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More Drilling Won’t Lower Gas Prices

By Climate Guest Contributor on March 1, 2012 at 10:01 am

"More Drilling Won’t Lower Gas Prices"

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Soaring Domestic Production Has Failed to Ease Pain at the Pump

by Michael Conathan

In an introductory economics class, the first thing the teacher sketches out on the blackboard is a strikingly simplistic graph: two curves making a swooping “X” between the two axes—the economic model of supply and demand. The basic underlying principle is simple: The point at which the supply curve and the demand curve meet will determine the price of the commodity. Increasing supply when demand remains constant will cause prices to fall.

This fundamental concept is widely understood by anyone who has sat through those Econ 101 lectures, and anyone who’s ever noticed a parking lot near a major sports venue jack up its prices on game day can easily relate. The concept is also the driving force behind the 2012 conservative reincarnation of Michael Steele and Sarah Palin’s favorite 2008 campaign slogan: “drill, baby, drill.”

If the solution were so simple, then the problem of rising gasoline prices wouldn’t exist—we’re already drilling like crazy in the United States. And yet prices have continued to spike. As my colleague Daniel J. Weiss explains, the reasons for the recent price increase are myriad and include political instability in the Persian Gulf, the influence of financial speculators, and increasing worldwide demand as economies recover.

Yet many conservatives are dusting off their old bumper stickers and touting more drilling as the sole solution to high prices at the pump. One Republican presidential contender, former Speaker of the House Newt Gingrich, is on the campaign trail promising that if elected he’ll get the price of gasoline back to a nationwide average of $2.50 per gallon. Yet even in a 29-minute infomercial-style speech, he couldn’t find the time to address any of the reasons why more drilling will not lead to lower prices.

Gingrich simply trumpets the misguided talking points of building the Keystone XL pipeline, tapping shale oil in the upper Midwest, and of course opening more areas to offshore drilling. He then leaves it to his audience to make the assumption that supply-side economics will work its voodoo magic, and presto-change-o, we’ll all be able to drive Hummers and have enough cash left over to put a latte in every cupholder.

By contrast, President Barack Obama delivered an address on energy last Thursday in which he made the less politically expedient but actually realistic proclamation that “there is no silver bullet” that will solve our energy problem. He further suggested anyone who pitches the idea that drilling alone will lower gas prices “doesn’t know what they’re talking about or just isn’t telling you the truth.”

If increasing oil drilling lowered gas prices, we’d know it already. When President Obama took office in 2009, there were fewer than 400 drilling rigs operating in the United States, a number that dwindled to fewer than 200 by April 2009. Since then, even as his administration conducted a wholesale review of drilling regulations in the aftermath of the worst offshore oil spill in the nation’s history—the BP Deepwater Horizon oil catastrophe in the Gulf of Mexico—the number of oil rigs operating in the United States has quadrupled. But that massive influx of supply has done nothing to reduce the price we pay to top up our tanks.

As fundamental as the law of supply and demand might be to macroeconomic theory, the on-the-ground reality is that more drilling will not lower gas prices. Here’s why:

  • It hasn’t worked yet. There are currently more oil rigs operating on U.S. lands and waters than in the rest of the world combined, production is at an eight-year high, and the most recent “Short-Term Energy Outlook” from the Energy Information Administration projects production to continue growing at least through 2013 based on current activity. By the end of President Obama’s recently issued five-year drilling plan, fully 75 percent of our undiscovered, technically recoverable offshore reserves will be open to drilling. All that additional activity hasn’t stemmed the recent gas price spike.
  • If oil companies wanted to increase production, they could. In March 2011 the Department of the Interior released a report revealing two-thirds of oil-and-gas companies’ offshore leases and more than half of their onshore leases are not being produced.
  • Pumping oil takes time. Opening new offshore areas will take seven years to produce any new oil, and the Arctic National Wildlife Refuge will take 10 years to produce a single drop of oil. Even if more production would lower prices, it wouldn’t happen tomorrow. And the Energy Information Administration finds that even if we wave the green flag for our entire exclusive economic zone, it will do nothing more than reduce the cost of gasoline by two cents, and not until 2030.
  • You can’t put crude oil in your tank. Ultimately, gasoline supply is constrained not by oil production but by refining capacity. More than half of the nation’s refineries are controlled by five companies, and last spring, as gas prices surged close to $4 per gallon, the Los Angeles Times reported domestic refineries were “operating at about 81 percent of their production capacity,” and that exports of refined products such as gasoline were increasing because foreign buyers were “willing to pay a premium.” Take one look at gas prices in Europe and you’ll understand why.
  • Supply is global too. As U.S. production increased, other oil-producing countries actually reduced their output to ensure the price didn’t fluctuate. Remember, there are two ways to make money—increase volume, or increase price. Countries such as Saudi Arabia, whose reserves are reportedly on the decline, have every motive to ration their golden geese’s eggs.

