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Domestic Drilling Doesn't Decrease Gasoline Prices
eldavojohn writes "As the political rhetoric heats up, there's something puzzling about drilling inside the United States. Essentially, it doesn't reduce what we pay at the pump. From the article, 'A statistical analysis of 36 years of monthly, inflation-adjusted gasoline prices and U.S. domestic oil production by The Associated Press shows no statistical correlation between how much oil comes out of U.S. wells and the price at the pump.' If the promises that politicians made when they opened U.S. drilling were true, then we should be paying about $2 a gallon now. Instead it's $4 a gallon. Minnesota Public Radio pulls some choice quotes from both parties and wonders why this decades-old empirical observation goes seemingly completely unnoticed."
Minnesota Public Radio pulls some choice quotes ...
Submitter here, my mistake on that above source. When I read this in my news feed yesterday, I didn't see the AP markings all around this story. All of it appears to be completely and solely Associated Press sourced. I apologize if that confused anyone.
Noticed that when I was looking to see if anyone had come up with a sufficient rebuttal to this empirical link but aside from a few insane pundits, I didn't find much. The remaining arguments for "drill here, drill now" probably rests on "job creation" (waiting on that fact check) and, according to Thomas McClanahan from the Kansas City Star, it "means fewer dollars going to nasty, unstable regimes and more revenue for the Treasury, especially if the drilling is on public lands." He might be right about lowering the trade deficit but I think there are other things we could stop doing to prevent unstable regimes.
My work here is dung.
We can only speculate
This is the problem when journalists with political agendas pretend to be statisticians. Oil is sold on a global market and goes to many different uses. You cannot look at one part of the supply and say "well, increasing this particular part of the supply didn't affect prices in this other particular market." There are too many other factors to consider: How much oil did other countries use? How much oil was diverted to purposes other than producing gasoline, such as plastics or heating oil? What happened to production in other areas? NONE of this is accounted for in this silly "analysis." Most telling? The analysis excluded the oil shocks of the early 1970's. Why? That was the clearest time that domestic gas prices (and supply) are driven largely by the global oil market. Yet, this analysis is being put into papers all across the US. For what purpose? Could it be to deflect criticism from the Presidents' drilling policies? When an analysis concludes "therefore, the basic laws of economics don't apply," then just like one that says "therefore, the law of gravity doesn't apply," our first instinct should be to question the analysis, not the basic laws.
Please spell it out: what are the mechanics of speculation driving up gas prices?
Speculators buy and sell futures contracts. Every time they buy a contract, they are betting that the price of oil will go up. But, whenever they buy, somebody else is selling, betting exactly the opposite - that prices will go down. And, recall that speculators eventually have to sell those future contracts (or have 100 tanker trucks pull up to their homes.) When they do, the price will be determined by the actual facts on the group -- how much demand is there, and how much oil is being produced at the time.
I congratulate you and wish you well in your asbestos underwear!
Speculation is not the problem. The safety net provided by government bailing out the biggest speculators (the big banks) is the problem. Let those folks go out of business like they ought to, and we wouldn't have a speculation problem.
cej102937
That was the motto of the communist system. Just in case you weren't making your comment tongue-in-cheek.
But there is an important point hidden there. In politics, you will hear "free markets are GOOD", "central planning is BAD". Or sometimes the reverse (in Europe). People forget that the point is to maximise the goods and services produced, as well as their access from everyone.
If you have no idea what to produce, a market is a good idea. If you know exactly what to produce, a market is an idiotic idea: central planning is the way to go. If you know that this good or service will produce a natural monopoly, you should go for either a tightly regulated market (but due to regulatory capture, this is dangerous) or central planning.
In real life, there are also externalities. Tax accordingly so that your market works better. Yes, taxes are a vital component of making markets work: you want the real price to be reflected, e.g. pollution must be paid for by the polluter.
TL;DR : regulation and taxes on externalities are important. Monopolies should be public. Leave the rest to the market if you don't know what is optimal. If you do, get rid of the market. In the future, robotic overlords will and should plan the economy for us.
