The Gulf Oil Spill and Supply Side Ramifications: Get Ready for $4 Gasoline

Shortly after the Deepwater Horizon disaster in the Gulf of Mexico, I wrote the following:

BP’s Oil Rig Disaster May Bring an End to Support for New Offshore Exploration

“I believe the long term implications of this incident will be to exacerbate our slide down the backside of peak oil. Fields take a long time to develop, and fields being developed now may have been producing oil in 5 or 10 years. But I believe this window of opportunity has now closed, and it will be much more difficult to find broad support for expanded drilling.”

I held this view because I believed the disaster would sharply shift the debate on drilling, giving drilling opponents fresh ammunition and pushing even some proponents into the opposition camp. The Energy Information Administration (EIA) recently estimated the impact on 2011 production. The Wall Street Journal reported on this today:

Drilling Is Stalled Even After Ban Is Lifted :

“The slowdown also has long-term implications for U.S. oil production. The Energy Information Administration, the research arm of the Department of Energy, last month predicted that domestic offshore oil production will fall 13% this year from 2010 due to the moratorium and the slow return to drilling; a year ago, the agency predicted offshore production would rise 6% in 2011. The difference: a loss of about 220,000 barrels of oil a day.”

So the projection has gone from an expected increase in offshore oil production to a double-digit loss of production. As I said at the time — and continue to believe — the long term implications of the disaster on supply will be significant. The 220,000 barrel per day loss will be made up by importing more oil, and the loss of that oil from the market will add to the upward pressure on oil prices. There will be some savings from conservation as prices continue to climb, but mostly the shortfall will just result in billions more dollars that will flow out of the U.S.

This isn’t meant to suggest that we need to speed up the permitting process. Maybe we do, but maybe we should continue to take it slow in the wake of the accident. As always, we need to try to understand the long-term risks/consequences of either approach. In any case, in a market abundant with oil, the impact on price would be minimal. Yet I believe we have very little spare global capacity, and therefore any shortfalls like this are going to continue to contribute to volatility in the oil market.

What this means is that that you should get ready for $4/gallon gasoline again by summer.

By. Robert Rapier

Source: R Squared Energy Blog