US suspension of offshore activities could cause energy supply shortage

The US has suspended offshore oil and gas exploration and production following the oil spill in the Gulf of Mexico. While the decision will please environmentalists, it will threaten the country's recovery from recession given the probability of job losses, higher oil prices and security of supply problems that, in the short term at least, will have to be resolved with imports or renewables.

Following the devastating environmental impact of the massive BP oil spill in the Gulf of Mexico, the US has halted operations related to new offshore oil and gas activity, extended a deep water drilling moratorium for six months and suspended operations at 33 other deep water wells in the gulf.

The decision to suspend offshore exploration and production (E&P) will have a huge impact on US oil production (24% of which is currently procured from Gulf of Mexico deep water wells), decreasing volumes by around 160,000 barrels per day in 2011. The US will likely have to turn to imports to make up the shortfall, which may lead to higher oil prices, especially if the suspension is extended. This will ultimately have a negative impact on the country's economic growth.

Companies operating in the US offshore sector will also be impacted: jobs will be lost, companies such as Chevron, Royal Dutch Shell, Anadarko and Hess will see their bottom lines hit, and equipment manufacturers and suppliers could see losses of around $11 billion a year.

The spill has also increased E&P insurance costs by 15%, as insurers are now taking into account the risk of drilling oil in deep waters along with the threat of a hurricane sinking an offshore platform. In the Gulf of Mexico oil spill, total insurance claims are estimated to be around $1.5 billion to $3.5 billion, although this figure changes on an almost daily basis. While these numbers are clearly speculative at this stage, they are a good indicator of the sheer scale of the disaster's impact.

Whatever the short-term decision, the permanent suspension of offshore operations is not feasible in the long run: rising global demand for oil and gas will not slow down, and so the industry will have to continue to pursue resources to cater for this need. Globally, oil and gas is increasingly being found in deeper and more technically challenging offshore provinces. Global offshore oil production has tripled in the past decade and, despite the US suspension, is expected to double in the next five years.

If the US is to stick with this suspension it will have to find a way of meeting domestic demand. While some of this will have to be met by imports, it might be that the Gulf of Mexico oil spill will cause the world to think again about its dependence on traditional fossil fuels and the possibility of giving a bigger role to renewable sources of energy.

Although there is clearly a need to examine the technical procedures currently in practice and the safety standards applicable to deep water drilling activity, the energy security dilemma currently being faced by the US, and many other developed and developing nations, dictates that oil produced from deep waters is of major importance in meeting energy demand.