Oil: New Drilling Wouldn't Cut Prices

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But a 2007 analysis by the agency concluded that opening up drilling in the moratorium area "would not have a significant impact on domestic crude oil and natural gas production or prices before 2030."

Congress banned most offshore drilling in 1981, and former President George H.W. Bush issued an executive order banning drilling in the wake of the 1989 Exxon Valdez oil spill in Alaska.

Stalling Production?

Critics of the oil and gas industry say that oil and gas companies are stalling energy production (BusinessWeek.com, 3/20/08) in some areas until they can better profit from it. "The oil and gas industry has millions of acres of leases that they're doing nothing with," says Erich Pica, an analyst at Friends of the Earth, an environmental group. "Even if we were to open up every piece of land in the country to drilling, these companies wouldn't necessarily produce more. They're in the business to make money, not to lower prices for consumers."

Representatives Rahm Emanuel (D-Ill.), Maurice Hinchey (D-N.Y.), Edward Markey (D-Mass.), and Nick Rahall (D-W. Va.) on June 12 announced plans to introduce legislation that would compel oil companies to use the 68 million on- and offshore acres that are currently being leased by large oil companies. The representatives said that oil companies are producing on only 20% of the acres they hold offshore and on less than 30% of the acres they hold onshore. "Big Oil seems more concerned with pumping up prices than pumping more oil," Markey says.

Oil industry representatives, who have been lobbying for increased access, dispute claims they are holding back supply. Rayola Dougher, economic adviser for the American Petroleum Institute, an industry trade group, explains that only a small number of leases explored prove suitable for production. "There's a lack of understanding about how exploration works," says Dougher. "Companies get a number of leases to explore, and production comes from a small share of them. In today's dollars, no one is holding back [from producing]. That's not a reasonable assertion."

Volatile Market

The other reason more drilling access won't cut prices is that oil prices are no longer determined strictly by supply and demand. In the past several years, more investors have entered into the commodities market to hedge against inflation and to diversify investments. Many analysts say these inflows can have more of an impact on oil prices than actual supply increases or reductions in demand (BusinessWeek, 5/29/08). For example, in the past seven months, Brazil's national oil company, Petróleo Brasileiro (PBR), has announced vast new deep-shore discoveries estimated at more than 33 billion barrels. The announcement had no effect on oil prices, which have surged 33% so far this year.

"The oil market is on steroids," says Fadel Gheit, senior energy analyst at Oppenheimer Holdings (OPY). "[Oil] is a financial game more than a physical one. Even if we lift the ban tomorrow, the best we can do is cool off some of the unprecedented euphoria in the market."

Herbst is a reporter for BusinessWeek.com in New York.