Why the Gulf spill isn't lifting oil prices — yet

The environmental disaster in the Gulf of Mexico has not driven up oil prices, but what happens in the future will depend on whether other countries follow the U.S. lead and adopt a moratorium on offshore exploration.

Much depends on whether others adopt U.S. moratorium

The environmental disaster in the Gulf of Mexico has not driven up oil prices, but what happens in the future will depend on whether other countries follow the U.S. lead and adopt a moratorium on offshore exploration.

Oil prices are down eight per cent from their level of about $84 US a barrel when the Deepwater Horizon drilling rig exploded on April 20.

Oil prices are eight per cent lower than they were when the Deepwater Horizon blew up on April 20. ((U.S. Coast Guard/Associated Press))

BP's well was an exploratory project and, despite causing the worst offshore oil spill in U.S. history, it was not a producing well, meaning its loss has no effect on current output. As well, offshore production wasn't expected to be a big contributor to future global output.

"It probably won't have a huge impact. Deepwater drilling accounts for about seven per cent of global output right now," Dina Cover, an economist with TD Bank, told CBC News.

But Cover does expect the spill will have significant effects, both on U.S. goals for energy self-sufficiency and for exploration in the Canadian Arctic.

Offshore drilling in the Gulf of Mexico, though, does account for a significant chunk — roughly 30 per cent — of American oil output.

Offshore was to be key U.S. exploration area

Before the spill, the U.S. federal Energy Information Administration (EIA) viewed the Gulf of Mexico as a key area where the U.S. could increase its output, given 15 per cent of total proven reserves are there.

The EIA predicted offshore oil would account for 35 per cent of American output by 2025. The Gulf spill, of course, has changed that.

"It's going to make it a little bit harder for them to continue exploring in the offshore waters," Cover said.

"That's one of the key areas in the U.S. where production is expected to come from in the future," she said. "It definitely is a significant chunk and could have an impact on their self-sufficiency goals."

Few people doubt that much tougher regulations — and stricter oversight — are on the way, especially if the investigation into the Gulf spill shows, as U.S. congressmen have alleged, that BP put profits ahead of safety in its drilling of the Macondo well.

The Paris-based International Energy Agency (IEA) has estimated that a one- or two-year delay in new deepwater offshore drilling in the U.S. could reduce production by as much as 300,000 barrels per day, about five per cent of what it projected American output to be by 2015.

The Paris-based International Energy Agency predicts a one- or two-year delay in new deepwater offshore drilling in the U.S. could reduce projected American output by as much as five per cent by 2015. ((Nexen))

Cover predicted the spill will have little effect on global supply, given that U.S. offshore production is less than two per cent of global output and with OPEC sitting on between five million and six million barrels per day of spare capacity.

The wildcard, though, is whether other countries invoke a moratorium on the development of new offshore reserves.

A Dow Jones Newswires report Friday quoted International Energy Agency executive director Nobuo Tanaka as saying global output could fall up to 900,000 barrels a day from projected levels for 2015 if that happened.

The report said the Paris-based organization is conducting research on the possible impact of the U.S. moratorium and its implications worldwide.

"If other countries like Angola, Brazil and the North Sea [countries] put on hold new offshore development and there is also one or two years of delay, the impact on global oil output might be 800,000 barrels a day to 900,000 barrels a day by 2015," it quoted Tanaka as saying.

"Given that spare oil production capacity is about six million barrels a day, [a reduction of] roughly one million barrels a day can't be ignored," he said.

Cover predicted the most likely fallout in Canada will be in the area of Arctic offshore drilling, where companies hold nearly $2 billion worth of exploration licenses for the Beaufort Sea.

Given the difficulties BP has had fighting its blowout not far from Houston, which is the world centre for offshore drilling know how, the questions about how to deal with that spill in the remote Arctic are daunting.

"After the Gulf of Mexico fiasco," predicted Cover, "it may be quite difficult to get approval for any projects in the ([Arctic] region.

Oilsands could benefit

Less production from the U.S. offshore could increase the attractiveness of Canada's oilsands to investors, despite the criticism that they are major generators of greenhouse gases.

Cover said that would come true if tighter regulation increases the cost of offshore exploration.

"If the oilsands production does become cheaper [if development costs fall], we could see money flowing from the offshore and into other areas such as the oilsands," she said.

An oil pumpjack in operation. ((Hasan Jamali/Associated Press))

Still, the oil industry has hardly been discouraged by increased costs from tougher regulation in the past

The U.K. reformed its rules for offshore drilling after the explosion and fire on the Piper Alpha production platform in the North Sea in 1988 killed 167 rig workers, coming up with more than 100 new safety procedures and exploration carried on there.

Cover expected new regulations in the aftermath of the Deepwater Horizon may lead to higher production costs and perhaps higher oil prices after 2015, if supplies become scarcer than they are now, but said the benefits to the safety of workers, wildlife and the environment, would be worth it.

"Did costs go up?" she asked.

"Yes, but there is still a lot of investment going into the industry. There is still oil there and people [will still be] willing to drill there under these new regulations."