There’s no doubt high gas prices are bad for economic recovery and growth. So if your freshman year economics professor was right about the whole supply-and-demand thing, when the increased supply of one particular thing doesn’t lower prices, then we should look to diversify our source of that thing while also reducing demand for it. This is a large part of President Obama’s answer to high gas prices.

Under the Obama administration the United States has put in place new fuel economy standards that will require cars sold in this country to average 55 miles per gallon by 2025. That helps answer the demand side of the equation. The administration is also incentivizing the development of renewable sources of energy that will reduce our dependence on fossil fuels. Diversifying sources of energy will result in greater supply and drive energy prices down. Similarly, we are investing in alternative, domestically produced liquid fuels that may prove capable of supplementing or even replacing traditional gasoline to reduce prices at the pump specifically.

More domestic oil and gas drilling will turn our public lands and oceans into pincushions, pave the way for the next BP Deepwater Horizon disaster, line Big Oil’s pockets with escalating profits, and increase the 25 percent share of planet-stifling greenhouse gas emissions that come from domestic fossil-fuel production.

Albert Einstein, among others, is credited with observing that the definition of insanity is “continuing to do the same thing over and over, and then expecting different results.” Perhaps Einstein wasn’t an economics professor, but he was still a pretty bright guy.

Michael Conathan is the Director of Ocean Policy at Center for American Progress. This piece was originally published at the Center for American Progress website.

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21 Responses to More Drilling Won’t Lower Gas Prices

  1. Dennis says:

    Excellent post. Add this to the mantra of cutting taxes and government is bad, econ 101 is now part of the so-called “liberal bias” that Republicans instinctively shout when confronted with inconvenient facts. 30 years ago a standard econmics textbook was viewed as conservative. When I talk to them, I simply no longer know what Republicans believe about basic economics.

  2. Leif says:

    What the GOP fail to understand is that energy is energy. Whether it comes from the ground or from the sun and its siblings. Home grown energy is money into the local economy not Swiss bank accounts.

  3. Sasparilla says:

    Excellent article. The number of oil rigs in operation in the US is actually at its highest point since the 1980′s (87 I believe).

    One other point to make with regards to gasoline prices: gasoline prices are connected to the world market (it can always be exported if it fetches more money someplace else) and whatever price it fetches on the world market greatly determines the US gasoline price – this is why the US Midwest whose oil prices have been very low due to the tar oil from Canada have not been seeing really low gasoline prices (cause the gasoline can always go somewhere else and fetch the world price).

    There’s been some talk recently that the light crude that is coming out of the shale wells (as it continues to increase in quantity and is expected to do so in the years to come) will distort the WTI price further in the coming years (partly because the light crude itself is not legal to export – US crude is restricted on which sources can export or not) – however gasoline prices are expected to stay up close to world prices.

    As a reference the US prohibits exports of crude oil with the exception of (1) crude oil derived from fields under the State waters of Alaska’s Cook Inlet; (2) Alaskan North Slope crude oil; (3) certain domestically produced crude oil destined for Canada; (4) shipments to U.S. territories; and (5) California crude oil to Pacific Rim countries. (see explanatory notes here: http://www.eia.gov/dnav/pet/TblDefs/pet_move_exp_tbldef2.asp)

  4. clays says:

    “It hasn’t worked yet.”

    What do you think prices would be without this high level of production? If increased production is keeping prices form going even higher (as Obama has said) why would even more production not bring down prices more?

    “If oil companies wanted to increase production, they could.”

    Federal permits are being issued at the lowest pace in years. No one knows what Obama is going to do, no one is going to put millions into development of federal lands when they don’t know what the govt next move is. Which is why production on federal lands in way down and production on private lands in way up.

    “Pumping oil takes time”

    True, but I’d say its a bit quicker than waiting for algae research to provide us with comparable alternatives.

    Really, this claim is ridiculous! Pumping oil takes time so lets just sit around and wait for totally new technology to be developed and proliferated. Really how does that make ANY sense at all?

    “You can’t put crude oil in your tank”

    Exports are increase because we are using less (which is a good thing.) Want more refining capacity? Remove some of the red tape. Unclog some of the bottlenecks (keystone) so refineries in the south don’t have to pay a premium on their raw materials.

    “Supply is global too”

    Benchmarks are just that, a benchmark. Every barrel of oil in the world doesn’t sell for the same price. Canadian tar sands oil sold at about a 25$ discount to WTI for 2011.

    “There’s no doubt high gas prices are bad for economic recovery and growth.”

    Hay, an honest statement wow. So, energy secretary Steven Chu, are you and Obama doing ANYTHING to lower gas prices?

