Should the U.S. Allow Offshore Oil Drilling?

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According to an assessment by the U.S. Department of the Interior’s Minerals Management Service (MMS), the OCS in the Lower 48 currently under leasing moratorium holds a mean estimate of 19 billion barrels of technically recoverable oil.  This has led some to claim that opening the OCS will not significantly improve the energy situation because 19 billion barrels would sustain only about 2 years of current U.S. consumption. But, a more appropriate way to consider the issue is that if the OCS could provide additional production of 1 million barrels per day (b/d) of oil, our Persian Gulf imports could be reduced by up to 40 percent. At 1 million b/d, 19 billion barrels would last about 50 years.

Some opponents of lifting the moratoria correctly point out that there may in fact not be 19 billion barrels of oil. But, this is no justification for not lifting the moratoria. In fact, if more rigorous geologic testing indicates the mean resource estimate to be greatly overstated, then no drilling will occur anyway. The fact is that no assessment could be carried out until the Congress ordered an inventory of the nation’s resources in 2005. More accurate knowledge of the resource in place should be a desirable outcome because it reduces uncertainty about potential future supply. This, in turn, can prove very important in shaping investment behaviors, and better inform policy-makers regarding the full portfolio of options available in formulating energy policy. In general, constraints raise costs, not lower them.

It is likely true that opening the OCS will not have an immediate impact on oil prices because of the time necessary to organize lease sales and to develop supply delivery infrastructure. However, once development progresses, the expected growth in supply would eventually influence market prices. Some opponents point out that the US Energy Information Administration indicated that the impact of opening the OCS would be negligible. However, modeling exercises that do not capture the influence of market expectations – a critical feature of price formation – are not suitable to understanding the full market impact of an increase in available supply options. Moreover, greater supply should dampen price volatility, all else equal, which is another desirable outcome. Opening the OCS, therefore, should be viewed as a relevant part of a larger strategy encompassing a portfolio of options aimed at easing prices over time.

An equally important point, if not more so, is that lifting the current moratorium in the OCS would also provide the benefit of access to almost 80 trillion cubic feet of technically recoverable natural gas. A recent study by the Baker Institute indicates that removing restrictions on resource development in the OCS has substantial implications for future U.S. liquefied natural gas (LNG) import dependence.  This is particularly salient since natural gas is becoming an increasingly important fuel in power generation, and, given concerns about carbon emissions, this trend is likely to accelerate in the next decade or so.  Thus, lifting the current moratorium in the OCS has potentially strong energy security implications as it could impact the transportation sector, industry and power generation.