The upcoming December 10th US Gulf of Mexico lease sale is the largest in nearly a decade and is notable for its restored minimum royalty rate of 12.5%. This competitive fiscal term is crucial for attracting the global exploration investment needed to address a looming supply shortfall and bolster US energy security, balance of payments, and consumer energy prices.

The Reality of Persistent Oil Demand

Contrary to pandemic-era predictions of an imminent peak, oil demand continues to grow. The International Energy Agency's Current Policies Scenario, which reflects existing government measures, projects oil demand growth through 2050. Global consumption, currently about 104 million barrels per day, is setting records, as no major economy is on track to meet Paris Agreement targets. Even optimistic forecasts for a demand decline have pushed that event further into the future.

A Decade of Underinvestment and Its Consequences

Multiple factors have led to severe underinvestment in conventional oil exploration for over ten years: the mid-2010s price crash, a shift by US independents to unconventional resources, and mistaken demand assumptions. This is compounded by industry consolidation, which has reduced the number of independent explorers. The result is that discovered oil volumes in 2023-2024 were the lowest since 1946, creating a foundation for a future supply gap. The IEA estimates roughly 25 million barrels per day of new production capacity from yet-to-be-approved projects is needed by 2035.

The Limits of Unconventional Growth and the Gulf's Potential

While US unconventional resources supplied 90% of global oil growth in the past decade, they lack the capacity to do so again. The Gulf of Mexico remains a vital source for future production growth if exploration occurs. Its prospectivity has been enhanced by advanced seismic imaging and high-pressure drilling technology, making deeper accumulations viable. For the US offshore, attracting this investment hinges on contract terms, specifically the royalty rate set in lease sales.

Global Competition for Investment

The decline in oil and gas capital expenditure has prompted over a dozen resource-rich countries—including Algeria, Angola, Nigeria, Indonesia, Malaysia, Thailand, Brazil, and Argentina—to improve their fiscal terms for oil companies. This global competition for finite exploration capital has yielded results, such as ExxonMobil returning to Iraq after terms were improved.

Strategic Imperative for the United States

With hydrocarbons meeting 82% of global primary energy needs and oil comprising about 30%, the world will need more oil for decades. The US is central to both production and consumption, making supply security a national security issue and price an economic one. Reversing the decade of underinvestment must begin now, and the US must compete effectively. Setting the Gulf royalty rate at 12.5% for the upcoming bid round is a key step to attracting the investment required to develop new supply.