Thursday, June 19, 2008

ANWR: To drill or not to drill

I wrote this as a comment on Econobrowser's piece on drilling in ANWR, which I have decided to publish as a blog post given its length.

Drilling ANWR now will do little to change anything. Why not leverage it for the future? It's a pot of gold which is only going to get richer as world oil supply decreases.

The Middle East holds the cards and there is little incentive for the Saudi's and Co. to add supply to the market when restricting that supply only increases revenue. Only 'indirect' threats to soverignity from disgruntled (and more powerful) consumers might force their hand. But as events in Iraq have shown this threat is largely empty and only emboldens Middle Eastern suppliers to be more restrictive in the quantity of oil made available to the world. Opening ANWR now isn't going to alter demand for Middle Eastern oil.

From an environmental perspective, delaying drilling of ANWR will allow time for the development of more environmentally tolerant drilling practices. Drillers should be partnering with environmental groups to develop low impact and more efficient drilling technology. Further drilling is inevitable, but drillers who garner support from environmental groups will be better leveraged to win government contracts. More importantly, delayed drilling strengthens the U.S. hand as a future supplier (rather than a consumer) of world oil.

Attitudes need to change.

[1] Alternative sources of energy supply need to be developed; the cost of developing such energies becoming economically viable as oil prices increase. Whether ANWR is drilled or not doesn't remove the political need to advance oil alternatives.

[2] Driving practices will need to change. Not just a shift to more fuel efficient vehicles, but perhaps the rejuvenation of town centers versus strip-malls; smaller cars bring other issues - not least where does all the shopping go! Will this mean big-ticket items will be sold online and delivered to the consumer's door rather than individuals driving to Circuit City brick-and-mortar style stores to pick up their LCD TVs?

[3] Pushing R&D in fuel efficiency opens markets to China and India who face the same problems as US consumers do (chief rivals for oil demand)

[4] More importantly, increased fuel efficiency lengthens the lifetime of available ANWR resources. Why not wait until oil is at $250 or $1000 a barrel (get there it will given it's in ever declining supply - the question is when) before drilling in ANWR? ANWR oil isn't going anywhere soon, why rush to drill it?

Dr. Declan Fallon, Senior Market Technician, the free stock alerts, market alerts and stock charts website