‘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.

That increased oil production will bring down gas prices is one of the most reliable Republican canards when it comes to energy, so what gives?

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.

Here are the global production and consumption numbers for the last few years from the U.S. Energy Information Agency (note the numbers to the left start at 84,000 thousand barrels per day):

And despite forecasts from BP and the International Energy Agency that domestic and global oil production will continue rising, Plumer notes that high gas prices aren’t going away anytime soon:

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.

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19 Responses to ‘Drill, Baby, Drill’ Fails: Why Gasoline Prices Remain High Despite Oil Boom

  1. Jack Burton says:

    It is all about the equation energy in for energy out. The tar sands illustrate this equation to perfection. Sure, oil is produced and profits are made, but the ultimate cost for the oil to the economy must be high or else the production will not occur.
    Everywhere you look there is news of more oil discovered. But none of it is easy and cheap to produce. Somehow our conservative friends can’t process that idea. Drill baby drill ain’t bringing back cheap oil. And YES, China and the Bricks are growing their energy demands faster than the oil can be pumped out. Everyone who can is now driving cars and flying. You see that all over Russia and more and more in China. Just look at traffic in major Russian cities and Chinese cities, and it is in constant growth. China especially is booming in personal car use. This demands oil, more and more oil.
    Two things are certain. Oil demand will rise and the CO2 spewed into the atmosphere will escalate to death spiral levels decades before the present models predict it. We are nearly at that point now with the feed backs kicking in 50 years early!

  2. Bill G says:

    This article does not detail the complexity of these markets. A big piece of what affects price is the local refinery output. California and Nevada are tied to a specific set of refineries – the gasoline mixes/grades used in CA are specific to CA and are not produced elsewhere. This has something to do with policy/law which mandates cleaner burning fuels. Since CA has not built a new refinery in a long time, the current refineries are run close to capacity – so if something goes out in the refinery, then there will be a local decrease in amount of gasoline product. This is ok, since we have to begin to move away from these kinds of fuels anyway – if CA wants lower gas prices and has no such concern, then CA should build more refineries.

  3. MarkF says:

    “That increased oil production will bring down gas prices is one of the most reliable Republican canards when it comes to energy, so what gives?”

    This canard is bipartisan.

  4. True, but these complexities are beside the larger point the article makes: world demand for oil is open-ended. All new supply is additive and will be burned and consumed. New supply, from the Bakken or the Monterey formation in California or anywhere else, will just be poured into the hopper and sold where it makes the most economic sense. It will not displace one molecule of oil from any foreign country. And it won’t make us “energy independent” unless we pass a law making it illegal to export it. If exporting provides a better economic return, that’s where the oil will go.

    This is exactly what will happen with the oil from Keystone XL: it will be refined in the Gulf, where there’s some spare capacity for handling such low-grade crude, and then exported. KXL is not about energy independence. It’s about making money.

  5. Rabid Doomsayer says:

    The massive rate we are using enhanced extractive techniques sort of says a significant drop off is just around the corner.

    Look how fast Mexico fell down the production tables. Multi lateral, multi nipple wells, says the Saudi’s are sucking the oil off the top of the water they have injected. Lets not even look at the water cut of their oil production.

    That we call oil, gunk that our fathers would have instantly dismissed says we are nearing the end of the line. The Dill in dillbit stands for diluted, conventional oil products are needed for tar sands oil production.

    The energy return, for energy invested, continues to fall. Fall to levels that will soon not add up. Spells a problem even if there is oil left.

    However there is enough oil to stuff the climate.

  6. DBrashier says:

    The price isn’t entirely a factor of supply and demand, however. It’s also subject to speculation pressures.

  7. Crease says:

    It’s really to bad the conservatives fro the most part refuse to even think about alternative green energy(s) as, well an alternative to fossil fuels such as petroleum are past it’s peak.I say the dems should come out against climate change and then the repubs will for it and alternative green fuels.It’s the old adage “if your for it i’m against it”.

  8. Leo says:

    It’s all about making money. Why else are the oil companies breaking record after record in profits year after year? These ballon bags have always got an answer besides greed…

  9. Dave S says:

    The lack of refineries also means when one shuts down for repairs or upgrades our supply gets smaller. But I agree, it’s not the answer to our future. Hydrogen is still being tested as are other alternatives. Just not at the pace we would all like. As my dad used to drum into me , patience,it will come.

  10. Paul Klinkman says:

    The price of gold worldwide is related to supply, to demand and to professional collectors. Most gold is hoarded. When the price of gold goes way up, hundreds of dormant gold mines open up and gradually they overwhelm the world’s collectors’ collective desire for more and more gold.

    The price of hydrocarbon energy isn’t that much different. At this time, China is buying up as much of the world’s hydrocarbon energy as it can. We in the U.S. have been living off of the rest of the world’s hydrocarbons for many decades, so an increase in domestic production doesn’t mean any direct exporting of “our” all-American oil to China. We’re just importing less.

    Actually, we’re exporting vast amounts of all-American coal to China. Then China burns it and we blame them for catastrophic climate change. For some reason known only to God and K Street, China is culpable because they burned it, and we’re not because we only mined it.

