Rossputin.com: Rational Thinking About Our World

Reader Brian C posted the following comment to my recent article about dependence on oil:

"Since so many questions are being raised, I have one. Is there any truth to the discovery by US oil companies of vast oil reserves in international waters off the coast of Brazil and Venezuela? Supposedly they would start producing oil for the US in 5 years."

Here's my response to him...I think it's interesting enough to justify its own blog entry:

Brian,

You have the story mostly right. The oil discovery was off the coast of Brazil. It's estimated at 5-8 billion barrels of light crude (which is more valuable than heavy crude because it's cheaper to refine), representing something like 40% of the total of all previous oil finds in Brazil.

Where you had it wrong is the "US oil companies" part. The field is primarily owned by Brazil's state oil company, Petrobras, with two European minority partners (Galp Energia from Portugal and British Gas).

They'll probably start producing in 3-4 years, with full production coming online 5-10 years after that.

One part of your question which I want to address because it represents a fundamental misunderstanding of commodity markets is the idea of "producing oil for the US". Basically, nobody produces oil for any other particular recipient. They just produce it and sell it at the highest price they can. Obviously countries need to use petroleum products, so countries which produce a lot of oil are likely to use some of that production domestically. But even in that situation, if it were possible to sell their production for more than they could import somebody else's oil they would do that. So, when someone is producing oil, they're not selling it "for the US" or "not for the US". They're just selling it. Even if they didn't want it to go to the US, there's no real way to stop it because whomever they sell to could just turn around and sell it to the US. Indeed, even if they did want it to go to the US, whoever bought it here could turn around and sell it to another country if that were going to be a bigger profit than selling it here!

So, it doesn't matter whether they're going to produce "for the US". All that matters is whether they produce at all. Whatever they produce increases the total worldwide supply and therefore lowers the worldwide price, even if the US never gets a drop from that particular discovery.

Here are a couple things you could read about the news:
http://www.businessweek.com/bwdaily/dnflash/content/nov2007/db20071115_045316.htm?
http://www.petroleumworld.com/Ed07112101.htm

Thanks for reading and writing,
Ross