Financials Are Out. Let’s Go Drill For Oil Instead…
The Smart Profits Report #558
by Martin Denholm, Managing Editor, Smart Profits Report
You know what?
I’m done with the financial sector for now. For the past 48 hours or so, everyone (except perhaps folks in parts of deepest, darkest Peru) seems to have pontificated ad nauseum about the woes within the sector.
It’s a lazy television producer’s dream. You can’t turn on a news or business channel without hearing the “Latest On Lehman,” as the tube revels in yet another panic-inducing story that can run endlessly.
Sure, people want to know the details - after all, this is one of the biggest financial meltdowns in history - but just how much is enough? And how much sense can you get from the television anyway?
Stock markets around the world are tumbling, following the bankruptcy of Lehman Brothers (NYSE: LEH), just six months after Bear Stearns folded. The recent collapse of two of America’s other major companies - Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) in the housing sector - has added to the worry that Uncle Sam is having an increasingly tough time writing checks.
Not even Bank of America’s (NYSE: BAC) purchase of Merrill Lynch (NYSE: MER) has alleviated fears much, and the next card to fall could be American International Group (NYSE: AIG), whose shares plummeted 35% today on bankruptcy fears and a cut to its credit rating. In addition, Washington Mutual (NYSE: WM) just reported that it’s added $4.5 billion in loan loss provisions for the current quarter. Shares are now at an 18-year low - down almost 100% from a year ago. And Moody’s just reduced the company’s bonds to “junk” status. But sliding somewhat under the radar today is another important issue…
Can We Drill For Crude Oil Or Not?
While the financial world frets, lawmakers in Congress are mulling over a vote on a wide-ranging new energy package - one that contains a controversial measure.
With a moratorium on offshore drilling set to expire on September 30, Democrats have proposed lifting it - a move that could pave the way for offshore crude oil drilling on the U.S. coastline.
“Democrats?” I hear you say. Yes, in a U-turn from their original opposition to the idea, Democrats now suggest repealing the ban on offshore drilling, in place since 1981, as long as it’s part of a wider energy plan.
Having initially stated that offshore drilling wouldn’t have enough of a positive impact on U.S. gasoline prices, the Dems’ new proposal would give coastal states the option of drilling between 50 and 100 miles off their coastline. Any areas more than 100 miles from the coast would be totally open to drilling.
The vote comes at a good time, too…
Preserve The Environment, Or Pay $4 For Gas?
While crude oil prices have declined dramatically from the record high of $147.27 a barrel on July 11 (the current price is around $91), consumers still aren’t seeing much relief at the gas pump. Not yet anyway.
Yes, average prices have slipped back under the $4 a gallon level, but the devastating aftermath of Hurricane Ike last weekend has crippled many refineries in the Gulf of Mexico and pushed the price back up.
According to AAA, the national average is $3.84 - up almost 5% from last week - as the massive hurricane swept through the region and forced the closure of 14 refineries in Texas and Louisiana, or 20% of U.S. refining capacity. That took 3.7 million barrels of production offline - and both companies and experts in the region say it could be up to two weeks before normal operations resume.
That could push gas prices back to the $3.90 a gallon level - and public sentiment towards offshore drilling over the long-term has shifted in favor of exploration, in order to break America’s dependence on foreign oil resources, alleviate some of the pressure at the pump, and provide a safety net from attacks to oil supplies in the Middle East and Africa.
Florida is one such state in favor…
Florida To Get Its Drills Out?
Florida’s main tourist attractions are well-documented: Theme parks.
But the state is also home to other attractions, such as a wide array of wildlife. For as long as the offshore drilling ban has remained in effect, residents have argued that drilling would pose a threat to the state’s lucrative coastline attractions.
But with gas prices having hit $4 a gallon, times are a changin’. And in a state that has now become the focal point of election campaigns, it’s a crucial issue. That’s where John McCain could pick up some support, since 6 in 10 Floridians support his pro-offshore drilling stance (a stance he made crystal clear in his speech at the recent Republican Convention, declaring, “We’ll drill new wells offshore and we’ll drill them now”), according to a Mason-Dixon Polling and Research survey.
Many agree with Florida’s Lieutenant Governor, Jeff Kottkamp (a Republican), who says he and his fellow leaders in the state can drill offshore, while also preserving its natural beauty, thanks to newer, safer technology.
Quoted in the International Herald Tribune (IHT), executive director of the Florida Petroleum Council, David Mica, says natural gas could hold more promise than crude oil. That’s because existing wells that were restricted because of the offshore drilling ban could be explored “in less than two years in an environmentally friendly sensitive way,” due to modern technological advances.
Aside from the environmental issues, there is also a deeper reason for wanting to drill: National security. With foreign oil an increasingly unstable resource, due to Middle East tensions and Russia’s recently renewed aggression, the need for alternative energy sources is unfortunately heightened, even if it means slightly comprising the environment.
You can see why: Almost two-thirds of America’s 21 million barrels of oil usage per day is imported from the Gulf, Africa, and Latin America.
But is offshore drilling the “cure all” for America’s oil needs?
