U.S. Oil Production Is At Highest Level Since 1997; Yet Gas Prices Remain ‘Stubbornly High’

American crude oil production is at its highest level since 1997, according to government figures reported today. The increase is being driven by innovations in hydraulic fracturing, which have allowed producers to access previously inaccessible oil deposits in shale formations.

This development is likely to be trumpeted by fossil fuel proponents as: a) the key to cheap gasoline prices; and b) a shining example of the free market working when government gets out of the way.

Don’t believe the hype.

Firstly, gas prices are still high, even with all this new crude output. Secondly, these hydraulic fracturing techniques driving the production boom didn’t just magically appear out of the free market — they were pioneered through many decades of government tax credits, loans, R&D programs, and mapping tools.

In other words, the two major talking points pushed by the fossil fuel industry (“cheap energy forever! Just let the free market decide!”) are proving to be vastly overblown.

Here’s the news on domestic production increases from Bloomberg:

Crude output rose by 3.7 percent to 6.509 million barrels a day in the week ended Sept. 21, the Energy Department reported today. America met 83 percent of its energy needs in the first six months of the year, department data show. If the trend continues through 2012, it will be the highest level of self- sufficiency since 1991. Imports have declined 3.2 percent from the same period a year earlier.

A combination of horizontal drilling and hydraulic fracturing, or fracking, has helped reduce America’s reliance on foreign oil. The same technology unleashed a boom in natural gas output from shale that pushed inventories to a record last year.

So domestic oil production is higher than when George W. Bush was ever in office. What has that done to gasoline prices? They’re still hovering at historic highs:

As a recent analysis from the Associated Press showed, there’s simply no correlation between increasing domestic oil production and falling gasoline prices. In March, AP took 36 years of Energy Information Administration production data and matched it with gas prices in the U.S. Here’s what they found:

Why do gas prices continue to rise even while domestic drilling increases? Because oil is a global market. Seth Borenstein and Jack Gillum of the Associated Press explain:

That’s because oil is a global commodity and U.S. production has only a tiny influence on supply. Factors far beyond the control of a nation or a president dictate the price of gasoline.

When you put the inflation-adjusted price of gas on the same chart as U.S. oil production since 1976, the numbers sometimes go in the same direction, sometimes in opposite directions. If drilling for more oil meant lower prices, the lines on the chart would consistently go in opposite directions. A basic statistical measure of correlation found no link between the two, and outside statistical experts confirmed those calculations.

So therefore, you get what we see today: national average gas prices at $3.81 per gallon, even with stunning increases in domestic crude production.

“Prices are stubbornly high,” explained Tom Kloza of the Oil Price Information Service, speaking to Fuel Fix yesterday. “People are flummoxed.”

Gas prices are expected to drop a gradually this fall. But that decrease will be due mostly to extra refinery capacity coming online and a switch-over to cheaper winter-blend fuels.

That’s the statistically-proven reality. What does the Romney campaign think of it? Well, it has largely avoided the issue. Romney simply continues to claim that more domestic drilling will be the answer to higher energy prices.

“The best thing we can do to get the price of gas to be more moderate and not have to be dependent upon the cartel is: drill in the gulf, drill in the outer continent shelf, drill in ANWR, drill in North Dakota, South Dakota, drill in Oklahoma and Texas,” Romney continues repeating.

But we see right now that the “drill more, drill everywhere” plan isn’t working. According to the non-partisan Congressional Budget Office, the only way to protect consumers from higher energy prices is to use less oil through efficiency measures, conservation, and non-petroleum fuels:

Even if the United States increased production and became a net exporter of oil, U.S. consumers would still be exposed to gasoline prices that rose and fell in response to disruptions around the world.

In contrast, policies that reduced the use of oil and its products would create an incentive for consumers to use less oil or make decisions that reduced their exposure to higher oil prices in the future, such as purchasing more fuel-efficient vehicles or living closer to work.

Well, rats. Romney opposes those solutions.

One thing we know Romney loves is the “free” market. And throughout his campaign he’s tried to draw distinctions between the different energy sectors, claiming that that the boom in fossil fuel drilling is purely a product of free enterprise and the failure of a few government-backed clean energy companies is purely a product of “government picking winners and losers.”

“That’s what happens when government puts in hundreds of millions of dollars into an enterprise. They don’t understand how the free economy works,” Romney said in May, decrying a $535 million loan guarantee for the solar manufacturer Solydnra.

