President Obama's pledge not to open the Atlantic Coast for oil drilling is a little like me promising not to become a brain surgeon. With oil prices languishing in the $30s, and many drillers more concerned with sweet-talking their bankers than seeking new frontiers to conquer, it's an easy commitment to make.
The president isn't alone in this rhetorical regard. Russia and several OPEC members continue to dangle the prospect of a supply freeze to a desperate oil market. Even Iran has supposedly indicated it may join -- just as soon as it has added another million barrels a day of production. In light of which, I can only refer you to my earlier assurance about not operating on people's heads.
Even easy words matter, though. The steady drip of hints and pledges from Russia and some OPEC officials has revived flagging hopes that the oil market has seen the worst of the current slump.
Talking up the market is obviously a cheap strategy. But it is also a dangerous one that could potentially backfire on Russia and OPEC if it doesn't lead to actual changes in supply.
That's because, as I wrote about here, the mere promise that foreign powers may intervene to save the day has enabled struggling U.S. exploration and production companies to sell more shares. This quarter is on track to be the best ever for E&P equity issuance, and three quarters of the money raised so far has come in since talk of the freeze first began to surface in late January. And just this week, Anadarko Petroleum sold $3 billion of junk-rated bonds, including 30-year paper yielding only 6.6 percent.
So the freeze, even if an empty promise, has already helped to thaw frozen capital markets for E&P companies -- not exactly the result intended.
Similarly, the president's reversal on allowing rigs in the Atlantic, while a political no-brainer, may also have unexpected consequences.
The hot debate in the oil market currently centers on how quickly U.S. shale production will collapse beneath the pressure of low prices and then how fast it will recover once those prices start climbing again. Yet, while U.S. shale has been a vitally important element in global oil supply growth, it is worth remembering that it is only a small part of oil supply overall: roughly 4 million barrels a day in a market of 96 million barrels a day.
The vast majority of global oil supply comes from conventional fields, where the time from exploration to production tends to be measured in years rather than the months that can characterize shale fields. Indeed, a big big reason why U.S. oil production has been so resilient over the past year or so is that projects in the Gulf of Mexico sanctioned when oil was in triple digits are finally coming onstream.
So while blocking Atlantic drilling until 2022 at the earliest makes zero difference to how quickly the current glut in the oil market gets cleared, it does mean a potential source of supply for the longer term has been delayed by at least another five years.
Given that oil majors are slashing investment, particularly in larger projects with long lead times such as deepwater prospects, this could tee up big jumps in prices further down the line. Kevin Book of ClearView Energy Partners, a Washington D.C.-based consultancy, sums it up thusly:
Is the South Atlantic decision sowing the seeds of the next spike? No, but it might fertilize the seedlings a little.
The unwelcome flip-side of this for oil bulls, though, is that the president's decision fits a broader policy agenda aimed at reducing dependence on fossil fuels. Yes, rig-free horizons on America's Atlantic beaches might well portend tighter supply next decade. Equally, though, more aggressive fuel-economy standards and support for vehicles running on batteries may take away from the demand side. You don't have to be a brain surgeon to work that out.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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