So no more drilling. We might as well take our medicine now.

Chris,

I think you might be mixing up trading and refining economics with production economics, and failing to account for how disaggregated these companies’ value chains have become.  Most of the money oil companies make comes from finding oil and getting it out of the ground.  That's true whether the oil is here in North America or on another continent.   Their profit margin is a function of the contract terms and actual production costs and is subject to a variety of "above-ground" risks--and that's if you can even get access, which increasingly the international majors can't.  I wouldn't assume that US oil in an area currently off-limits to drilling will automatically yield a lower profit margin than oil from some overseas project.  If you listen carefully to what the oil companies are saying, they think there is plenty of oil that would be economical to produce at $70/bbl, but they can't access enough of it, either here or internationally.

In addition, the days when the majors ran their refineries mainly on their own oil ended long ago.  Most of them produce a lot less than they refine, and most production is sold to third parties, because it's the wrong grade or in the wrong place for their current needs.  So they are big buyers, on both a gross and net basis, here and abroad.  As to the profit margin on imported oil, for a trader it is pretty thin, unless they take a big risk on the price, and they don't need a cargo of physical oil to do that.  For a refiner, it's a function of the margin from turning that particular grade of oil into products, at the prices prevailing when they are sold.  Refining, whether on domestic or foreign crude, was a very low return business (i.e. below the cost of capital) for most of the 1980s, 1990s, and the first few years of this decade.  After a period of outstanding margins from about 2003-7, it's back in the doldrums. 

So after sorting through all of that, the question I think you're asking is, if oil companies were given more opportunities to explore for oil in the US, would they drill them?  The answer is yes, subject to finding the oil and being able to produce it economically with current technology at current prices.  (That's the main criterion for claiming oil resources as "proved reserves.")  When you consider that the main source of company valuation is proved reserves, followed closely by expected future production, and if they can increase both of those in a country where the risk of being expropriated or taxed into unprofitability seems low, they will pay up big at every lease round.  I believe that has been the case for those areas that have been opened up in the last few years. 

Chris,

Sorry if I answered the wrong question. Oil trades in a global market, and the price Americans pay is not set by the cost of producing oil here--nor for that matter by the cost of producing it in the Middle East, since production there is essentially set by fiat and not by the market.  However, I don’t agree that "there is so little it would barely put a dent in the global supply." The price of oil is set by the last few million barrels per day (MBD) and by the difference between the desired inventory and the actual inventory in the key markets.  Adding an extra 1-2 MBD in the US, particularly if it was mostly light sweet crude, would alter the balance between OPEC and non-OPEC production, and possibly force some OPEC oil back into "spare capacity", the erosion of which over the last three years has been one of the principal factors driving oil prices to the stratosphere.

Thus more US oil would reduce prices, not because it's much cheaper to produce--it probably wouldn't be--or by flooding the market--it couldn't--but by changing the dynamic in that last 5-10% of global oil supply/demand that sets the price for all the rest.