Of course, the story isn’t that simple. The fracking technologies enabling such a massive boom in domestic oil production were commercialized through tens of billions of dollars in government support over many decades. Following up on a recent Breakthrough Institute investigation, the Associated Press wrote a piece this week on the impact of federal investments:

“There’s no point in mincing words. Some people thought it was stupid,” said Dan Steward, a geologist who began working with the Texas natural gas firm Mitchell Energy in 1981. Steward estimated that in the early years, “probably 90 percent of the people” in the firm didn’t believe shale gas would be profitable.

“Did I know it was going to work? Hell no,” Steward added.

In 1975, the Department of Energy began funding research into fracking and horizontal drilling, where wells go down and then sideways for thousands of feet. But it took more than 20 years to perfect the process.

Alex Crawley, a former Department of Energy employee, recalled that some early tests were spectacular — in a bad way.

A test of fracking explosives in Morgantown, W.Va., “blew the pipe out of the well about 600 feet high” in the 1970s, Crawley said. Luckily, no one was killed. He added that a 1975 test well in Wyoming “produced a lot of water.”

Steward recalled that Mitchell Energy didn’t even cover the cost of fracking on shale tests until the 36th well was drilled.

“There’s not a lot of companies that would stay with something this long. Most companies would have given up,” he said, crediting founder George Mitchell as a visionary who also got support from the government at key points.

“The government has to be involved, to some degree, with new technologies,” Steward said.

Without consistent government support early on for a once “stupid” technology, the domestic oil boom we’re seeing today might not exist.

Fossil fuel interests have spent more than $150 million this year on the presidential campaign trying to convince Americans that we need to “let the oil companies do their thing” and we’ll all have endless, cheap energy. Those are nice, easy talking points. But they’re simply not based in reality.

7 Responses to U.S. Oil Production Is At Highest Level Since 1997; Yet Gas Prices Remain ‘Stubbornly High’

  1. Paul Klinkman says:

    Before the U.S. Presidential election of 2008, the Koch brothers rented six supertankers, filled them with oil and parked them in the Gulf of Suez. As a result the price of oil and gasoline rose before the elections. This attempt to influence American voters didn’t manage to put Senator McCain in the White House.

    I have no evidence whatsoever that the Koch brothers are trying the same trick this election, except that they have vowed to spend $200 million cash on influencing this election cycle and the price of gasoline is pretty high right now.

  2. Tami Kennedy says:

    It was my understanding U.S. refineries were near maximum production. Any excess by default would end up on world market subject to global pricing with little near term impact to gas costs.

    By same argument Romney would have zero chance of meeting his 2020 campaign numbers.

  3. Todd says:

    The costs of production of new deep-water oil in the Gulf of Mexico/offshore Brazil are near 80-100 dollars/barrel. Production costs of shale oil are perhaps even higher. New tar sands higher still. This is what is setting the floor for oil prices for the foreseeable future. There is only one solution to high oil prices and that is permanent demand destruction. More use of public transportation, more use of bicycles, better supply chain logistics, local production, telecommunting, hybrid cars, plug-in hybrids and super-efficient ICE cars replacing all the old cars are already working and will to reduce demand for oil. But it will take a few years before the oil market accepts and adjusts to this. But oil prices collapsed partly due to improved fuel efficiency in the period 1980-1986, and it will happen again.

  4. roger blanchard says:

    Nobody seems to question the production numbers from the EIA but there are reasons for questioning.

    First, the weekly numbers appear to be seriously flawed on the high side. Looking at the monthly data for ~5 months running, the average production value from the EIA is ~6.25 mb/d while the weekly value is up to ~6.5 mb/d. That is quite a difference, particularly when you consider that Alaskan production is about 120,000 b/d lower this Sept. compared to Sept. 2011.

    Only 2 states have shown significant oil production increases in recent years: Texas and North Dakota. Most states continue to see declining production.

    Further, there is a substantial production difference between the data from EIA and that from the Texas Railroad Commission and the Bureau of Ocean Energy Management (BOEM), with the data from EIA being over 400,000 b/d higher for the first 5 months of the year compared to the sum from the TRC and BOEM. That’s a substantial deviation.

    Roger Blanchard
    Sault Ste. Marie, MI

  5. Earl Richards says:

    Google the “$2.5 Trillion Oil Scam – slideshare” and google the “Global Oil Scam.” The US is a victim of this scam. Purchase electric cars and solar panels.

  6. Mark Ziegler says:

    If the refineries are at full-capacity, the oil companies are probally shipping overseas.

  7. Mark Shapiro says: