I hate to say I told you so. But maybe repeating an analytically based mantra, over and over again, and backing it up with current data will allow policy decisions made by Washington and state governments to be evidence-based and less prone to the influence of special interests. Drill, baby, drill will not make a sustained difference in oil and gasoline prices.
A little bit of recent history: Remember the not–too-distant political campaign for President? No, don’t, it was too painful! But I hope you do recall this frequent statement by leading members of both parties: If we drill for more oil, the price of oil and gas will come down for a sustained period and the nation would be less prone to relatively fleeting gas price hikes followed by gas price reductions.
At the time these statements were made, I indicated that while more drilling will increase supply, it will not have a major impact on oil or gas prices. Why?
Oil producers have a legitimate interest in selling oil to the highest bidder — and they do. The U.S. exports a relatively large amount of oil globally to countries willing to pay larger sums of money than producers can get in the U.S. It’s more than Shakespeare’s “et tu, Brute?” Or “the unkindest cut of all.” As hinted at by some in the oil industry, who claim righteousness, “It’s profits, stupid!”
Other reasons complement the export desires of producers and decouple oil and gas prices from supply and demand. During the recent spike in gasoline prices in California to near $5 in some places, Sen. Dianne Feinstein suggested that a good deal of price manipulation and speculation is involved in setting prices for both oil and gas. Over 70% of the futures market for oil is now in the hands of financial speculators. As reported in the media by many astute analysts, trading is now dominated by Wall Street banks, hedge funds and other financial institutions. According to Bart Chilton, commissioner at the Commodity Futures Trading Commission, “It’s speculators who are moving markets. They are almost exclusively the entire market [for oil] at certain periods of time.”
Further, lack of refinery capacity, the seasonal switching to summer blends, the increasing costs and uncertainty of drilling for tight, hard-to-get-at oil and fear of tension in the Middle East have affected the recent spike of oil and gasoline prices at the pump in the U.S. In some parts of California, gas is now well over $4 a gallon and is increasing by the day. The national average is near $3.80 a gallon, up by well over 10% since early January. Clearly, low and moderate income families are hurting. Many folks are paying over 15% of their income for fuel and are sacrificing other basic needs: health, education, food. Just as clearly, the implicit tax caused by the rise in prices and unpredictable price variations is hurting the economy and the margins earned by large and small businesses.
What can Americans do? It will not be simple. But I bet if we implore (pressure nicely) Congress to reduce the near-monopolistic position held by oil in the transportation fuel markets, we would go a long way toward reducing prices of both oil per barrel and the price of fuel. Succinctly, opening up the fuel market to safe, less costly and, environmentally better alternative transitional fuels and flex-fuel automobiles would provide price competition for gasoline. Similarly, if the EPA provides more flexible regulations permitting conversion of older vehicles to alternative transitional fuels, pumping fuel would mean real choices for consumers and likely lower cost levels over longer periods of time. Finally, if competition at the pump helped drive down the price of oil drilling to near breakeven prices per barrel, producers would have fewer incentives to drill in tight, environmentally sensitive areas like the Arctic Circle.
Regrettably, renewable energy, capable of serving the transportation needs of most Americans, is probably several years away. Maybe the nation can speed the timing up with focused research as proposed by President Obama. Renewable-energy generated fuel, when cost-effective and ready for prime time use by the majority of ordinary Americans, will become a real plus for the nation. But we shouldn’t wait for the perfect or almost-perfect solution! We can do something now to improve the economy, increase America’s security, lower consumer costs and help the environment, including reducing GHG emissions.
Paraphrasing that old oil man, Socrates (just kidding), an unexamined oil and gas policy is not worth having. Drill, baby, drill is such a policy. America can do better. If you believe drilling will have a major impact on gasoline prices, I will sell you the Golden Gate or Brooklyn Bridge. Let’s reduce our dependency on oil and gasoline, by opening the market to consumer choice.+