby, Drill!" Is a Stupid Motto

You can hear the chants faintly in the night. "Drill baby, drill!" is the cry coming from oil companies, various political candidates, and uneducated voters alike. Every time someone pays $4 per gallon for gas, the sound gets louder.

As much as some may want me to buy into the notion that the Obama administration is responsible for high gas prices because offshore drilling isn't wide open, I hope we're all smart enough to know there's a lot more to the story. The moratorium after the BP oil spill wasn't good for oil prices, but now that we're over a year past the disaster, I think we can move beyond that to realities of the market.

Capacity problems where it counts most
For drilling to have a major impact on oil and gasoline prices, it would have to start NOW. And there are plenty of rigs available to drill, as long as you want to drill in shallow water.

Take Transocean (NYSE: RIG  ) for example. The company has 26 ultra-deepwater rigs, which operate in water depth between 7,500 and 12,000 feet. All of those 26 rigs are under contract, and none come available before June 2012. Of those, 12 of the rigs are operating in the Gulf of Mexico, showing where the oil is in the Gulf.

Standard jackup rigs, which operate in water up to 400 feet, are sitting idle with 23 of 52 rigs stacked and another four idle. And the restrictions imposed after the BP disaster likely had little impact on those rigs being "stacked" (taking a rig out of service and shutting it down until needed again) because 17 of those rigs were stacked before 2010.

Hercules Offshore (Nasdaq: HERO  ) is even worse shape because it doesn't have deepwater rigs, so it has much lower utilization. Of the company's 54 rigs, 29 are stacked right now. And the problem isn't just a U.S. issue -- the pain is being felt internationally as well. According to management, overall 35 of 84 jackups in the Gulf of Mexico have been stacked, and internationally there are 83 idle jackups, 41 of them "cold stacked" (like stacked, but requiring more time and expense to get it running again), and another 64 under construction. Demand just isn't there in shallow water.

Take a look at five drillers who have deepwater drill rigs and where their stacked rigs are concentrated.

Company

Stacked Rigs

Stacked Rigs With Drilling in 3000' or Deeper

Transocean

36

6

Pride International (NYSE: PDE  )

4

0

Seadrill (NYSE: SDRL  )

2

0

Noble (NYSE: NE  )

12

3

Atwood (NYSE: ATW  )

3

0

Out of the 57 rigs these companies have stacked, only nine are capable of drilling in water deeper than 3,000 feet. So plenty of capacity is available in shallow water, but the deeper the water, the less capacity there is. These are exactly the reasons Transocean and DryShips (NYSE: DRYS  ) are focusing on deeper water with new ships.

Open up the Atlantic?
No drilling leases have been available off the Atlantic coast since the early 1980s. One of the industry's issues with current policy is the postponement of a lease sale planned for 2011 until 2017, although the president has indicated they may come available sooner.

But what could drilling in the Atlantic really do to impact the price of oil? According to the Bureau of Ocean Energy Management, the answer is "not much." In a 2006 study of the outer continental shelf -- or OCS -- just 3.8 billion barrels of oil are estimated to be technically recoverable in the Atlantic region out of the 85.9 billion barrels for the U.S. as a whole. This is how it breaks down:

Region

Mean Estimate of Bbo Recoverable

Percent Recoverable Under 800 Meters

Alaska OCS Region

26.6

100%

Atlantic OCS Region

3.8

60%

Gulf of Mexico OCS Region

44.9

14%

Pacific OCS Region

10.5

69%

Based on this data, I would suggest that pursuing drilling in the Atlantic is all but worthless, while focusing on the Gulf of Mexico and Alaska is the prudent choice. Which is exactly what the president indicated he was doing in asking Interior Secretary Ken Salazar to begin outlining a permitting process for Alaska. Hopefully that's a step in the right direction. But even then progress will not be swift, and the impact would be minimal at best.

The University of Alaska in Anchorage reported that by 2057 the Alaskan OCS might produce 10 billion barrels of oil. That sounds like a lot, but to put the number in perspective that's 596,000 barrels per day (10 billion/46 years/365 days) -- a whopping 0.69% of the 86.6 million barrels of oil the world consumes each day. As oil is a worldwide market, that's how we should judge our production's impact on prices. How much impact would a 0.69% bump in supply have on the price of oil?

Even if we could get all of the recoverable oil out of all four regions, it would only be about 992 days of supply for the world. That barely gets us into 2014 if we started using it today.

Foolish bottom line
So we have enough capacity to drill for oil. but only if it's in shallow water. And even if we could get the oil out of the ground quickly, we would make only a small dent on world supply. At best, expanding drilling will likely only increase world supply around 1%, something OPEC could offset with one meeting.

