I see lots of commentary on President Obama’s decision to open most of East Coast offshore areas, more Gulf of Mexico areas and Alaskan seas to drilling for petroleum. The ones that catch my attention are those stating with authority that these areas will yield little gain for the US’ pool of oil reserves and certainly not enough to change our energy situation. They conclude that we are sacrificing our environment for too little return.

I was doing reports on petroleum at the State Department in the early 1970’s, the middle of the “Oil Crisis” brought on by producers in the Middle East cutting supplies. At the time the producers said they were doing this to conserve a “wasting resource.” You see, most authorities were saying at the time that we were rapidly diminishing our oil resources. (You can read some of these reports on the internet that have been released through the Freedom of Information Act.)

In response to the warnings I did a calculation of our oil consumption. I found that with no new discoveries and consumption of oil continuing to grow at the record rate of the 1960’s, the fastest growth in oil consumption in history, our proven reserves of oil in 1970 would be depleted by the year 2025. I argued that that was too far into the future to project use of an energy supply that had only been our major source of energy for the previous 25 years.

Well the fear factor had already spread too far with the result being the establishment of a cartel of oil producing nations, OPEC, that quickly raised the price of crude oil 10 times its price in the 1960’s. Needless to remind most, this type of market control was what got Rockfeller and his Standard Oil broken up by the USA Government in its initial “trust busting” move.

My predictions on depletion were reinforced in subsequent years by major new oil finds in the North Sea, that inter alia, made the UK energy independent, and the Mexican side of the Gulf of Mexico. The USSR also became the largest producer of crude oil allowing another major producer to enter the market. The USSR also eased the supply situation by becoming the largest exporter of natural gas.

We had plenty of supply but the price did not come down. The world had adapted to pricing crude oil to the cost of production at the margin, in this case, the cost in the North Sea. Enter Brent oil as the benchmark crude oil price.

So what is my point? First, anyone who catagorically dismisses promising new oil exploration areas as being too small to be worthwhile should remember that we will not actually know the extent of the reserves until we begin to drill, the lesson we learned in the North Sea and other new discoveries. Second, he should keep in mind simple economics. Oil is probably the most price “inelastic” commodity, i.e. demand is static and does not respond to price changes. Evidence of this can be found in the traffic choked highways and byways of Europe where gasoline sells for 2 to 4 times its price in the USA. On the other hand, growth in supply can change prices dramatically. Thus any increases in supply would result in large drops in price since demand will not grow proportionally.

So I suggest to those who dismiss drilling in the new offshore areas as sacrificing the environment for small gains in our energy situation that they do their homework more carefully.