After trading at a record high of $147 a barrel Friday, the price of oil saw its largest one-day drop since the 2003 beginning of the Iraq war on Tuesday, falling $6.44 a barrel. Wednesday, it fell another $3.71, to $135.03, and at one point was trading as low as $132.
So what happened? As is usually the case with markets, a variety of factors caused this dramatic drop. According to the Associated Press, the Energy Information Administration announced that U.S. crude-oil supplies rose by 3 million barrels; beleaguered banks have been selling off valuable energy contracts to pay for other debts; and there's even some speculation that computer programs used by Wall Street may create a "cascading effect" once prices start to drop.
But bizarrely, the AP didn't mention that on Monday - again, the day of the single biggest one-day drop in oil prices in five years - President Bush removed the executive order imposing a moratorium on offshore drilling in the United States.
To think that this dramatic and unexpected move by the Bush administration didn't have a significant effect on oil prices is folly. Even Democrats admit that relatively small margins in oil production could have a huge impact on prices.
"If they [Saudi Arabia] produced half a million barrels more oil a day the price would come down a very significant amount and, at the same time, it would stop the speculation that keeps driving up the price of oil," Sen. Charles Schumer (D., N.Y.) said on the Senate floor Wednesday.
But if half a million barrels a day is all that's needed to get the price of oil down, why, pray tell, are we at the mercy of the Saudis?
Last December, at the behest (and expense) of the American Petroleum Institute and Shell oil, I flew down to the Gulf Coast to visit an offshore oil platform. They helicoptered me 165 miles out into the gulf and I stepped onto Brutus, a tension-linked platform anchored to the seafloor 3,000 feet below. It would be an understatement to say I was in awe. Until you're actually standing on one you can't begin to appreciate the sheer size and complexity of such a thing.
The platform is the size of a few football fields jammed together, and the top of the derrick was easily a few hundred feet off the water. Dozens of people lived on board, and everything - from the computer systems to the actual drilling rig - was state of the art. Brutus produced over 100,000 barrels of oil a day - down from over 300,000 at its peak capacity.
That sounds impressive. But here's what truly floored me: Shell decided Brutus's location in the gulf would be profitable for drilling in April 1999. The company then built the massive oil platform, transported it to the right location in the gulf, anchored the floating leviathan onto the seafloor 3,000 feet below, drilled 17,000 feet below that, and began producing oil in July 2001. It took only two years to get Brutus online.
Of course, it helps that the oil companies have plenty of money to throw at the problem. Constructing oil platforms can cost in the billions of dollars. A few new oil platforms equivalent to Brutus off-shore in the U.S. could easily account for the half a million barrels Senator Schumer claims are driving prices up.
Of course, it's not as simple as saying that, if we allow more offshore drilling, the oil companies will have America's energy problems solved in a mere two years. It takes time to discover oil, for one thing. But they're getting much better at finding it. The technology for oil prospecting has improved dramatically. At Shell's headquarters in New Orleans, I visited their conference room where geologists, engineers, and executives gather to make decisions about where to drill. Suffice to say, it involves looking at scarily accurate maps and computer-generated images of cross sections of the earth's crust on a 10-foot-high screen the width of the room. And it's all in 3-D.
But due to restrictions on drilling, much of America's coastline has never been fully explored, let alone with the latest technologies. Just a few months ago, an oil find was made off the coast of Brazil that might contain 33 billion barrels of oil. Now imagine what a similar find off the coast of America would do for oil prices.
Again, there's no guarantee that oil will be up and pumping in just a few years. But given the price of oil, and the fact that oil companies have an obscene amount of cash sitting in the bank to throw at prospecting and construction of new facilities, oil companies are highly motivated. There's an excellent chance they'll start producing oil much faster than naysaying politicians would have you believe.
It's also worth noting that existing oil production in America is declining, particularly in the Gulf Coast. The long-term path to energy independence can't focus exclusively on offshore drilling at the expense of other forms of energy and new technologies.
California governor Arnold Schwarzenegger recently said that the idea that more offshore drilling would bring down gas prices amounted to "blowing smoke." The cigar enthusiast might want to reconsider that statement-as should Obama, who also opposes more drilling. It's a losing political issue. With gas $4 a gallon, a June Gallup survey found that 57 percent of Americans support drilling off-shore and in wilderness areas.
Saying offshore drilling won't bring down gas prices is demonstrably wrong. The price of gas dropped significantly upon Bush's word that more domestic offshore drilling was one small step closer to becoming a reality. How much more will it drop if we actually start drilling and producing oil?
By Mark Hemingway
Reprinted with permission from National Review Online