Comprehensive Energy Price Model Including Deepwater Drilling Risk

Abstract

Relying solely on traditional drilling technology to estimate the world’s proven Oil Reserves denies the likelihood that billions of barrels of unfound oil lay just outside the industry’s technological reach. With substantial financial and legal assistance and government support to develop newer technologies like Deep-Water Drilling (DWD), the major oil companies and the US White House are confident that new fields can be brought into production that should increase supplies and stabilize or lower energy prices. Each new find, they estimate, will help increase the world’s proven oil reserves allowing investors and consumers to feel more optimistic about providing for their future energy needs. It is also hoped that this new technology will lead to safer, more economic and environmentally appealing exploration and production methods (Belhaj, et al)1. Pertinent questions arise as to what impact BP’s tragic oil spill may have on the future of Deep-Water Drilling and on the future of energy prices? Does industry have the technology to successfully and economically exploit fields using DWD? What role should governments play in regulating dangerous, environmentally unsound drilling practices? Should regulations be allowed to impede progress? Identifying DWD as having a major influence on cost and being a critical parameter in any energy equation, the authors answer these questions and present two models that pessimistically and realistically describe the future role of DWD in places like China, India and Brazil over the next 50 years – places with growing populations and economies, but little government oversight. Conclusions are reached with a discussion about the need for DWD in the current economic slowdown in advanced economies that have witnessed decreased oil demand and why traditional models affecting energy prices have been unsuccessful in predicting the current high energy prices.