More Drilling Doesn’t Make Gas Cheaper

This is something that’s been known for decades: the oil market is a global one, and its price is also global. If a barrel of oil costs 100$, that is its price in the US, in Britain, Angola, Japan, Iran, etc. And that price is determined by the market forces of supply and demand: if people want more oil than there is, the price goes up; if there’s more oil than demand, the price goes down. But really, there is much more oil in the ground than we need, so the limiting factor is production: how much of it is pumped out of the ground and turned into gasoline, kerosene and diesel.  Therefore, like that of diamonds, the supply of oil is artificially controlled and companies can ramp production up or down as they see fit, based on the market price of oil. OPEC is notorious for doing this: the 12-country cartel holds 79% of the world’s oil reserves and is responsible for 44% of world oil production. Due to their large share of the pie, they can effectively control the price of oil — and in turn, the price of gas — simply by producing more or less oil.

OPEC countries

 

American oil production, on the other hand, accounts for only about 9% of the world’s supply. Because even double the production would still be dwarfed by OPEC, the price of gas cannot be affected much by American supply. This fact is evident via statistical data that shows gas prices being unrelated to how much oil the US produces. For example, while US production increased by large amounts in the past three years, gas prices have not only not gone down, but almost doubled from 2.10$ to 3.58$. Therefore, expanded drilling — be it in the Gulf of Mexico, Alaska or North Dakota — will only result in more profits for (American) oil companies, not cheaper prices for consumers. In fact, the American drilling boom in the past several years has only happened because the (global) price of oil is now so high, that it’s worth trying to get it out of the bottom of the ocean, the tundra, or rocks.

Politicians pretend they can lower gas prices by expanding drilling: George W. Bush was for it; Sarah Palin made “drill baby drill” famous; Barrack Obama is also for it, despite the BP oil spill. The truth is, the government could easily lower the price of oil by reducing the gas tax, but that money goes to repairing the roads on which gas is consumed. Otherwise, their hands are tied. Yes, expanded drilling will increase our energy independence, but that just means we’ll still have gas if OPEC decides to stop exporting; it doesn’t mean that gas won’t cost 10$/gallon.

 

However, increasing supply isn’t the only way to reduce gas prices: reducing demand will have the same effect. The US consumes about a quarter of the world’s oil, or 20 million barrels per day. That is by far the highest rate: the next country is China, who only consumes 7 million barrels per day. This means America has a lot more influence as an oil consumer than an oil producer: while we can’t flood the market with oil to make gas cheaper, we can buy more hybrids and build more nuclear power plants, to achieve the same effect.

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From Minnesota Public Radio, via Slashdot

2 Comments.

  1. Only 13% Of American Oil Comes From The Middle East | Apt46 - pingback on April 12, 2012 at 6:37 pm
  2. Loyalty Matters A Lot; Facts, Not So Much | Apt46 - pingback on May 17, 2012 at 12:19 pm

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