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The Daily Reckoning

Does the BP spill mean the end of cheap oil?

Offshore drilling was banned for decades after a 1969 spill off the Santa Barbara coast. If the same happens after the BP spill in the Gulf of Mexico, oil prices could shoot through the roof.

By Guest blogger / May 19, 2010

Development Drillers float beside Discoverer Enterprise drill ship in the waters of the Gulf of Mexico at the site of the BP oil spill approximately 42 miles off the coast of Louisiana on May 18. The spill could mean the end of cheap oil in the US for years.

Hans Deryk/Reuters

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“Following the Gulf disaster…it will be a long time before any new permits are issued for drilling for oil in the Gulf…” said Rick Rule, at the Family Office get-together this weekend.

And this from Bloomberg:

Senators from California, Oregon and Washington introduced legislation to ban oil drilling off the West Coast amid mounting concern about the spill in the Gulf of Mexico.

“We believe that offshore oil drilling is simply not worth the risk,” Senator Dianne Feinstein, a Democrat of California, told reporters today in Washington.

The measure would amend the Outer Continental Shelf Lands Act to impose a permanent ban on drilling off the three states.

Offshore drilling was banned for decades after a 1969 spill about five miles off the Santa Barbara coast soaked California beaches in a 35-mile long oil slick. In July 2008, then-President George W. Bush lifted the presidential moratorium. Congress allowed its own drilling ban to expire three months later.

“This oil spill could destroy the future of offshore drilling,” adds our Family Office researcher, Charles Delvalle. “More states will be allowed to decide whether they want drilling offshore or not. And Senators are trying to allow neighboring states to have a ‘veto’ over any one state’s offshore drilling decision.

“So let’s say Florida wanted to put some offshore rigs up close to Georgia. If Georgia doesn’t want that rig up, it can ‘veto’ Florida’s decision.”

Daily Reckoning readers can see where this is going. Even if the oil were available beneath the sea, the oil industry is going to have more and more trouble bringing it to market.

Rick notes that even on dry land, the oil industry is facing disasters. A number of major exporters – Mexico, Iran, Venezuela and Peru – could take themselves out of the export business in the next few years, he says, thanks to their habit of using oil revenues for social/political purposes and failing to invest in additional capacity.

This is occurring as the number of cars – and the demand for energy – is exploding.

Implication: a higher oil price.

“There’s plenty of $200 oil,” said Rick.

Trouble is, there isn’t that much $70 oil.

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