By Timothy Gardner, NEW YORK (Reuters) – U.S. domestic oil production has dropped five percent since this year’s peak in February and near-record oil prices are unlikely to inspire drillers to slow the country’s deepening dependence on foreign oil, experts say. “Why on earth would you drill here when we’ve been drilling here for 120 years and when there’s vast untapped regions across the globe?” said Kyle Cooper, analyst at Citigroup Global Markets in Houston.

U.S. pumps pulled 5.43 million barrels per day of oil in early July compared to 5.70 million bpd in early February, according to the federal Energy Information Administration. The United States uses all of its domestic crude production. It relies on imports of crude and oil products for the remainder of the approximately 20 million bpd of oil it burns daily.

As domestic output dropped this summer, crude imports averaged more than 10 million bpd for a record two months, the EIA said this week.

U.S. production often falls in the summer as workers repair Alaskan oil infrastructure during the thaw. But rarely has the summer production droop been so deep.

Last year in early July, for example, domestic output was slightly above February production. By August, production had only slipped about two percent below February output.

A six-week outage of Royal Dutch Shell’s (RD.AS) 150,000 bpd deepwater Mars platform this summer in the U.S. Gulf coast helped to cut output.

But the impact of outages is intensified by a long-term drop in U.S. oil output, said Mir Yousufuddin, who tracks oil production for the EIA in Dallas. U.S. oil output peaked during the Arab oil embargo of 1973 when production was 9.3 million bpd.

U.S. production in 2003 fell 1.5 percent to about 5.7 million bpd, and the trend is on track to fall.


New production from the U.S. Gulf deepwater oilfields next year will help cut the U.S. decline, but a long-term drop in California production, the nation’s fourth largest oil producer, combined with rising U.S. demand, and a fall in domestic drilling since 2001 won’t cut reliance on record imports, experts said.

Seven new field start ups in the U.S. Gulf in the second half of 2004 as well as BP’s (BP.L)’s (BP.L) Holstein and Thunderhorse fields in 2005 could add as much as 450,000 bpd at peak if all goes well.

But that will not stem the decline of production of mature fields in Texas and Oklahoma, and especially California. In the Golden state, output has fallen about from 842,000 bpd in 2000 to an average of 742,000 bpd from October last year to March this year, according to state records.

And U.S. petroleum demand will rise 380,000 bpd this year and another 300,000 barrels next year, the EIA estimates in its latest monthly report.

U.S. President George Bush’s plan to tap the Arctic National Wildlife Reserve, believed to hold as much as 16 billion barrels of crude, has so far been thwarted by environmentalists. Even if ANWR was tapped, production would take about 10 years to begin according to government estimates.

What’s more, record prices for oil futures of over $42 per barrel hit this summer have failed to dramatically boost oil exploration drilling, except in California.

Despite record oil futures, there were 168 rigs searching for oil in the United States last week, up 14 from last year, but down 55 from the same week in 2001, according to the Baker Hughes (NYSE:BHInews) rig count.


“We’ve expected an increase for almost a year now,” said EIA’s Yousufuddin. “The industry for some reason is holding tight. They are investing in repurchasing their own stock, investing somewhere else, not in exploration drilling.”

Virgin oilfields in Africa and Latin America have made major U.S. oil companies explore elsewhere. “When the fields and the production rates are so much higher, when your environmental, regulatory issues and labor costs are so much lower, you can afford pay $3.50 to $4.00 (a barrel) in transportation costs to ship oil from there to here,” said Cooper. He said lifting costs can average as much as $10 a barrel abroad and as much as $20 a barrel in the states.

The impact on increased foreign oil demand on U.S. consumers is debatable.

Some see the lower lifting costs abroad as a bonus. Others see the growing dependence on foreign oil as a potential problem, especially with American drivers’ fondness for big automobiles.

“It’s not good for the consumer to rely on foreign oil,” said Jack Aydin, analyst at Keybanc Capital Markets. “But let’s put it in perspective. Europe has relied on foreign oil all along. It hasn’t hurt them, except they cannot have cars getting 12 miles a gallon.”