The world currently uses 85m barrels of oil a day, and we have to get it from somewhere.
The easiest and cheapest way is to drill for it on land. Most of the world’s oil still comes from oilfields below land, principally in the Middle East. If you run out of land based oil, you can start to drill offshore. Offshore production is a lot more expensive than on land, but worth it if prices are high enough. That’s why offshore drilling in shallow waters began in earnest after the oil price shocks of the early seventies. Offshore drilling in the relatively shallow waters of places like the North Sea is tough enough, but nothing like the challenge of extracting oil form deep waters like the Gulf of Mexico. BP’s Deepwater Horizon rig was designed to extract oil from more than two miles below the sea bed using a rig floating a mile above it. By any standards this was a difficult, dangerous and expensive undertaking. Since the rig failed on 20th April, killing 11 of her crew and sending 3m barrels of oil into the sea, the costs have risen dramatically. BP had agreed to put $20bn into a fund to pay for damages and lost earnings; $100m into a fund to compensate oil rig workers affected by the suspension of normal operations; and may face another $17bn or so in fines.
Whether this accident turns out to be the of 9/11 of energy, as President Obama predicts, is not yet clear, but one thing’s for sure – the price of oil is going to be increasing substantially for the foreseeable future.
Will this mean that it continues to be profitable to extract oil not only from deep water but using other expensive methods like oil shales and tar sands? Or that we start to rein back on oil in favour of cheaper sources of energy? Time will tell.