Oil Exploration

| Tue Dec. 16, 2008 12:08 PM EST

OIL EXPLORATION....Dan Drezner is puzzled by news that that the oil majors are cutting exploration projects:

So, let me see if I have this right:

  1. If oil prices are sky-high, the energy sector explains that it will be slow to develop new fields, because exploration requires massive fixed investments and no one knows what the price of energy will be 5-10 years from now;

  2. If oil prices are low, the energy sector explains that it is unprofitable to develop new fields because… energy prices are low.

Seriously, am I missing something here? Given lag times and the natural propensity to consume more of something when prices are low, doesn't it make sense to "drill, baby, drill" when the price of energy is low?

High oil prices do spur extra exploration, but not by as much as you'd expect. And while uncertainty about future oil prices is certainly part of the problem, I doubt it's a major one: generally speaking, everyone knows which direction oil prices are going in the long term, and it's the opposite of "down."

No, the underlying issue here is that there really aren't that many great places left to explore. Last week, for example, Lesley Stahl of 60 Minutes did a breathless segment on Saudi Arabian oil exploration that would have done credit to a nine-year-old. She went out to Shaybah, a drilling project that's been three decades in the making, and spent ten minutes gushing over the almost impossible odds the Saudis overcame to get the project up and running. 135 degrees in the shade! Hundreds of miles from nowhere! One hundred million cubic feet of sand! 400 miles of pipeline! Oil that didn't want to flow! Storage tanks with roofs that move!

But she never asked the one question she should have: if Saudi Arabia really has as much easily extractable oil as they say they do, why are they building projects like Shaybah? Why not just sink a few holes into the easy stuff instead?

Almost certain answer: because there isn't any easy stuff left. It's either Shaybah or nothing. And that's pretty much the story in the rest of the world too. There just aren't any easy sources of oil left. It's almost all in desolate wildernesses, deep underwater, in polar regions, or locked up in tar sands. And just to make it worse, projects to extract this stuff are risky too. At least half will come up dry after tens of billions of dollars worth of test drilling.

This is why oil companies are so eager to open up the American coast to drilling. There's not really very much oil there in the big scheme of things, but at least it's relatively easy to get to. In the rest of the world, the easy pickings are gone, and the appetite for sinking vast sums to get what's left just isn't always there. Like it or not, we're running out of oil. Spending money on alternatives is looking like a better and better bet to everyone, including even the oil companies.