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.

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:

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.