The Obama administration lost its court bid to maintain a six-month moratorium on offshore deepwater drilling which a federal judge ordered lifted last month.
The Fifth Circuit Court of Appeals denied the government's emergency request to stay that judge's order pending appeal.
The motion was denied because the government failed to show "a likelihood of irreparable injury if the stay is not granted," the appeals panel judges wrote in a 2-1 ruling.
The government also "made no showing that there is any likelihood that drilling activities will be resumed pending appeal."
Interior Secretary Ken Salazar has said he will soon issue a new order to block deepwater drilling regardless of how the court ruled and oil companies have not resumed drilling due to the legal uncertainties.
The court noted that the Salazar "has the right to apply for emergency relief if he can show that drilling activity by deepwater rigs has commenced or is about to commence."
It also ordered that the appeal be expedited so the case can be argued on its merits during the week of August 30.
The moratorium was imposed after the deadly April 20 explosion on a BP-leased drilling rig sparked the worst environmental disaster in US history.
President Barack Obama acknowledged the moratorium would cause economic harm, but said it was necessary to give investigators adequate time to understand what caused the accident and create new safety regulations.
Oil companies and Louisiana politicians railed against the moratorium, saying it would cause further economic devastation and that rigs and drilling plans should simply be inspected on a case-by-case basis.
Louisiana Governor Bobby Jindal hailed the court's decision Thursday but expressed concern that the uncertainty has created a "de facto moratorium" which could cost the state 20,000 jobs.
"We absolutely want drilling to be done safely and do not want another spill or one more drop of oil on our coast or in our water, but thousands of Louisianians should not have to lose their jobs because the federal government can't adequately do its job of ensuring drilling is done safely," Jindal said in a statement.
"The federal government has an entire agency dedicated to monitoring safe drilling. It shouldn't take them six months or longer for a new national commission to ensure safety measures are in place and their laws and regulations are being followed."
Judge Martin Feldman ruled in favor of 32 oil firms on June 23, saying he was persuaded that the moratorium was "arbitrary and capricious" and "simply cannot justify the immeasurable effect on the plaintiffs, the local economy, the Gulf region and the critical present-day aspect of the availability of domestic energy in this country."
A lawyer for the Interior Department told the appeals court Thursday that the moratorium was "necessary to make sure we're not faced with a second oil spill while we're still struggling to contain and clean up the spill from the Deepwater Horizon incident."
"I think it's beyond question that there's a threat of serious harm to the marine or coastal environment," attorney Michael Gray argued.
Lawyers representing the oil companies argued that the government is overreaching and that the moratorium has already caused irreparable economic harm.
"The problem with the moratorium is it's a one size fits all mechanism: the industry leader is treated the same way as the industry laggard," said John Cooney, an attorney representing Hornbeck Offshore Services.
"They are all frozen into limbo for an extended period of time. There is no way any one operator can come into compliance with the safety measures that are put out by the government and then resume operations."