THE DELICATE POLITICS OF OIL DISCOVERY / THE WALL STREET JOURNAL

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SEPTEMBER 17, 2009, 1:33 P.M. ET

The Delicate Politics of Oil Discovery

By MATTHEW CURTIN


Barely a week goes by these days without a major oil company announcing a massive new discovery. Recent hot spots include the Gulf of Mexico, offshore Brazil and West Africa. But beware jumping to conclusions about how much this changes the dynamics of the oil and gas market, for oil bears or peak-oil pundits.

The discoveries do show energy companies are no slouches in finding new ways to detect and develop reserves with the right backdrop. That includes high oil prices as a catalyst, access to the fertile areas, and regimes conducive to exploration and foreign investment. This month alone, BP in the Gulf of Mexico, Petrobras and BG Group offshore Brazil, and Monday ENI and Repsol offshore Nicaragua have found what may amount to nearly 10 billion barrels of oil equivalent. A consortium led by Anadarko have discovered what could be a major new field off the coast of Sierra Leone.

Unfortunately if geological and financial impediments are ultimately surmountable, political constraints are harder to drill through, particularly in countries where the industry is in state ownership. Unlike the bonanzas offshore Texas and Brazil, Mexico's industry remains oddly in decline. But then exploration is in the hands of oil monopoly Pemex, too often bled dry of cash to fund government spending.

Indeed, impressive as the application of new seismic and other technologies are, Wood Mackenzie, the energy consultancy, says the latest discoveries are in line with the underlying exploration trend of the past decade. Indeed, given the incentive of a multiyear rally in oil prices, it's a surprise output from non-OPEC countries hasn't increased. Instead their oil production has hovered a little above 50 million barrels a day.

With the world economy recovering faster than expected and broad energy consumption sure to rise in the years ahead as the industrialization of China and India continues, it's tempting to conclude oil prices must inevitably be squeezed higher. But leaving aside the uncertainty of long-range forecasting in the industry, it's worth remembering some immediate issues. OPEC production cuts leave the cartel producing at roughly 6.5 million barrels a day below full capacity. It might take years of robust global growth to absorb that.

Factor in the impact of new fuel-efficiency standards and the push for biofuels, it could be 2020 before U.S. gasoline consumption, historically the driver of global oil demand, returns to 2008 levels, says Edward Morse at Louis Capital Markets. And there are signs that even China is catching the fuel efficiency bug as it realizes subsidizing energy stymies economic competitiveness. If demand surprises on the downside and the oil majors' innovation helps supply surprise just a little on the upside, the oil market could remain delicately balanced for some time to come.

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