Drilling Unlikely to Lower Oil Prices, Energy Information Chief Says

March 18, 2011 - 1:42 PM

oil drilling

An oil well in a farm field in Tioga, N.D. Domestic production of oil is rising for the first time in two decades thanks to new drilling techniques that are opening up vast fields of previously out-of-reach oil in the western United States. (AP Photo/James MacPherson, file)

(CNSNews.com) - Richard Newell, administrator of the U.S. Energy Information Administration (EIA), said that while oil prices are likely to stay above average for the remainder of 2011, it is unlikely that an increase in domestic oil production would dramatically affect oil prices in either the short-term or the long-term.

Newell, a political appointee, was tapped to head the EIA by President Barack Obama in mid-2009.

In his testimony before the House Committee on Natural Resources on Thursday, Newell said that because oil is a global commodity dependent on global trends, domestic production would do little to ease prices at the pump in the near future.

“Long term, we would not expect additional volumes of oil that could flow from resources of federal lands due to greater access to have a large impact on oil and gasoline prices,” said Newell.

He also said that increased production in the United States could potentially cause OPEC to lower production, thus negating any impact of increased drilling in the United States.

“Another key issue is how OPEC production would respond to any increase in non-OPEC supply, potentially offsetting any direct price impact of an increase in U.S. production,” Newell told committee members.

“Of course, greater domestic crude oil production, no mater what the cause, be it increased development, higher resource potential in current known fields or wider application of advanced technology would impact local economic activity and net oil imports,” Newell added.

John Felmy, chief economist at the American Petroleum Institute, agreed with Newell that increased domestic production was unlikely to translate into lower energy and gasoline prices but it could depending upon the behavior of OPEC.

“It’s possible, of course,” said Felmy. “And that was our point when everybody started talking about releasing the SPR (Strategic Petroleum Reserve) oil, that OPEC could easily counter act anything you do in that regard.

“In fact, the experience we had back in 2000 was that we released 30 million barrels of oil from the SPR from October to December, and in December OPEC cut output by 33[million barrels]. So clearly they have the ability to do a lot,” he added.

“The question is, however, will they be willing to take a hit on volumes with an expectation of price and that, of course is very difficult to gauge,” said Felmy. “I can’t predict OPEC behavior, but past OPEC behavior said they fought for market share, and it did have a price impact.”

Despite its impact on the price of gasoline, Felmy said there are plenty of other economic benefits to increasing our domestic oil production.

“Even if you forget about the price impact,” he said, “there’s a very good number of reasons why you would produce here. It would generate jobs. It will reduce the trade deficit, and it will improve our economic security and government revenue. So irrespective of the price, there are a lot of very good reasons to do it, and so we continue to emphasize that.”

When CNSNews.com asked if Newell knew how much oil and natural gas was sitting untapped on land and offshore in the United States, Newell declined to answer.

However, when asked if tapping those resources could lead to lower gas and energy prices in the long term, Newell said that it depended on a number of global factors.

“One needs to think about this in a global context,” said Newell. “Currently, the U.S. liquid supply is about 11 percent of global liquid supply of about 88 million barrels per day. So if one thinks about incrementing that over some period of time, you know resource development tends to take at least several years.

“So one needs to put in context what increments or decrements to supply would be in that global context and the kinds of numbers that tend to be related to developments would be on the order of less than a percentage change in this fraction in the global market,” Newell added.

“So, in terms of near-term prices, we think it would be of a magnitude that would tend to be in the range of what we tend to see in terms of typical daily price fluctuations, which on a typical day we tend to see price fluctuations of one to two percent in oil markets,” he said.

Newell also said that 2010 was a high year for production, adding that there had not yet been an impact from declines in drilling due to the moratorium imposed in the Gulf of Mexico following the BP oil spill, but that the moratorium could affect oil production in the future.

“Even if one has developmental drilling going on, there’s about one to three years between drilling and production levels that we’ll see, so there are significant lags,” said Newell.

“We had seen offshore production increases over the last several years due to increased leasing and development offshore. We’ve yet to see a downward impact on offshore production in response to the Macondo well blowout and the subsequent moratorium and regulatory changes that took place,” Newell added.

In his testimony to the House Committee, Newell predicted that because of recent events in the Middle East and North Africa, the price of a gallon of regular gasoline will average $3.70 this summer and $3.56 for the remainder of the year, which is about $.77 higher than last year’s average.

According to the EIA, as of March 14 the national average price for a gallon of regular gas was $3.56 per gallon. However, in some parts of the country, the price for gallon has already risen above $4.00.

The EIA is the non-partisan, statistical and analytical agency within the U.S. Department of Energy.