This Marketplace story from Wednesday does a really good job of explaining the fundamental economics of new oil field discovery. The context for the story is BP’s discovery of a new oil field in the Gulf of Mexico, one of the largest discoveries in the past two decades. Part of the challenge, though, is that the field is 250 miles out from shore, and six miles down from the bottom. Six miles. That’s a very, very long way to drill, right at the upper edge of feasible drilling depths. This FT article provides a good summary of the discovery and the likely consequences, including a good table of other recent discoveries. BP’s stock price has risen substantially as a result of this discovery.
High oil prices induce exploration such as the activity leading to this discovery. Oil field discoveries shift the supply curve out, leading to higher output and lower prices. But the technical challenge of drilling six miles through the ocean floor means that this oil will take quite some time to get to market, perhaps a decade. Plus, as the Marketplace story indicates, although it is a big discovery it is still not that big relative to global consumption levels, so the outward shift will be slow and small relative to global consumption.
For those of you teaching principles/intro this fall, this is a good example to use to illustrate supply shifts.