Oil Company Stops Drilling without Environmentalists Forcing a Halt

An oil company already has market incentives to not drill too much and to preserve resources for the future.

An oil company stopped drilling in the Arctic. Environmentalists rejoiced.

But this shows us something about resource management.

According to The Associated Press, “Shell ceases Alaska Arctic drilling, cites disappointing results from exploratory well.”

Royal Dutch Shell will cease exploration in Arctic waters off Alaska’s coast following disappointing results from an exploratory well backed by billions in investment and years of work.

The announcement was a huge blow to Shell, which was counting on offshore drilling in Alaska to help it drive future revenue. Environmentalists, however, had tried repeatedly to block the project and welcomed the news.

Shell has spent upward of $7 billion on Arctic offshore exploration, including $2.1 billion in 2008 for leases in the Chukchi Sea off Alaska’s northwest coast, where an exploratory well about 80 miles off shore drilled to 6,800 feet but yielded disappointing results. Backed by a 28-vessel flotilla, drillers found indications of oil and gas but not in sufficient quantities to warrant more exploration at the site.

“Shell continues to see important exploration potential in the basin, and the area is likely to ultimately be of strategic importance to Alaska and the U.S.,” Marvin Odum, president of Shell USA, said in The Hague, Netherlands. “However, this is a clearly disappointing exploration outcome for this part of the basin.”

Shell will end exploration off Alaska “for the foreseeable future,” the company said, because of the well results and because of the “challenging and unpredictable federal regulatory environment in offshore Alaska.

Obviously, Shell would have been happy if the cost for drilling in the Arctic had not been so expensive due to regulations and environmentalist lawsuits. But based on other things in the article and also stuff I’ve heard on the radio, I don’t think that is the only reason why drilling is “challenging and unpredictable” for Shell. The company has been trying to open up a well there for years. And for years, the price of a barrel of oil has been much higher.

If the oil had been more plentiful and easier to get out of the ground I’m sure that Shell would have gone ahead with production. But now, after that collapse in fuel prices—thanks to shale oil and also to the potential for Iran to export their oil—trying to squeeze oil out of the well they’ve got does not seem as financially attractive.

So what is Shell going to do? They are going to leave the oil in the ground until it is profitable to remove it. In other words, they are going to wait until the oil is needed more than it is needed now.

What we have here is an example of how the free market naturally rations and preserves resources. When the oil is needed, that will be reflected in an increase in the price that will make up for the expenses of extracting that oil.

Charles Ebinger, senior fellow for the Brookings Institution Energy Security and Climate Initiative, said in an interview that a successful well by Shell would have been “a terribly big deal,” opening an area that U.S. officials say contains 15 billion barrels of oil.

While oil prices have dropped significantly in recent years and nations have pushed for cleaner energy sources, analysts predict that the world between 2030 and 2040 will need another 10 million barrels a day to meet growing demand, especially in developing countries, Ebinger said.

Those predictions may be right or they may be wrong. The government tries and fails to predict the future and make businesses follow their leading. Rather than directing the future of energy resource management, we are better off allowing private businesses to take the risks, reap the rewards, and suffer the losses involved in meeting future needs.