I'm not at all suggesting that drilling shouldn't be opened up off the U.S. coast -- doing so would definitely help increase domestic production. But we should keep the impact of that drilling in perspective. Opening drilling isn't likely to have much of an effect on oil or gasoline prices any time soon. So we discuss and debate drilling all we want, but I think our attention would be better focused on natural gas and renewable energy -- where we can make a real difference.

If you're interested in seeing what companies would benefit from not only high oil prices but also increased drilling check out our free report 3 Stocks for $100 Oil.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Noble, Hercules Offshore, and Transocean. Motley Fool newsletter services have recommended Atwood Oceanics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (13) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 19, 2011, at 2:50 PM, oilsands wrote:

    As to the chant, Drill, baby, drill,

    it is worth noting that Alaska residents receive a share of the royalties. Some years back it was $6000.00 per person, per year. Don't know what it is currently, but you can see why Sarah Palin is a cheerleader for the chant. to bad the residents of Texas, California, Pennsylvania, Ohio, Indiana, Illinois, Kentucky, New Mexico, Oklahoma, North Dakota and Wyoming and other states don't have the same deal.

    This article give an impression which is unfortunate, namely that the industry is standing around with nothing to do. First, working rigs have INCREASED in the us every month since Obama took office. Second, It was the Bush Administration which was not ready to lease when the moratorium ran out in 2006. How two oilmen in the Pres/VP spots could let this happen is beyond belief. The only possible conclusion is that they did not want to have drilling prosper in the US.

    More to the point, worldwide, there is intense competition for rigs and manpower and specialty equipment. We are not the 800 pound gorilla in this universe. The author does correctly state that even new operations in the OCS will barely affect the price of gasoline. The general public deserves a real education in the time sequences to market and the various factors affecting pricing. Won't happen though, too dangerous to the profit margins of major advertisers and contributors.

  • Report this Comment On May 19, 2011, at 6:57 PM, mrhutcher wrote:

    This is the same old tired baloney we hear every time drilling is recommended to help our oil supply. "I t won't help for 10 years!! But 10 years and 10 more years have gone by, and we're facing the same soaring oil prices and the same jackasses poo-poohing drilling. It's about time we PUSHED drilling EVERYWHERE and stop listening to these morons!!!!

  • Report this Comment On May 19, 2011, at 9:19 PM, buffalonate wrote:

    We produce 5% of the world's oil and consume 20%. The amount of oil we drill is insignificant on the world markets and even if we drastically increased production it would have little effect on gas prices. It would provide a lot of jobs though. I am in favor of drilling everywhere but I am not deluded enough to think we could produce enough to bring down oil prices.

  • Report this Comment On May 19, 2011, at 10:19 PM, jimmy4040 wrote:

    Refineries at this stage would be more useful, but you can't get a permit to build any.

    There is a larger concept here, namely that the whole history of oil production is an attempt to limit production and apportion markets. The producing nations don't want to meet or exceed demand, they try their damndest to fall just below that number.

    The reason we went into Libya may be for humanitiarian reasons, but Europe pushed us into going because Gaddafi declared force majeure and abrogated his contracts on February 22nd. Military action followed from that like night follows day. My back of the enveople calculation is that Gaddafi could get about $18-22 a barrel more at least than that oil was contracted for, if he could have gotten it to the Chinese who wanted it. The Europeans wound up having to pay hundreds of millions more for their oil on the spot market than they had contracted for.

    So as you see, nothing about the price of oil is ever really what it seems, especially supply and demand.

    Climate change is real and the use of fossil fuels is damaging to the environment, but never believe that the price of oil is related to the consumption of oil except over a 5-10 year timeline.

  • Report this Comment On May 19, 2011, at 10:38 PM, buffalonate wrote:

    They are building a new refinery in South Dakota sometime in the next year or two.

  • Report this Comment On May 19, 2011, at 11:50 PM, mracz425 wrote:

    Great Article.

  • Report this Comment On May 20, 2011, at 9:04 AM, Trumpace wrote:

    Drilling should start now I agree with. True that the price today may not show results, but if we do not start to drill big time then the price five years out could be $8 per gallon which would fall into the O'bama "energy would nessarily skyrocket" needs. The facts are clear and the agendas as well and the costs of doing nothing are glaring. With the technology the oil industry has today, there is plenty of oil to be had, recent data has backed that up. Back in the 1970's they predicted we'd run out of oil by 1980, well its 30+ years later and we can see that didn't come about. It is all about agendas and money that prevent oil from being drilled for in the U.S. we will give $2B tax payers dollars to Brazil to drill but far be it from our leader to allow it to happen here.

    The other thing to consider is the high paying jobs that would be created in the U.S. (not to mention tax revenue) if we drilled and by the way no one considers the "Land" drilling that could be happening either. What would the unemployement number be if we created thousands and thousands of jobs by drilling in the U.S. not to mention the cut back in the need to send our money to nations that hate us. Yep, pretty stupid IMHO. Drill, drill, drill equates to Jobs, jobs, jobs. If these politicians would stop worring about being elected by the minority green groups, this country could boom again and the elections would not be close as many more regular working class people who would then have jobs, would vote them back in gladly.

