Every time we hear about a new oil discovery, we hope that it means lower prices in the future. But does it happen, or are these discoveries just making up for the loss of supply from depleted oil wells or oil spills?
The share-swap agreement between British Petroleum (BP, publically traded company) and Rosneft (state-owned Russian company) means that Rosneft will be able to extract large amounts of oil and gas from the Arctic region, using BP's deep-water drilling expertise. Given what happened in the Gulf of Mexico, where a BP deep-water rig blew up and spewed millions of barrels of oil into the ocean, BP will have its work cut out proving that this Arctic venture will be environmentally sound. It will probably prove to be an expensive operation and may be controversial to regulate, given Russia's control of Rosneft.
Long-term this sort of oil exploration will probably only help to slow down crude oil price rises, and consequently the effect on heating oil prices will be limited. Besides, the biggest effect on heating oil prices is seasonal variations in demand - although the long-term trend is upwards and inflation-busting. Another thing to keep in mind is that this new oil field is probably more expensive to exploit than oil fields have been in the past; one reason this field is only being explored now is because it wasn't worth it in the past (when oil was cheaper). Now oil costs more, we are tapping into more difficult sources -- because it's finally cost effective to do so.
Read more about the investment pros and cons: Is BP a safe investment?
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