Monday, March 26, 2012

Drill Baby, Drill?

It occurred to me recently that I ought to write a post about how Republican politicians ignore the facts and abuse economic common sense in order to score political points. But it didn't take long to figure out that one post wouldn't be enough to cover that gigantic topic. I need to do it in installments. So I'll start with gas prices.

Unless you have decided to stop paying attention - and who knows, that may be the best thing to do - you know that gas prices have been rising all across the country, getting close to, and in some places actually crossing, the $4/gallon line (there's really nothing magical about $4/gallon, but it gets people's attention.)  And you probably also know that according to a lot of Republican politicians, high gas prices are, naturally, all Barack Obama's fault! If only he would get rid of those quibbling regulations and stranglehold taxes and pipe dreams about renewable energy! If only he would unleash the oil companies to produce more, all would be well! As Mitt Romney put it recently, "The best thing we can do to get the price of gas to be more moderate and not have to be dependent upon the cartel is: drill in the gulf, drill in the outer continent shelf, drill in ANWR, drill in North Dakota, South Dakota, drill in Oklahoma and Texas."  Even Sarah Palin's got to like the Massachusetts Moderate when he delivers a line like that.

The President has pointed out, of course, that since he took office, US oil production has increased.  And it increased for the first time in 24 years. That's right: with the exception of a small (.8%) upward bump in 1991, US oil production fell every single year from 1985 up to 2008; over all those years together, it fell 45% - almost in half. (Here's a chart, and the numbers, showing US oil production, ever since 1860.). Since 2008, production has risen by 15%; that's an increase of about 725,000 barrels a day. According to Romney, that should have gotten "the price of gas to be more moderate," but of course that hasn't happened. And it doesn't take an economist to figure out why.

The price of gas is driven mainly by the price of oil, and the price of oil is determined in the global oil market. The United States produces about 10% of global supply, so when our production rises by 15%, the world supply, other things equal, rises by a paltry 1.5%. But still, shouldn't even that small increase in supply lower prices, rather than raise them? Well, yes, but only if demand stands still. But of course it doesn't.  From 2008 to 2011, while US production was rising by 725,000 barrels a day, Chinese and Indian consumption alone rose by more than 2 million barrels a day. We can drill like mad - and trash ANWR, pollute our coasts, contaminate our aquifers, and accelerate global warming - and we will never keep up with growing demand and rising prices.

It is particularly ironic for us here in Montana that what we do to increase local oil production will probably have the effect of actually increasing what we pay for gas. Right now, Montana has about the cheapest gas in the country, right behind Wyoming (here's a very cool interactive map that shows you gas prices for every county in the country). Gas is relatively cheap here because the refineries that serve us are buying oil produced in the region. This oil doesn't have a good way of getting to international markets, where it would sell for a lot more than it does locally. Montana oil producers and politicians (from both parties) would love to change all that by building the Keystone pipeline and moving Montana oil into the international market. Montana producers would get a much better price and probably produce more, but Montana consumers would pay more as well.

If we can't lower the world price of oil by producing more of  it, what can we do? The obvious solution is to use less. We do that by promoting energy efficiency and conservation, and by displacing oil and other fossil fuels with renewables.* It's the logical economic response: when the price of a good rises, buy less of it. It's surprising how clever people can be in doing that. And when some day we get serious about dealing with climate change (that's going to have to wait until some of us stop denying it exists), we'll be glad that oil is cheap not because we've drilled for every last gallon, but because we simply don't need it anymore.

*I have posted a comment on this point, below.


  1. Excellent; thanks Dick. If anyone is interested in additional analysis and documentation to support the fact that gas/oil prices are driven by global supply and demand forces, I recommend reading the conservative (i.e., old fashioned - principled) weekly publication The Economist.

    Steve Siebert

  2. After I posted this piece, Bob Archer, an old friend from the Peace Corps (we were in Colombia from 1964 to 1966) and a guy whose professional life has been devoted to energy issues, emailed me to take issue with my statement that oil can be readily displaced as a transportation fuel by renewables. Given currently available technologies, Bob is correct. All electric cars (charged from renewable sources such as wind)are in their infancy, improvements in battery technology have been hard to achieve, and widespread use of electric cars would require substantial infrastructure investments. Ditto hydrogen. And there is a lot of opposition to biofuel (ethanol and biodiesel) production because, among other things, it diverts agricultural resources away from growing food. Our ability to displace fossil fuels with renewables for heating and generating electricity is greater, but that still doesn't solve the transportation fuel problem.

    But I will fall back here on my observation that it is remarkable how inventive people can be when it comes to economizing on expensive resources. This inventiveness increases with time. In the short run, available technology limits how much economizing we can do, but in the long run, technologies change and adapt to the reality of rising resource costs. I'll wait and see if Bob will let me get away with that observation!

  3. this is a great post, Dick. More than worthy of submission as an op-ed, if you were so inclinced.