Logic says that when oil prices are high, oil exploration occurs at a rapid pace, with both small wildcatters and Big Oil motivated to find new supply as fast as possible. But when oil prices are low, some exploration still needs to happen if the industry is going to survive. It takes years to take an oil well from the exploration stage to production stage, and new supply will always be needed eventually, as oil fields age and their productivity slows.

So how much exploration are we seeing? Less than you might expect, given the prices we saw last summer.

Oil Exploration For Dummies

Before the first drop of oil comes out of a well, even before a drill bit touches the ground, thousands of man hours have gone into a project that has at best a 1 in 3 chance of resulting in actually finding any oil, and only a 1 in 6 chance of finding something that could be considered commercial.

The process starts with geologists conducting surface surveys. From there, geophysical surveys are done (think seismograph machines and explosive shock waves for underground mapping) to pinpoint prospective areas for drilling. Those two sentences are big line-items on the budgets of Big Oil, and it's no accident that fundamentally all of the world's nonacademic geologists work in the oil & gas business.

Once likely areas are identified, drilling teams are called out and the real fun begins. Most wells that are drilled come up dry – not a drop of hydrocarbon to be found. But just because well A is a dry hole, doesn't mean that well B a mile away will be, so a number of test wells are drilled before a target area is declared a bust. If oil is found, the oil well is either capped (to be completed later) or upgraded to a fully functional well, and the team moves on.

Because drilling activity is the only tangible way to measure exploration activities (beyond press releases and TV commercials), the most commonly used way to measure what's actually happening is to look at weekly drill statistics. Here's a handy chart from our friends at the U.S. Energy Information Administration (EIA).

It puts into graphic relief the statistics that the American Petroleum Institute released last week – which aren't encouraging. According to the API, 11,071 wells were drilled in the U.S. during 1Q 09. That seems like a large number, but it is down 22% from the same quarter last year, and down 35% from last quarter (4Q 08). That number includes oil and natural gas wells and all the dry holes that were drilled during oil & gas exploration. Hazem Arafa, director of the statistics department at API, said in the press release:

Apparently, some of those choices include reducing exploration. Mr. Arafa goes on to note:

If you look at a chart of all the active oil rigs around the world, not just the U.S., you see the same kind of drop-off.

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