CBS: "More US drilling didn't drop gas price"

Thursday, April 5, 2012

Gas prices in Waimea, Hawaii
The reason drilling more doesn't lower the price of gasoline is that the U.S. government does not force American businesses to sell us their gas at a discounted rate. So they sell their gas at the going rate — the global price of oil at the moment. And that global price is set by OPEC.

Even if U.S. drillers found huge reserves and flooded the world market with oil, OPEC would simply lower its production. They've done it many times when new oil fields have been discovered (for example, Norway's). They cut their production (so oil is scarcer) until the price comes up to where they want it. They are a large enough cartel to have that kind of impact on the global supply of oil.

Other competing fuels will bring the price down. The Open Fuel Standard will do that.

As Gal Luft put it in a recent post:

Cartels, by definition, exist to maximize the profits of their members. OPEC members, which last year raked in $1 trillion in oil revenues, are doing that masterfully.

No amount of U.S. drilling or efficiency measures will change that. The cartel's financial needs will drive it to respond to counter moves by its clients: When we drill more oil at home, OPEC can drill less to return to a tight supply-demand relationship. When we use less, OPEC can drill less.

And here is a different take on the same issue from a recent article on CBS News. In the excerpts below the authors point out what has already happened. It points to the same painfully ineluctable fact — drilling more doesn't lower gas prices:

A statistical analysis of 36 years of monthly, inflation-adjusted gasoline prices and U.S. domestic oil production...shows no statistical correlation between how much oil comes out of U.S. wells and the price at the pump.

If more domestic oil drilling worked as politicians say, you'd now be paying about $2 a gallon for gasoline. Instead, you're paying the highest prices ever for March.

Since February 2009, U.S. oil production has increased 15 percent when seasonally adjusted. Prices in those three years went from $2.07 per gallon to $3.58. It was a case of drilling more and paying much more.

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.

When you hear people tell you "the answer to gas prices is drilling more," please take the time to educate them. This widespread erroneous belief is wishful thinking, and it is standing in the way of progress.

Read more:

Question: Isn't Drilling for Our Own Oil a Better Option?

The Flexible Fuel Answer to OPEC


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