    China plunks down drilling rights money and gets the right to hoard fossil fuel energy in the ground until needed, or until they can make a profit selling their rights off. That’s because the price of oil in the ground increases pretty steadily every decade, almost like a savings bond.

    Also, OPEC gets the opportunity to hoard oil until the price of oil rises to a comfortable cartel price.

    No, the development of what, 2% more oil fields, to feed the world’s addiction won’t significantly affect oil prices.

    I’m not sure that I particularly liked this article.

  11. Gale says:

    Oil extracted from the US is our biggest natural resource. How about having enough for the people here before anyone is allowed to export it?

  12. Ozonator says:

    Gas prices are due to EssoKochs’ insistence that we pay to play their version of the international spot market. It has little to do with transportation costs. It appears to be a combination of international price fixing and increasing prices due to regional holiday travel plans. This has been in operation since lead was taken out of gasoline and the price for unleaded was less for about a week.

  13. Paul Scott says:

    Forget oil! Electric vehicles are very affordable now and incredibly cheap to operate. You can install enough solar PV to generate energy to drive 12,000 miles/year for around $6,000. That system will generate energy for 30-40 years.

    Contrast that with the cost of buying enough gasoline to drive 12,000 miles/year for 30-40 years.

    I’ve been driving on sunshine for over ten years. My solar PV system paid for itself years ago, so for the rest of my life, I drive for free – on sunlight.

  14. Gas prices go up because demand exceeds supply. Speculators can’t push prices in one direction for long. Other speculators will do deals in the other direction, because the fundamentals always will out.

    The fundamentals are much more than today’s supply and demand. They are about the market’s prospects. What WILL supply and demand be next year? Markets are anticipatory mechanisms.

    The oil market is far too fractured, with far too many players with divergent personal and national interests, to be manipulated for long. The Norwegians are not in a speculative conspiracy with the Saudis, and the Kochs are not plotting with Hugo Chavez. OPEC members very often disagree with each other, and when they set quotas, they often cheat.

    Having been in and around the energy trading business for 30 years, speculators want to do one thing: get the trend right and follow it. There can be, for a limited time, a positive feedback loop. (Why is he market going up? Because the market is going up, so everybody want to buy.)

    It’s waste of time to blame speculators. The comment about electric cars is on the right track. If we want to get out from under gas prices, we have to stop using so much. It’s that simple.

  15. Mulga Mumblebrain says:

    As you say the EROEI reality is intractable. Cheap hydrocarbons are over, forever. And making the problem worse (or better if you want to see ‘demand destruction’ in action, for the less well-off, at least)is the return of the financial grifters, the speculators and manipulators who were responsible for so much of the leap in prices up to July 2008. They have trillions handed out by Reserve Banks to blow new asset bubbles, and no moral compunction, whatsoever, in doing so.

  16. Mulga Mumblebrain says:

    Putting greed in charge of human affairs was a brilliant idea. Not only did it contradict almost all classic philosophical and religious insight, but it also made insatiability the prime driver of human affairs. The ethos of the highly malignant cancer. Then to turn it into an actual religion, with dogma, catechism and a priesthood, and call it ‘neo-liberal’ capitalism, was a stroke of suicidal genius.

  17. mulp says:

    Let’s refer to the oil and coal industry by the correct economic model: pillage and plunder.

    The difference between marauding raiders and oil drillers is only in the permanence of the oil drillers impoverishment of its victims.

    When raiders enter a village, plunder the wealth and food, and burn it to the ground, the village might take five years to rebuild and restore their food stores.

    Oil drillers will come in and plunder the oil field and pillage the land and leave a decade later, but the oil resources won’t return for hundreds of millions of years, and the pollution won’t fade for decades to restore the use of the land for growing food.

    The crime is referring to oil and coal mining as capitalism – would anyone call the Vikings, Genghis Khan, Somali pirates as capitalists?

  18. cindy11 says:

    How you managed to write this whole article without the word “export” baffles me.

    #NoKXL #NoLNG

  19. K. Spangler says:

    This concept of reaching a point where our production will not be able to suffice our consumption reminds me of a documentary I just watched called, “The Power of Community: How Cuba Survived Peak Oil.” This documentary focused on how Cuba, as a nation, managed to adapt to their impending need to decrease their consumption of oil and energy because they had reached peak oil. Peak oil implies that they had reach the apex of production and consumption of oil, in which there were destined for a gradual decline from that point forward. They, as a collective nation, recognized the immediacy of their crisis and made serious lifestyle changes to adjust. They rode their bikes everywhere, never used air-conditioning, and heated water by the sun. These citizens understood that it was their duty to act, not wait for something even more serious to happen.
    Somehow, America has managed to ignore the immediacy of our environmental crisis. We fail to see the direct correlations of our increasing overconsumption with the fail to find more, cheaper oil. And, we fail to grasp that there is not an unlimited supply waiting to be exploited for us. How can we instill such urgency? Governmental regulations? Smaller, more focused education?