There is plenty of oil in offshore areas already leased to oil companies, so why don’t the oil companies just go get that oil rather than ask for new leases. The reason is that the current price of oil is not high enough to make it profitable. It is a great mistake to suppose that all new oil comes at the same price.

The price of recovering an additional barrel of oil includes exploring the geology, leasing the area, drilling test wells, drilling production wells, applying technology to help increase the recovery, and shipping it. The early steps require capital investment that has costs of either borrowing or losing income that would have resulted from investing it elsewhere. Chevron invested $2 billion in a new oil field 190 miles off of Louisiana prior to any oil flowing.

New technology makes it possible to recover oil that was previously unobtainable. Offshore oil platforms now can drill into the sea bottom 4000 feet below the surface, not just the in the 400 foot depths near the coast. It costs about fifty times as much. Wells can be drilled not just straight down, but the drill bit can be steered to fan out bore holes parallel to the surface. That enables the collection of more oil from one drill site.

When oil flows slowly, there are techniques to break up the rocks under ground and to increase the pressure so that oil is forced out. There are large companies who make a business of buying seemingly depleted oil fields and restoring them to economic production.

Asking how much it costs to recover new oil is like asking, “How much does a house cost?” It all depends. The geology may indicate there is oil underground, but it might cost $200 a barrel to get it out. Reserves in ANWR are about twice the amount economically recoverable with current technology. The amounts commonly cited in ANWR are generally just the portion believed to be economically recoverable with current technology. The untapped oil in existing offshore leases cited by critics is generally the portion that is not economically recoverable with current technology.

Why do critics like Nancy Pelosi take the economics of recovery into account when evaluating ANWR, but not take it into account when evaluating offshore drilling? I wish some journalist would ask.

With prices soaring, surely much more oil ought to be available, right? It is more complicated than that. There is a time lag in bringing the oil to market. The lag generally varies between one and seven years. Let’s say the current price of oil is $115 per barrel. Is it wise to bet, say, $2 billion, that the price will be $115 seven years from now? In the past few months, the price soared to $145 per barrel and then retreated to below $110. When oil company executives were brought in to testify before the Senate, the said they thought that oil “should be” at around $60 or $70 a barrel. Their opinion counts most, because they determine if a new project is a worthwhile investment.

The price of oil depends upon supply and demand. Oil company executives should be very good at forecasting what supply can be available at what price, but there is no reason to suppose they are experts at forecasting demand. That depends upon the difficult-to-forecast world economy and the impossible-to-forecast whims of politicians, who can add taxes that diminish demand. Put a high tax on oil and while the cost of producing it remains the same, and demand will drop. In the U.S., the threat of a carbon tax substantially discourages production oil and coal-to-conversion.

The government could contract to buy large quantities of newly developed oil from American producers at, say, $120 per barrel, for delivery starting in five years. I’m not sure if this is a good idea or not, but it is the kind of thinking that reflects the nature of the supply and demand nature of oil prices.