Speculation and futures bend the rules of supply and demand. Gas prices are not determined by actual supply and demand, they are determined by speculators hedging on low supply in the future. Would you care to explain why despite supply being at an all time high just a few years ago, prices never came down to match? You can't say that it has anything to do with our oil coming from unstable nations; it's been that way for a long time, decades before we ever saw gas prices climb above the $2 mark.
I take it what you're asking is how futures contracts actually impact the market price of anything since they are essentially an artificial market not bound by the laws of supply and demand. When speculators buy enough contracts at above the current market price, oil producers see this and start artificially limiting their supply in hopes that they'll be able to sell it all down the road at that higher price, and that causes the price of oil to go up now. We had an agency called the CFTC put in place specifically to prevent this sort of thing from happening, but what happened? Enron happened.
You remember Enron, don't you? They were instrumental in exploiting a loophole in the CFTC's regulatory powers to allow oil speculators to trade outside of those regulations. As the CFTC lost power, the futures market exploded, and as it has continued to increase dramatically over the past decade, so too have oil prices. You have to be out of your mind to argue that oil prices coincidentallyskyrocketed with the futures market.
There's a third thing to consider, that being that last year the U.S.'s largest export was....gasoline! It comes down to the fact that the U.S. is using less gas, and instead of lowering prices to encourage more consumption to increase profit margins, the gas companies sell it off outside the U.S., largely to South America, keeping prices high.
I think the big thing we need to do is figure out WHY the prices don't come down from domestic drilling. I would bet it doesn't have nearly as much to do with the cost of drilling, and way more to do with the fact that people on Wall Street decide what a barrel of oil is worth, it doesn't matter where it comes from.
It's a global commodity. There is no way that domestic production can change the global price if global production is declining. Globalisation ensures that your suppliers can sell to the highest bidder, and as capitalists, they'd be crazy not to.
Second, it IS expensive to drill in deep water. Not only in immediate costs, but in potential costs of litigation. You have to prepare you nest egg with that in mind. BP certainly convinced everyone in the industry of that fact. You cannot calculate only the immediate profit, but must consider that in the long term the risk of an evironmental catastrophe will hit you, and you can't reduced your profit margin, even if you were so inclined.
The bottom line is, consumers have to get off the drug. The days of free fossil fuel are over anyways (whatever those idealistic economists who obviously still believe in the tooth fairy will tell you). Suck it up, plan in consequence. Give up the macmansion in the suburb and think of a more reasonable lifelstyle. Don't blame others for what YOU can change? Fuel is expensive? Don't buy it.
(I know, we are all affected by indirect cots of other products we can't do without, but we can certainly reduce that impact by changing our behaviour anyways).
I like my dinosaurs feathery, and my pterosaurs hairy (or is it pycnofibery?)
Oil is fungible
It has nothing to do with some grand conspiracy. It's a simple matter of supply and demand. America is competing on the world market for cheap energy. The locality of drilling only determines who gets first sale profits and the quality of the crude. Other than that, the highest bidder gets the oil. Simple as that.
Now personally, I think we should maintain our strategic reserve for times of natural disasters and regional conflict (war). The idea of tapping into it to spook the speculators is flat out wrong. It's also not working anymore. The hedge fund managers are starting to become immune to this political tactic.
Life is not for the lazy.
Is nothing to do with the price of oil per barrel essentially.
I will give you an example from up here in Canada where I live, specifically Victoria BC. The price here varies between roughly $1.12/litre and $1.39/litre (i.e. $4.24 to $5.26 US dollars. The exchange rate is $1 Cdn = $0.9997 US so no effective difference at the moment). The price per litre varies on a daily basis, with no real apparent pattern.
Now, our gas comes from Alberta as oil, is shipped to the US to be converted into gas, then gets shipped back north to BC (why we don't make it ourselves is beyond me).
The price goes up based on anything remotely bad in the news apparently. Revolution in Libya, price goes up. Bad weather, price goes up. Election coming, price goes up. Long weekend coming, price goes up. It drops periodically when things are normal. I have only seen it go over $1.39/litre once or twice and then only for a few hours. When it goes up at one station, it follows at the rest, same thing when it drops.
It seems to me that this price war has nothing to do with the price of oil internationally. I haven't noticed a pattern for the most part.
