Tuesday, March 27, 2012

Why Drilling for More Oil Makes No Difference

The chants of "drill baby, drill" are still occasionally heard. One is occasionally told that that we are floating on a sea of oil, but the government won’t let us get at it. The latter statement was encountered on the internet so it must be true. These rumblings get louder whenever the price of gasoline rises—on the assumption that we have some control over the price of oil. A recent AP article by Chris Kahn provides an interesting context in which to refute that claim: In a First, Gas and Other Fuels Are Top US Export.

Kahn provides us with this fact:

"For the first time, the top export of the United States, the world's biggest gas guzzler, is — wait for it — fuel."

"Measured in dollars, the nation is on pace this year [2011] to ship more gasoline, diesel, and jet fuel than any other single export, according to U.S. Census data going back to 1990. It will also be the first year in more than 60 that America has been a net exporter of these fuels."

Note that he is referring to refined petroleum products not crude oil. This is significant because it suggests that our refineries have excess capacities. For decades we have depended on refineries in Europe to provide us with fuel when demand exceeded supply.

"And there's a simple reason why America's refiners have been eager to export....: gasoline demand in the U.S. has been falling every year since 2007. It dropped by another 2.5 percent in 2011. With the economy struggling, motorists cut back. Also, cars and trucks have become more fuel-efficient and the government mandates the use of more corn-based ethanol fuel."

One might think that a high price for gas would tempt refineries to produce more and sell more, and thereby drive the price down. But that is not how the oil market works. Gas prices are driven by the market price for crude oil. This is an international market in which the US is a tiny player as a source of supply. The refiners, like all good capitalists, take their product where they receive the best price.

"Gasoline supplies are being exported to the highest bidder, says Tom Kloza, chief oil analyst at Oil Price Information Service. ‘It's a world market,’ he says."

"Refining companies won't say how much they make by selling fuel overseas. But analysts say those sales are likely generating higher profits per gallon than they would have generated in the U.S. Otherwise, they wouldn't occur."

If we produce more crude oil domestically, it will still be processed and provided to us at the price determined by the global market because suppliers, at every stage, will want the best price for their product. That will not be changed by our small increase in production. The price of gasoline will not come down based on our actions. If we should end up with an excess of gasoline, it will be sold to the highest bidder, not used to lower the price of our fuel. That is capitalism in action—get used to it!

Even though we cannot control the price of oil, increased domestic production decreases the amount of imported oil that must be purchased. That keeps more money flowing in our economy rather than shipping it overseas. That is a very good thing.

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