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Page added on August 17, 2010

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Business Insider: Living with oil demand – and offshore drilling

Production

Potential future costs will make the costly production process even costlier and oil pricier

By G PANICKER

THE worst oil spill in US history would have set oil prices afire if it had happened two years ago. The market then, fretting over long-term scarcity of oil, was red-hot. Now, US crude prices are still about the same as they were at the start of the year. It says something about the current mood in the market.

Certainly, the effect of the oil spill in the Gulf of Mexico will be felt in coming years. The International Energy Agency (IEA) has just doubled its forecast for the loss of production to as much as 100,000 barrels per day (bpd) in 2011 and 60,000 bpd this year. It assumes production could be delayed by six to 12 months.

In an earlier report, IEA had estimated a drilling delay of a year or two could rob 300,000 bpd of the Gulf’s production by 2015 and as much as 900,000 bpd if similar delay occurs globally.

Such a loss is still a drop in the bucket for a world that is consuming 87 million barrels of oil per day. Further, there is large spare capacity in Saudi Arabia, unlike the pre-recession period.

Yet, few will dare bet oil price would remain depressed for long. Potential future costs associated with meeting safety regulations, clean-up, compensation, and inspection and insurance will make the costly process even costlier. And demand will start rising with the economy.

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