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The Rhetoric and Realities of Offshore Drilling

We have heard a lot about offshore drilling for oil and gas recently, and it is not hard to see why. Prices at the pump in North Carolina are among the highest in the nation, and shortage of supply has even closed stations across the state.  As a result, two thirds of North Carolinians support ending the moratorium on offshore drilling in the Atlantic, hoping for lower prices, reliable supplies, new jobs and increased state revenues.

However, the Energy Information Administration has some interesting facts about the prospects for oil and gas off our coast, and it is inconsistent with some of the rhetoric we have been hearing.

Although there are estimated to be 76 billion barrels of oil off the U.S. coastline, most is either off Alaska, where drilling is permitted but very difficult, or in the Gulf of Mexico, which is already being exploited.  Only 3.8 billion barrels are estimated to be off the Atlantic Coast, which is currently subject to a moratorium.  With U.S. oil consumption estimated at roughly 20 million barrels of oil per day, the addition of 3.8 billion barrels to our supply is relatively insignificant.

However, the case is different for natural gas.  Thirty-seven trillion cubic feet of gas are estimated to be available off the Atlantic Coast, but almost half of all offshore gas reserves are now subject to a moratorium.

Leasing and drilling take a long time. If the moratorium was lifted tomorrow, production would likely not begin until 2013.  For the year 2030, this new offshore production is estimated to increase oil production from all offshore sources by 3%, although the share coming from the Atlantic will be very modest.  By 2030 this new offshore production of natural gas is estimated to increase overall production in that year by 18%, with almost half coming from the Atlantic Coast. 

The total contribution of these oil and gas fields over their lifetime will not add much to the offshore total for the U.S., perhaps only 2%.  Overall U.S. output of oil from all sources has been declining for years, and the end of the moratorium will have no measurable impact on that decline. On the other hand, overall U.S. output of natural gas is now at an all time high, and the fields in the Atlantic could help maintain current production levels.

Given these facts, what can be said about the rhetoric and the reality of offshore drilling?

Rhetoric:  Offshore drilling will lower the price of oil and the price of gas at the pump. 
Reality: In the long run, world oil markets determine the price of oil.  World oil production is growing slowly while world demand for oil is growing rapidly, fueled by growth in developing countries like China and India.  As demand exceeds supply, prices will rise.  The production from new sources of offshore oil in the U.S., estimated to be 160,000 barrels a day in 2030, would be negligible in a world oil market of more than 100 million barrels per day, and have no impact on rising prices.

Rhetoric:  Offshore drilling will lower our dependence on foreign oil.
Reality:  The production of an extra 160,000 barrels of oil a day domestically as a result of drilling offshore would only replace 2% of our current imports from overseas, which now run at 14 million barrels per day.
Rhetoric:  Offshore drilling will provide jobs to North Carolina.
Reality:  The development of offshore oil and gas fields will provide jobs, but North Carolinians will probably not get most of them. 

First, the managerial and technical expertise required would be provided by international energy companies, who draw on a global labor pool. 

Second, North Carolina does not have the facilities necessary to construct oil and gas rigs.  These could be developed, but the naval yards in Norfolk/Hampton Roads, Virginia, would be a much more likely location for such work.  Some workers would commute from counties in North Eastern North Carolina to newly created jobs in Virginia. 

Third, there are no oil refineries on North Carolina’s coast to process the production from the new fields.  A new oil refinery would create many jobs that pay significantly more than average wages in that region, and attract businesses in the chemical industry that rely on petroleum products for their inputs.  However, a completely new refinery in this environmentally sensitive area would face very significant political opposition. 

On the other hand, a natural gas terminal, one that processed gas from the offshore wells and also, perhaps, Liquefied Natural Gas (LNG) from overseas, would pose a much less significant environmental threat.  Given the size of the gas fields, and the fact that Compressed Natural Gas (CNG) is now being considered as a substitute for gasoline in vehicles, this could offer North Carolina increased security of supply in transportation fuels.  There is even an under-used natural gas pipeline in place in North Eastern North Carolina.

Rhetoric:  North Carolina’s state government will gain millions of dollars in royalties or taxes.
Reality:  The Baltimore Canyon, an offshore formation that contains oil and gas, is located more than 20 miles from the coast.  Royalty payments in this area are subject to the control of the federal government.  In other parts of the country (for example, the Gulf of Mexico), states have shared in hundreds of millions of dollars of royalty payments.  However, this is an area with much larger, mature fields.  The federal government has often made concessions on royalties in order to encourage exploration, and has a history of weak management.  Furthermore, in the years ahead the Federal government will face very significant financial constraints.  While increased state revenues in the years ahead are a possibility, they should probably not be relied on for our fiscal future.