    No, the overall goal is to decrease our dependency on oil, to build and strengthen our economy,” Chu replied. “We think that if you consider all these energy policies, including energy efficiency, we think that we can go a long way to becoming less dependent on oil and [diversifying] our supply and we’ll help the American economy and the American consumers.”
    http://politi.co/wTbPVc

    So, all you people hurt by short term energy price increases, you loose your job because your company is scaling back because of increased fuel costs… too bad so sad we’ll send you an unemployment check and food stamps instead.

    • Leif says:

      We do not have to wait for new technologies clays, they are here and crying for a chance to show their stuff. You and yours stop development and increase costs every step of the way. Why carry water for the rich to sell back to you when it is raining all around. Turn the umbrella over and drink to your hearts content.

      • clays says:

        If alternatives were available today there would be all kinds of rich people pouring money into them trying to get richer.

        Wind and solar are increasing… but that makes electricity not fuel for your car.

    • Brooks Bridges says:

      “Reinventing Fire” from the Rocky Mountain Institue shows many ways exist TODAY to make us far more energy independent. In fact, that’s what is most frustrating – we don’t need new technologies to make huge improvements. Please read the book to become more informed.

      Example: Empire State Building was just retrofitted to be more energy efficient. Result, 36% reduction in energy and payback time was like 3 or 4 years.

  5. Ken says:

    This totally ignores global supply and global demand. Current US production, as illustrated in the article, is still a small amount.

    The US produces 10.7% of the world’s oil and consumes 25.9% of the world’s oil. The increase in production above represents less than 1% of the total world production. The net economic effect is minimal.

    Until we produce enough more (or reduce our consumption sufficiently) to affect global supply/demand, there will be no price impact. The conclusion of the article that drilling in the US will not impact oil prices is myopic and probably incorrect.

    It is true that speculators who are driven more by anticipation of future prices than anything else impact the current price unpredictably.

    Political unrest feeds the speculator component because if the market loses a 10% chunk of supply, demand will sharply increase the cost. The demand is increasing dramatically in China, India, and South America.

    A better conclusion for the article would be that US production, unless hugely increased will be inadequate to stem the rise in oil prices and without the increased production in the US, the price of oil would be higher still.

  6. Bob Wyman says:

    There is, in fact, a “silver bullet” that can lower gasoline prices. That is: Competition.
    Today, petroleum has a “monopoly” on liquid transportation fuels. We need to break that monopoly by passing the Open Fuel Standard Act (HR1687, S1603) to require US auto manufacturers to sell flex-fuel vehicles that can run on any mix of gasoline, ethanol or methanol. This would cost less than $100 per car and would create an instant market for alternative liquid fuels. Once gasoline has real competition, we’d see price reductions. Flex-fuel cars work for Brazil, China and others… Let the market work!

  7. Dick Smith says:

    I agree with Dr. James Hansen (and many others). We need a carbon tax. We want the price of gas to go up if we’re ever going to get consumers to switch to low-carbon or no-carbon vehicles fast enough to avoid the worst effects of global warming.

    But, as the recent debate over $4 gas shows all too clearly, rising gas prices are probably one of the few issues that could cost Obama the election.

    So, I’m looking for articles or explanations that, unlike this column, start from the premise that higher gas prices are “NOT a problem” for the average consumer because he can make the transition to a high-mileage electric or hybrid without taking an financial bath?

    If we can’t give the politicians a good story to tell their constituents about why we NEED high gas prices–and how it’s not really going to clobber the average Jo and Joe–even a revenue-neutral fee-and-dividend carbon tax ain’t goin’ nowhere.

    Suggestions?

  8. BillD says:

    The main point is that oil is an international market and US production is only small part of that market. If I remeber correctly, US oil reserves are only about 10% of the world total. Even if we drilled more oil than we need, it would not have much effect on US prices, since oil or gasoline would be exported to satisfy world demand.

    Natural gas is different, since it is not easily exported.

    We just bought a turbo diesel car for my wife. The new car gets 42 miles per gallon and the van it replaced got about 24 mph. That part of a good trend.

  9. Even California, with the highest prices in the 48 contiguous US states, ends up exporting some of it’s gasoline, and the refineries tell us it is only be cause we reduced consumption in CA. Domestically, most of it goes to Oregon, which has lower gasoline prices at the pump that CA. Internationally, it goes to Mexico, Canada and Ecuador.

    Video here: http://abclocal.go.com/kgo/story?section=news/business&id=8564377

    Politics makes liars of them all.

  10. M Tucker says:

    The Republicans in congress and the candidates on the stump will not stop demanding more drilling and they will continue to lie to the American public by telling them it will reduce the pump price. What they really really want is to have Arctic sea drilling and drilling on all public lands that hold the promise of oil, even in the National Parks. That is the goal despite the fact it will have absolutely no impact on the price of oil. It is an end in itself. Big Oil wants it and the Republican Party will work to satisfy them. The big goal is to break into ANWR. Since it has been protected Big Oil has been stumbling all over itself to get in. Like telling a child he cannot have something the child becomes preoccupied with having it. Check out anwr.org. The address seems like it might be a site devoted to the preservation of ANWR…that could not be further from the truth and it is thick with lies. The terror of Nigeria, Shell, is prominently represented there.

