Exxon Mobil Corp. (NYSE: XOM) has announced two oil discoveries in the US Gulf of Mexico, totaling more than 700 million barrels of oil equivalent. The finds are the company’s first since the end of the moratorium on drilling that followed the explosion of the Macondo well operated by BP plc (NYSE: BP) in April 2010. While 700 million barrels is nothing to sneeze at, it’s also nothing to stop the presses for.
The pre-salt finds offshore of Brazil could total as much as 30 billion barrels. Brazil’s Petroleo Brasileiro (NYSE: PBR), Royal Dutch Shell plc (NYSE: RDS-A), Repsol YPF SA (OTC: REPYF), Hess Corp. (NYSE: HES), and Exxon all have a stake in that massive find. But even that find won’t make a big difference in the price that consumers pay at the pump.
In the first place, Exxon’s new find represents less than 3% of the company’s proved reserves of 24.8 billion barrels of oil equivalent at the end of 2010. The company pumps about 4.5 million barrels of oil equivalent every day, so even if it could get every drop out of the new find, that’s about five months worth of production. Put another way, the new find can supply US consumption for about 35 days. In reality, only about half of the total 700 million barrels will ever get extracted.
The more important point is that finds ultra-deepwater fields is very expensive to produce, and will get more expensive as companies adjust to the new safety regulations imposed following last year’s disaster. As you would expect an executive to say, “This isn’t exactly $50 a barrel oil.”
Consumer expectations of any lowering of gasoline pump prices as a result of finds like this are pure fantasy. Virtually every recent oil discovery of any size has been made either in the deepwater offshore or in the frozen Arctic, and sometimes both. It will never get cheap to develop those finds.
There is no more cheap oil. Blaming OPEC or speculation for higher oil prices merely shifts the discussion off the main point. If consumers want lower oil prices, then they’ll have to use less oil in order to stretch out global reserves, both known and unknown.
Or, as they say, the only cure for high oil prices is high oil prices. Finding more oil, even large amounts of it, will never lower the price because we’ll never be able to find enough of it to keep up with demand.
Every crude discovery in deep water or inhospitable climates drives another nail into the coffin of cheap oil. That’s the message from Exxon’s new find.
Exxon shares are up nearly 2% in the first hour of trading this morning, to $81.56, in a 52-week range of $55.94 to $88.23. The inability of OPEC to agree on increasing production probably has more to do with that rise than does the new discovery. WTI Crude has jumped over $100/barrel again on the report from OPEC.