Oil futures were sent sharply higher this week after a surprise announcement from British Petroleum that the company would be shutting down the Prudhoe Bay oil field, the nation’s largest, due to the discovery of a severely corroded pipeline. The loss of Prudhoe Bay, which accounts for 7% of total U.S. output, will cut world oil production by 400,000 barrels per day and could last as long as three months, due to the extent of the pipeline problem.
September U.S. Light Crude Futures rose $2.22 to $76.98 per barrel on the news, and some estimates projected prices could be pushed as much as $10 per barrel higher than pre-shutdown levels by the loss. This shock to oil markets came despite the shutdown being temporary, oil inventories being high, and the federal government indicating that it would likely begin releasing large amounts of oil from the 700 million barrel Strategic Petroleum Reserve to cover the shortfall.
While the shutdown will certainly put a small dent in consumers’ wallets, it should serve to absolutely crush one of the great lies in the debate over drilling in the Arctic National Wildlife Refuge, or ANWR: that the amount of oil in the ANWR field would have “little impact” on supply. This claim is regurgitated by every opponent of drilling from Greenpeace to Sen. Joe Lieberman, who asked melodramatically during a previous debate over drilling, "Is it worth forever losing a national treasure, one of our last great wild places, for a six month supply of oil 10 years from now?"
Another favorite factoid from drilling opponents is that peak production in ANWR would reduce oil prices by only $0.50 per barrel — an estimate based on production coming into a supply glut and $24 per barrel oil. That’s hardly the scenario we face in the future. But one does not have to argue any longer over projections, models, or a six-month supply of trite analogies to discern what effect ANWR could have on world oil markets. Prudhoe Bay is giving us a real taste right now — but only a 44% taste.
While Prudhoe Bay produces an impressive 400,000 barrels per day, the Energy Information Agency estimates that peak production from ANWR would likely be 900,000 barrels per day — an incredible 222% of Prudhoe Bay. And if removing Prudhoe Bay’s production for just a few months can “shock” oil markets and induce a supply crisis severe enough to merit the mobilization of the Strategic Petroleum Reserve, imagine what adding two Prudhoe Bays to the world supply for several decades could accomplish.
And 900,000 barrels per day peak production is just the most probable projection. The EIA estimates that there is a 5% chance that peak production could be as high as 1,600,000 barrels per day. Yet we are to believe that finding the equivalent of four new Prudhoe Bays would have little impact on supply and price?
The relationship between supply, demand, and price is not at all linear. One need not double the production of oil to halve its price, for example. When demand exceeds supply by even a small percentage, prices can skyrocket as buyers compete for a limiting resource. Likewise, when supply exceeds demand by even a smidgeon, suppliers can find themselves selling into a price freefall as each attempts to sell excess inventory first.
The considerable supply of oil currently sitting unused in the desolate North Slope of Alaska represents a market-shifting change in the ratio of supply and demand. Although it is emotionally appealing to some, America need not “wean” itself from all foreign oil to obtain lower prices (a moot impossibility when dealing with a global market for a fungible commodity, by the way). We simply have to ensure that supply slightly exceeds demand.
For those of you that are still lost in the ether regarding energy markets, that means we need to actually drill for oil when we find it. In ANWR and the offshore areas of the United States, America has enough oil and gas to take control of her energy destiny for the near-term future. And if nuclear power is again committed to in a serious way, we will have that ability for the long-term as well.
If the amount of oil in Prudhoe Bay is significant, as it surely is, then the amount of oil in ANWR is very, very significant indeed — but only if we choose to use it.