  11. with the doves says:

    The supply and demand that matter are global, not within the US. Global supply of crude is not really growing much, while demand is, which pushes price up.

    The increase in US crude is not that significant in the world market – maybe 1 percent of it.

  12. Etend says:

    It is amazing how Gas prices went down during the 2008 campaign race ….. And now it goes back up when a Democratic president is trying to get re-elected… I can only guess who is in control of Big Oil and gas prices? Someone is trying to use wealth and power to confuse the 99%

  13. jyyh says:

    One can always move to Venezuela or Iran. Or China for that matter. Dated data:
    http://www1.eere.energy.gov/vehiclesandfuels/images/facts/fotw569.jpg

  14. Dave Thomas says:

    Of course not. More drilling will raise gas prices in the same way that global warming makes it colder.

    Did this author write the lines in the old folk song Oh Susanna? “It rained so hard the day I left the weather it was dry, the sun so hot I froze to death…..”

    Now we can add the line, “Having more gasoline will make gasoline more expensive.”

    This article will not appear in an updated version of Thomas Paine’s “Common Sense.”

  15. Ray Kondrasuk says:

    The U.S has 40% of the world’s proven oil reserves; Saudia Arabia, just 3%.

    It’s all right there in the World Book Encyclopedia “P” volume (for ‘petroleum’) my mom bought me to help me with my eighth grade homework.

    In 1958.

  16. kevin says:

    “with the dove” has it right — it is a GLOBAL market (supply AND demand). Even if we produced 90% of our own oil, price would still track closely w/global price, which would NOT be significantly impacted by our increased supply. Big growth in developing markets with occasional risk of supply disruptions ANYWHERE cause the global price to increase and occasionally spike. The only way to dampen the economic hit we take is to “hedge” via technologies that make the price swings less painful. That means moving to more efficient or alternative energy carriers.

    That can’t happen w/out govt program as such techs require either a subsidy to get through initial cost disadvantage, or for the conventional fuel to become (very slowly so as to avoid economic setback) more costly.

    Those who demand low gasoline prices are demanding we remain locked into the status quo of vulnerability to oil prices that whipsaw the economy and are the true “job killing machine.”

  17. Jelly Jam says:

    So true…I wish these lying Republicans would get off the Keystone pipeline and take their heads out of their butts. The President is the right (not perfect) path.

    - Exploring and investing in/subsidizing new energy sources
    - Pushing for more fuel efficient/hybrid vehicles
    - Promoting environmentally-friendly mass transit, biking, and walking. (The same way we invested in an interstate highway is the same way we need to double down on hi-speed, interstate and intrastate rail.)

    President Obama has also increased domestic supply, and while I don’t entirely agree with increased drilling & fracking, I understand his logic. However, all this drilling will be futile if we don’t seriously start investing in a new energy source whether it’s solar, wind, biofuel, hydro, etc. Whatever. We’re just going to push our environment over the edge if we just drill. Investing heavily in the above three is not just environmentally sound, but it’s also economically stimulating over the long run. It’ll provide jobs now and retain our economic status in the future. Right now we’re losing to like Germany and China. That’s not the American Way.

  18. Common Sense says:

    time for a fact check.
    The rig count during Bush in 2001 was about 1100 and in 2008 was approximately 1890. Democrats took over the House and senate in the 2006 election, with their first hold on congress beginning in 2007. After the 2008 election, Democrats had the Presidency and both houses of congress. Gas was about $1.80 when Obama took office and the rig count was roughly 1890. Throughout 2009 rig count dropped to below 840 and gas prices began the inevitable march to $4 a gallon. In mid 2009, rig count begand to rise to its level today. From the chart is seems it takes about 12-18 months after rig count goes up and gas prices come down. Correlation is not causation, however it could be interpretd that way. See the links below:

    http://www.energydigger.com/imageViewer/pub/graphs/rig-counts/us/2012-03-02/us-landOffshore

    http://gasbuddy.com/gb_retail_price_chart.aspx

    So this article has some factual errors as do the posters above.

    There is no silver bullet and after nearly 40 years of a Department of Energy that cost us trillions of dollars Chu now tells us “its all of the above.” Why have they not used their trillions of dollars over 40 years to help create energy alternatives? We must continue to have oil based product until we have a reliable and ubiquitous alternative. Otherwise we face economic and social ruin. There has to be a transition period where we use both what we have today and a new source of energy. I would love nothing more than tell certain other countries to stuff it while we enjoyed energy of our own making. Killing petro projects is not the answer until we get the alternative up and running.