It also appears that deepwater drilling for oil has, momentarily at least, lost its allure. Several governments have imposed a moratorium (wholly or partially) on deepwater drilling activities. Perhaps unsurprisingly the United States led the way. Opposition to offshore energy exploration and exploitation, especially on the part of environmental and community groups, has by no means been confined to the United States however, with events ranging from a chain-of-hands protest on the Thai island of Koh Samui over drilling activities in the Gulf of Thailand to the occupation of a drilling rig off Greenland by Greenpeace activists. That said, investment in deepwater drilling was already in decline prior to the Deepwater Horizon accident (see below).

So is deepwater drilling firmly off the agenda? Hardly. The present pause in activity is likely to prove to be no more than a brief hiatus. Indeed, there have already been signs of significant 'pushback' against such restrictions from those with an interest in letting the drilling proceed. Perhaps counter-intuitively this has included opposition to a ban on offshore drilling emanating from the southern US states whose coasts on the Gulf of Mexico have been worst impacted by the spill. After all, the oil industry is a big player in the economies of these states and numerous jobs and livelihoods (including political ones) depend upon it. Such arguments were deployed by the UK government when it approved the first deepwater drilling to take place in the North Sea since the Gulf spill on 1 October 2010, in defiance of EU opposition and the protests of environmental groups.

Economic Imperatives over Environmental Concerns
So how much have environmental issues got to do with the apparent lack of interest in deepwater oil? This is a complex point, but in short, very little. The key reason why investment in deepwater projects slowed is the same reason why investment in other expensive, unconventional oil sources such as tar sands slowed, and that is the global financial crisis (GFC). Global upstream oil and gas investment budgets were cut by US$90 billion in 2009 compared with the previous year. In essence, the business case for developing tar sands and deepwater oil went out the window when demand fell with economic activity, causing oil prices to collapse back to around US$35 (from a peak of US$147) per barrel. Other factors do, however, come into the equation. These include geopolitical considerations, the fundamental issue of peaking oil supply whilst demand continues to escalate and the nature of the underlying relationship between the oil price and global economic activity.

If oil prices become sufficiently high so that it is no longer affordable to use in the standard car, then alternative modes of transport must be found. For countries that can afford it, efficient mass transit systems and the use alternative energy carriers (such as electric high speed rail) may dampen the impact of a peak oil scenario. In the developed world, there has been a significant push towards smaller more efficient vehicles, which is attributable, for the most part, to higher oil prices. For countries that cannot afford the additional inter-sectoral reallocation costs of more efficient infrastructure and assets, there are fewer alternatives. In the United States, high oil prices both reduced the demand for large automobiles and eroded the value of existing inefficient vehicles. The same holds true for inefficient manufacturing processes that rely on crude oil derived fuels. This means that high oil prices also threaten capital input contributions to economic growth.

It is also well documented that high oil prices are associated with lower employment rates. High oil prices are functionally similar to trade tariffs on exports, and therefore threaten the comparative advantage of, often, developing countries that produce cheaper goods for the export market. Often these countries rely heavily on manual labour to produce goods that are sent to the developed world. Sourcing materials closer to home imposes a temporary reallocation of assets cost, including the cost of retraining labour forces. In the short to medium term, high oil prices increase unemployment in net importing countries, and therefore have a negative impact on labour inputs to economic growth.

The circumstantial evidence of the capacity for oil price to induce recession is compelling. Of the last five global recessions, four were preceded by a price spike attributable to a single event. Indeed, it has been argued that the transfer of billions of dollars from net importing countries that have characteristically low savings rates to the Organization of Petroleum Exporting Countries' (OPEC) economies - with high savings rates - has caused global recession in the past. The most recent global recession was also preceded by a record oil price spike of US$147 per barrel. While few would doubt that the sub-prime mortgage market in the United States catalyzed the recession, its depth would not have been possible without high oil prices. It should be of concern that the most recent price spike was superimposed on a gradual upward trend that has pushed prices three times higher than a decade ago. A growing body of evidence presented by peak oil theorists suggests that demand and supply fundamentals are playing a greater role in determining oil price, and provides a robust explanation for the stable increases in oil price over the last decade. Previous price spikes have been much more abrupt and may be attributable to a single exogenous event such as terrorism, war, natural disaster, and cartel behaviour.

At the height of the recession, demand for oil fell in parallel with economic activity, causing oil prices to collapse back to around US$35 per barrel. As mentioned above, this had a drastic, negative impact on the business case for the development of unconventional oil and gas resources. Nonetheless, exploration and development of unconventional resources continues. Recent examples of oil exploration in 'frontier' provinces include activities off Greenland, in the Arctic, and in the vicinity of the disputed Falkland Islands. Fundamentally, this is because high oil prices have in the past not resulted in improvements in extraction technology that are sufficient to increase production from existing conventional oil fields. This is borne out by the case of the United States - since US oil production peaked in the early 1970s, no advances in extraction technology or additional discoveries have managed to restore production rates. This is also true for the overwhelming majority of post-peak countries. As oil is a finite resource that is subject to depletion, the only option left is to develop deepwater and tar sand resources provided this can be achieved at a cost threshold that does not induce recession.

A Fragile Balance
The question becomes one of causality - does economic activity drive oil production (through improved technology), or does oil production drive the economy (through the services delivered)? The answer must include both elements of the equation, though we are entering a period where depletion is about to outpace extraction capability. Conventional economics (in its pure form) asserts that as oil prices rise the case for investment in alternative technologies and resources improves, therefore eliminating the issue of peak oil. However, this must only be true up to a point, as conventional economics also ignores the fact that cheap oil drives economic growth through supporting labour, capital and useful work inputs.