    So drilling for oil is a no brainer IMHO and yes the price today would not change much although it is possible that the futures traders in oil might sell off knowing the price would drop once the product is on line and that could benefit pricing today or in the nearer future. If we do not drill then 5-10 years from now $4 a gallon would be considered a buy as does $2 today because the price could be $8 per gallon like in the EU.

    Just think where we have come in the last 60 years in the price of oil..., from seven gallons for a buck to over $4 today. In 1973 I pumped (full service) gas as a low as 16.9 cents a gallon.

  • Report this Comment On May 20, 2011, at 10:22 AM, jimmy4040 wrote:

    The SD refinery, if it ever gets built, will be the first new one in the US in 35 years.

  • Report this Comment On May 20, 2011, at 11:08 AM, dmawhinney wrote:

    Sounds to me like the writer has a bias toward renewable sources - a reason why he offers such piddling numbers for the offshore Atlantic potential. I have seen numbers quite a lot larger approaching that of Saudi Arabia.

    The truth is no one knows whats offshore of the East Coast. Drilling records are decades old and seismic technology has become something quite different since then. In fact, it's only in the last five years or so that technology has allowed researchers to "see" underneath existing fields to oil potential 10,000 to 15,000 below ground; and that below ground could be in 7000 feet of water.

    Renewables will NEVER be more than a mole on an elephant when it comes to solving our energy needs. Take away the tax and subsidy incentives, we shouldn't be pursuing any commercialization of them at all. Research is fine and when solar panels become economically feasible without subsidies, I'll put them all over my roof here in the Southwest.

  • Report this Comment On May 21, 2011, at 5:41 PM, TominTexas wrote:

    "Renewables will NEVER be more than a mole on an elephant when it comes to solving our energy needs."

    Yeah, pinwheels, sunbeams and unicorns, that's the answer.

    Don't know if it's true or not, but I recently read that Waste Management (WM) generates more energy than all the solar systems in the U.S.

  • Report this Comment On May 24, 2011, at 4:32 PM, Melaschasm wrote:

    Drill Baby Drill is the perfect motto for our times.

    We have a bunch of shallow water rigs sitting idle, and a bunch of readily available shallow water oil off the east coast. Drilling sounds like an obvious idea to me. For those who still don't get it, I will explain. More drilling equals more tax revenue, more jobs, more money from selling leases, and slightly increased supply of oil.

    Atlantic drilling and exploration permits would also result in the discovery of far more oil than is currently estimated. Technology has improved dramatically in the three decades since we last explored for Atlantic Coast oil.

    Drill Baby Drill is not just about the Atlantic. There is oil in Alaska, in tar sands, and various other places around the US that is not available for drilling. Even if drilling will not make us energy independent this year, it will make a big difference of the course of several decades.

    The shortage of specific types of drilling rigs is not an excuse to ban drilling. A serious change in policy that encouraged drilling would result in the production of more rigs capable of drilling for oil.

    That OPEC could increase oil production is a meaningless point. Obama can not order OPEC to increase production, but he can remove the restrictions on US production and let free markets work their magic.

    Obama recently denied a permit in Alaska because they are going to use an old ice breaker which was not fuel efficient enough. Bush had the opportunity to ramp up oil production during his presidency, but mostly ignored the industry while in office. This is not about partisanship, it is about oil prices and the US economy.

    Even though we are unlikely to find one oil field which will meet all of our energy needs for the next one hundred years, we could find 100 oil fields that could average one year of oil each.

    Foolish bottom line:

    DRILL BABY DRILL!!!!

  • Report this Comment On May 25, 2011, at 12:10 PM, lctycoon wrote:

    Forget about drilling bringing down the price of oil. That won't happen - the Fed raising interest rates would do more to bring down the price of oil as would reducing the Federal Deficit (since oil is trading in dollars and both of those things would strengthen the dollar).

    How about doing it for jobs? The unemployment rate in the USA today is somewhere between 9 and 22% depending on who you believe. Offshore drilling - and the oil industry in general - pays much higher than the average job. So... we have lots of people PAYING taxes, spending money, saving money, and stimulating the economy! The extra tax revenue would help with the deficit too.

    It would take a long time to bring all the new fields online so it would not be a quick fix, but it would help. It would also reduce the trade deficit and reduce our reliance on foreigners.

  • Report this Comment On June 16, 2011, at 11:11 AM, bullcarp wrote:

    if you want to drop the price of a barrel of oil $30

    in 20 seconds, all you need to do is raise the

    margin req. to 30%. this would get rid of most

    of the speculators. does any body know why

    the govt. doesnt do this.

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