Will Drilling More Oil in the U.S Lower Gas Prices?

Many of our politicians continue to tell us that drilling more oil in the United States will lower our gas prices. The US is drilling more oil and yet gas prices are still high. Are the politicians right or is this just partisan politics. Who should we be

The cry from many of our politicians is “Drill, baby drill”. Drill more oil so we can be less dependent on foreign oil and have lower gas prices. Would drilling more oil lower gas prices?

Short Memories

Americans, especially American politicians have short memories. If you are old enough, than you remember the oil shortages, the gas lines, the cold houses and closed schools during the winter of 1973-1974 when OPEC (Organization of Petroleum Exporting Countries) shut off our imported oil supply.

In a surprise move on October 6, 1973, during the Jewish holiday of Yom Kippur, Egyptian and Syrian forces attacked Israel. At this time, the cold war was going on and Egypt and Syria were allies of the USSR and Israel was an ally of the U.S. and western European countries.

On October 17, 1973, angry with the United States and Europe, OPEC nations imposed a complete oil embargo on the United States. Gas prices rose from 30 cents per gallon to $1.20 per gallon and President Nixon banned all gasoline sales on Sundays and gas rationing of 10 gallons per customer was common.

An angry congress said the U.S. needed more domestic oil so this will never happen again. On November 13, 1973, congress approved the Trans-Alaskan Oil Pipeline, which was to supply an additional 2 million barrels of oil per day for the United States. Along with this, new government mandates for better miles per gallon cars, smaller cars and efforts were raised to find alternative energy supplies.

Fast Forward to the 21st Century

Since the oil embargo of the 1970s, advancements have been made with miles per gallon and alternative energy sources, but not nearly enough as thought would be 40 years ago.

Today, Mideast tensions and rising gas prices are in the news again and our politicians are foaming at the mouth with finger pointing and blaming. Half of congress is screaming drill everywhere and the other half screams about more alternative energy.

Refined Oil Product versus Crude Oil

The U.S. has a large refining infrastructure to refine crude oil, so the U.S. can import crude oil, refine it here and sell the refined product to other countries. When you read that the U.S. is now a net exporter (more exports than imports) of finished petroleum products, finished petroleum products include gas, diesel, and jet fuel, not the crude oil that is drilled out of the ground or offshore.

U.S. Oil Imports and Exports

You might think that all of the oil drilled in the United States (or offshore) is oil that we get to use here in the U.S. Much of the oil that US oil companies drill here is refined into the finished product and exported to other countries [1].

  • In early 2012, the U.S. exported (sold) more refined petroleum products than it imported and it imported (bought) more crude oil than it exported.
  • For the first time since 1949, the U.S. exported more petroleum products than it imported (2011 data).
  • The U.S has reduced the imports of crude oil by 10% since 2006.
  • In December 2011, the U.S. exported almost 650,000 barrels per day of gasoline.
  • Between 2005 and 2011, the amount of oil the U.S. has imported has dropped from 60% to 47% of consumption.

U.S. Oil Production History and Gas Prices

According to an Associated Press analysis, less oil production does not cause an increase in gas prices. Between 1986 and 2009, U.S. oil production dropped and throughout most of this time period, inflation-adjusted gas prices were at or below $2.00 per gallon. History shows us that when less domestic oil is drilled, gas prices did not rise. When domestic oil production increases, as it has recently, the price of gas has not gone down [2].

Roan Plateau in Colorado                                                      

U.S. Oil Production and Political Posturing

Many of our politicians will have you believe that President Obama has drastically reduced oil drilling and this is the reason our gas prices are going up, that is not true.

Since President Obama has been in office, U.S. oil production is up, yet gas prices are also up. Republicans like to point out that oil drilling is up only on private lands but down on federal lands. That is true. This shouldn’t matter when talking about increasing oil production and higher gas prices since increased oil production is an increase no matter if it’s on federal or private land.

Domestic oil production is up and gas prices are up. That should tell everyone that more oil drilled does not have to mean lower gas prices. Republicans are doing the blaming now because a Democrat is in the White House. If a Republican were president, the Democrats would be screaming about high gas prices, just like in 2008 when George Bush was president. This blame game is nothing but political posturing which doesn’t do any of us any good.

Oil and Gas Prices

Recently, blame for the rising oil and gas prices has been directed at commodity speculators on Wall Street. Speculators will trade oil futures based on what they think the future price of oil will be and bid those prices either up or down. With the current tensions in the Middle East, they are bidding up the price of oil. In the past, speculators accounted for about 30% of the speculative oil trades, today speculators account for more than 60% of the oil futures contracts [3].

Even though the demand for gas in the U.S. has dropped, demand for gas is rising in other countries. The oil companies can sell their refined oil products like gas to other countries where they could get a better price. All of this raises our gas prices since it is a world marketplace.

NASA satellite picture of irrigation from the Ogallala Aquifer

The Keystone XL Pipeline

In early 2012, the Obama Administration turned down the building of the Keystone XL pipeline that would have carried Canadian oil to the U.S. Gulf Coast. There were also environmental concerns, since the pipeline would have gone through the Nebraska Sand Hills Rowe Sanctuary and the Ogallala Aquifer.

Proponents of the pipeline say that more oil coming into the U.S. will lower our gas prices and make us less dependent on foreign oil. Yet we have already seen that more oil does not necessarily lower gas prices.

Those against the pipeline argue that all of the Canadian oil will go to the U.S. refineries on the Gulf Coast and be exported. The pipeline could actually raise prices for oil and gas in the U.S. There is an oversupply of Canadian crude oil in the Midwest, which has caused a price discount for this oil. The pipeline would remove the oversupply and increase prices of the Canadian crude.

Philip K. Verleger, president of PKVerleger LLC, a consulting firm that specializes in oil markets wrote “US farmers who spent $12.4 billion on fuel in 2009 could see those costs rise to $15 billion or higher if the pipeline goes through. At least $500 million of the added cost “would come from the Canadian market manipulation”. [4]

Conclusion

If the United States oil companies were allowed to drill more oil on federal lands as Republicans are calling for, studies show that our domestic gas prices will not necessarily come down. But the oil companies would certainly make more money. If any company makes a product that the entire world needs and were allowed to make more of that product, they would obviously make more money.

Drilling on federal and public lands upsets many people, since much of the federal land is pristine areas and national forests. If the oil companies and some politicians really want to drill for oil on these federal lands, maybe all Americans should get a dividend check once per year like Alaska citizens get. With so much rhetoric and political posturing going on, it is hard to see the truths.

Copyright © Sam Montana 2012

References and Resources

[1] U.S. Energy Information Administration

[1] U.S. EIA Petroleum Supply Monthly

2] Associated Press - More US drilling didn't drop gas price

[3] Why Republicans Aren’t Mentioning the Real Cause of Rising Prices at the Gas Pump by Robert Reich

[4] Christian Science Monitor/MSNBC - How much would Keystone pipeline help US consumers?

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