"‘Drill, Baby, Drill’ Fails: Why Gasoline Prices Remain High Despite Oil Boom"
On Monday, USA Today reported that the price of gasoline hit $3.60 a gallon for the first time since October — an early start in comparison to the usual price rise seen in the spring. The increase occurred despite world oil production climbing to 88.8 million barrels per day in 2012, about 2 million barrels higher than two years ago according to the Washington Post’s Brad Plumer. And about half of that increased production is due to an oil boom in the United States that’s driven imported oil to its lowest level since 1987.
As Plumer points out, “The big thing to remember is that oil prices are a function of both supply and demand. If world demand for oil rises faster than producers can pump the stuff out, prices will go up.” Plumer cites a piece by James Hamilton of UC San Diego, which shows China’s consumption of oil is booming, and that the world economy as a whole is growing apace — and thus demanding more oil — even as fuel efficiency increases.
Technically, the world isn’t even producing enough oil to keep pace with the rise in global incomes. Oil supply has risen by 2.3 percent since 2010. But the world economy has grown by 7.1 percent since then. The only reason that oil prices haven’t soared to record highs, Hamilton points out, is that countries have been undertaking new conservation measures. Americans, for instance, are buying more fuel-efficient cars in droves.
Granted, oil prices would almost certainly be even higher than they are now without the drilling boom over the past two years in places like North Dakota. But at this point, the extra drilling is struggling to keep up with the pace of global economic growth.
The [IEA] recently projected that U.S. oil production would continue rising through 2020 and beyond, as companies extract more “unconventional” oil from shale rock and other sources. But global demand was also expected to rise 35 percent between now and 2035, with China on pace to become the largest oil consumer in the world in the next two decades.
And that’s the optimistic scenario. Raymond T. Pierrehumbert, a geophysical sciences professor at the University of Chicago and a lead author on the third IPCC Assessment Report, recently pointed out in Slate that while going after unconventional oil remains profitable, and thus likely to continue, it requires ever greater effort to retrieve the same amounts of oil:
Technological developments have made it possible to tap into tight oil, but these are not the same kinds of technological developments that have given us ever more powerful computers and cellphones at ever declining prices. Oil production technology is giving us ever more expensive oil with ever diminishing returns for the ever increasing effort that needs to be invested. According to the statistics presented by J. David Hughes at the [American Geophysical Union] session, we are now drilling 25,000 wells per year just to bring production back to the levels of the year 2000, when we were drilling only 5,000 wells per year.
We have to keep increasing drilling just to keep production steady, and the faster you drill in a particular area the faster production peaks and drops off. That future is an economy pouring ever greater amounts of energy and money into efforts “to extract the last drop of profit through faster depletion of a resource that’s guaranteed to run out.” So the structural economics of continuing to pursue oil are shaky, even if further industry profit is possible.
It remains the case that the best way to avoid high gas prices and supply shocks — not to mention avoiding catastrophic damage to the global climate — is to move away from oil as an energy source.