Massive Drilling For Crude Oil Could Have Little Impact
Nevertheless, the U.S. still gobbles up one-quarter of the world’s oil production, yet only possesses 3% of the world’s oil reserves, so drilling might not be enough. In addition, it may not have the quick and positive impact on gas prices that many expect.
While many politicians are obviously keen to pander to voters’ wishes at this time of year, some Republicans believe the Democrat plan is a crafty way of promoting offshore drilling, but one that doesn’t actually boost domestic production very much.
Quoted in Reuters, Republican Roy Blunt of Missouri is one such dissenter, saying it “removes the financial incentive for coastal states to team up with the federal government to break our dependence on foreign oil and bring prices down at the pump.”
Others say that some states will be reluctant to participate if there is no revenue sharing plan, while only allowing firms to drill 50 miles from the shore means they can’t take advantage of oil located in the outer-continental shelf.
In addition, the IHT notes that government analysis has shown that a widespread offshore drilling program “would result in a price reduction of perhaps two-tenths of one cent 18 years after drilling begins.”
This issue is a longer-term concern - but one well worth watching in the runup to Election Day on November 4.
Best regards,
Martin Denholm
Today’s Smart Profits Notes:
- Royal Dutch Shell Plc (NYSE: RDS) is enduring a tough time at the hands of Nigerian militants from the Movement for the Emancipation of the Niger Delta (MEND). At 10:10 PM on Monday, the group decided to step up their drive for recognition when they destroyed a portion of the Bonny Light crude system pipeline with explosives. They have officially declared an “oil war” and claim that they will continue targeting installations in the region.
- In the U.S., Exxon Mobil Corp. (NYSE: XOM) will contribute $5 million to the areas ravaged by Hurricane Ike. While Exxon does have interests of its own in the area, including a giant refinery in Baytown, along with other facilities up and down the Gulf Coast, its donation will go to communities by way of the American Red Cross, United Way, Salvation Army and a state relief fund.
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6 Responses to “Financials Are Out. Let’s Go Drill For Oil Instead…”
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Letting American voters decide complex issues has become a serious problem. It is obvious offshore drilling can not reduce crude oil import dependency, or lower gas prices at the pump. The majority of Americans adults are incapable of understanding that, so better to form a congress of all US fifth graders making B’s or better and do as they find.
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It is insulting for the quote by IHT that government analysis has shown that widespread offshore drilling program “would result in a reduction of perhaps two-tenths of one cent 18 years after drilling begins” Anyone or any organization making such an announcement should be fired or abolished. As a petroleum marketer for 50 years, I can tell you that just an announcement would have a dramatic effect on this nation. Our nation has suffered enough by bad judgement by our government. It is time to fire the energy experts that are bankrupting this country, and start drilling without all of the arcane restrictions that are wanted by bureacats. It is time to move ahead for jobs now and self owned oil for the future.
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You point out interesting facts and statistics. However, I am often amused when I read articles about the oil & gas industry. A lot of people write about drilling here and drilling there…It does not happen overnight, 1st you need to do seismic exploration to find out if there is any geological formation worth drilling. Exploration likely has been done in many if not most areas of the US coast, so lets say somebody knows exactly where to drill, it still can take up to a decade to bring a new oil field into production in an area that has no infrastructure. Presently, at best, in several other parts of the world, some newly dicovered oil field in deep water have been brought into production in approximately 7 years…that was amazingly quick, at least …that is what I was told.
regards
Ben Couturier P.Eng
presently Offshore Nigeria
PS. In case you did not know, Canada is the #1 exporter of petoleum to the US ( …unless that changed last month)
[Reply]
Martin, there are a couple items in your article that could be expanded on. One is that the government analysis is wrong about the price of gas only going down 2 tenths of a per cent. In the short term the price of a barrel of oil will steadily drop because once the drilling starts the speculators won’t want to be holding high priced options in the futures market. Remember the futures market is looking at the future price of oil and with drilling going on and more supply about to hit the market they won’t be bidding the price up. Evidence of this is already happening when George W. Bush first mentioned the possibility of lifting the executive order on the drilling ban prices started to fall, then when he actually lifted the executive order the price of oil started falling a little faster.
The second item is that you are exactly right when you stated that only allowing firms to drill no closer than 50 miles from shore would not produce much oil because most of the oil is on the continental shelf. I don’t know if this was done by the Dems as a whole but I do know it was crafted this way on purpose by one very powerful Democrat who has much to gain by not seeing the price of oil decline. That Democrat is Nancy Pelosi!! She has quite a bit of money invested in T. Boone Pickens’ wind farm project. The price of oil has to be high for wind power to be a viable alternative. With the price of oil at $50 or $60 a barrel who needs wind. She has put her own self interests ahead of the American people and the American economy. People used to go to jail for that.
Expanding on T. Boone’s wind project is the fact that his wind project is a cover for him cornering the water market in Texas. Don’t believe me, look up
http://www.dcexaminer.com/opinion/columns/TimothyCarney/T_Boone_Pickens_wants_your_water.html Ken Stintzi
[Reply]
Fed Up With Financials? Let’s Go for Sustainable Energy instead!
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Intriguing. You make a superb thought.
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