However, one change that does happen is if the price of a barrel jumps dramatically up, the price of gas jumps immediately - no matter that the gas we bought actually cost less. However, if the price per barrel drops dramatically, the price at the pump drops slowly if at all.
Its nothing more than an industry colluding to ensure they get the highest prices possible, combined with a government that is not interested in regulating it at all because they collect massive taxes on the sale of fuel.
So it doesn't surprise me that drilling in the US doesn't affect price at the pump - because the industry that sets the prices has zero interest in lowering the price of gas, they are milking it for all they think they can get away with, and with zero repercussions. Our NA society is built on burning fossil fuels, and nothing is going to change that any time soon.
"The first time I got drunk, I got married. The second time I bought a chimpanzee, after that I stayed sober" Arian Seid
You really shouldn't trust Wikipedia. In 2010 the U.S. produced 9,688,00 BBL/Day which ranks us third in the world behind Saudi Arabia and Russia. Those two did 10,520,00 and 10,270,00 respectively. If you add up the numbers in the link below you will see thats 15% not 9%. For some reason you refuse to believe the U.S. is "major producer". A relatively modest increase in production would have an impact on world supply.
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2173rank.html
Very true. Which is why Keystone is going to the golf coast. So that the crude can be refined and then loaded onto ships and sold overseas. In fact there's a $2bn anual tax incentive to take canadian crude and ship it overseas. Long term the US tax payer is the one that pays for the Pipeline via tax incentives.
If you wanted to lower gas prices in the US you would pass the Pickens Plan (the bi-partisan Natural Gas Act that was recently filibustered in the senate by those beholden to big oil) to convert comercial semi's to Natural Gas (by the way the original conversion from gas to diesel took 5 years). And then you tax the crap out of petroleum exports. You put those tax dollars into renewables and building a hydrogen infrastructure.
By the way one of the biggest by-products of natural gas production is hydrogen. So if we're going to push natural gas we might as well collect and distribute hydrogen the same time. Supply and demand at work.
Who cares if it's a global commodity, the politicians said that home drilling would reduce the price of oil.
It doesn't.
Story: End Of.
We KNOW they were lying, we KNEW at the time they were.
But still it was demanded to be passed because it would reduce prices and help the poor out.
Now that it has been shown to be a load of bollocks, why will you now excuse them for lying about it?
It is not an "excuse" for the price. It is people betting that the price will rise more often than that it will fall. There are numerous reasons the price could fall:
1) Huge unexpected oil reserve found.
2) Breakthrough in some alternative energy technology
3) Mass change in lifestyle
4) A Major industry converts to natural gas, etc.
Compare the likelihood of the above with the likelihood of:
1) USD will inflate
2) World population will grow, increasing demand
3) Oil supply will continue to be used up
I think it is likely the price of oil is below its true value.
Speculators. During the crash in 2008 speculators got out of oil in a big way and lo, prices plummeted. As they got back in prices have gone steadily back up.
And sorry to go off on a rant here, but to the larger point...
As far as triggering behavioral changes, I would recommend increasing taxes on gas (we're still much less expensive than Europe) and VASTLY increasing tolls for daily commuters. If you live in the city/suburbs and are commuting to the suburbs/city you are a big part of the problem. If employers want to reap the benefits of cheap real estate in the burbs, let them subsidize workers transit or - MUCH BETTER - make them pay so much that telecommuting is very strongly incentivized.
Spend the increased taxes on improving mass transit and information infrastructure, see consumption drop, and maybe the best part would be more people working from home and being able to spend more time with family instead of wasting hours of their days stuck in traffic to go to a job they could easily do from anywhere with a decent net connection (for the most part).
Fuel costs would stabalize or go down for long-haul uses and things like food production while purely recreational use would be treated like an expensive luxury (as it should be).
What we need is not just changing from one fuel source to another, but a radical shift in how our economy works to recognize that physical transport of individual humans from point a to point b is pointless, that productivity has increased so much that a 40 hour work week is just dumb for the most part (and would be better split up between 2 people working 20 hours/week each), and that technology will let us make quite a few office jobs things people do routinely from home rather than being the exception.
Since I can't tell them apart, I treat all ACs as the same person.