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Drilling Fever May Be Contagious

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For the last 27 years 80% of the countries outer continental shelf has been off limits to oil exploration. The drilling moratorium went into effect in 1981 to protect our shorelines from possible destruction from oil spills. With gasoline nearing $4.10 per gallon that may all be about to change.

President Bush is going to ask Congress on Wednesday to lift the ban on exploration and let states decide where to allow drilling. "The president believes Congress shouldn't waste any more time, " White House press secretary Dana Perino told the Associated Press. "He will explicitly call on Congress to pass legislation lifting the Congressional ban on safe, environmentally friendly offshore oil drilling."

Congress has its own plan and a continuation of the ban through 2009 was scheduled to be heard on Wednesday by the House Appropriations Committee. Congressional democrats along with some GOP lawmakers from coastal states have opposed lifting the ban for many years. Scenes of the Alaskan oil spill from a ruptured Exxon tanker still make it on the TV news whenever the words offshore oil are mentioned around coastal states.

On Monday GOP presidential candidate John McCain made lifting the ban a key part of his energy plan. McCain said states should be able to decide themselves and participate in the royalty revenue. Candidate Barack Obama opposes lifting the ban and says allowing exploration now would not impact gasoline prices for at least five years. He is right about that and it is probably even farther out than that. However, any relief consumers can get from what is likely to be $10 gasoline in 2015 would really be welcomed. With peak oil expected in 2010 the decline curve will be falling sharply by 2015 and there will be gasoline rationing either by law or by price.

There are 547 million acres of federal coastal water that are off-limits and they are believed to hold nearly 18 billion barrels of recoverable oil and 77 trillion cubic feet of natural gas. The country uses 7.6 billion barrels of oil per year and 21 trillion feet of gas.

President Bush is also going to reiterate his call to open up the Alaskan Natural Wildlife Refuge (ANWR). McCain is still against opening that area to exploration even though it could hold enough oil to produce another million barrels per day for the next 15 years.

Crude traded in a fairly narrow range on Tuesday and closed right at $134. Tuesday was expiration day for July crude options and most expected much more volatility than we received. Friday is futures expiration and you can bet there will be volatility after the inventory report on Wednesday. That report is expected to show another decline in crude inventories but a build in gasoline and distillates.

The Saudi oil conference is scheduled for this weekend and odds are very good there will be some new initiatives offered and possibly some more production. It should be a negative force for prices unless we just get the same old "plenty of oil in the markets" mantra from the attendees. Traders will probably not want to go into the weekend long with the possibility of some earth shaking news over the weekend.

Jim Brown

OptionInvestor.com  

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