Drilling Down to the Truth about Rising Oil Prices
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The Fiscal Times
May 6, 2011

Drivers are furious with the skyrocketing cost of gasoline, probably the most closely watched price of any in our car-centric society. Some Republicans are trying to focus that anger on President Obama by claiming his delaying offshore drilling in the wake of the disastrous BP oil spill in the Gulf of Mexico is responsible for pushing prices above $4 a gallon in some areas.  Yesterday, the Republican led House passed legislation that would expand offshore drilling even though safeguards have yet to be implemented. 

The delay has nothing to do with this spring’s soaring gas prices. The real causes lie in the Middle East and in China, neither of which Obama nor the Republicans can do anything about.

The Middle East link is obvious. Protests against oppressive governments have triggered violent responses in countries from the Persian Gulf westward to the Mediterranean, creating great uncertainty about the future availability of oil supplies. As usual, the new uncertainty has driven up both spot and futures prices for crude oil, which accounts for more than two-thirds of the cost of gasoline at the pump.

The average cost of oil produced by the Organization of Petroleum Exporting Countries (OPEC) has jumped 60 percent, from $74 dollars a barrel in early September to above $115 last month. Even though oil prices, like other commodities have dropped in the last few days, the Energy Information Administration, an independent part of the Energy Department, said it “expects oil markets to continue to tighten over the next two years given expected robust growth in world oil demand and slow growth in supply” from non-OPEC countries. This will further squeeze world oil markets “at a time when the disruption of crude oil exports from Libya and continuing unrest in other Middle East and North African countries already highlight significant supply risks.

That’s where China comes in. It’s responsible for a significant chunk of that “robust growth” in oil demand. Amazingly strong economic growth year after year has caused the number of vehicles on the road there to double, to 75 million, in just the last five years. Most of those cars and trucks have been made in China, which produced about 18 million in 2010, as many as the U.S. and Japan combined, according to data presented at a recent energy conference in Washington.

China became a net importer of crude oil around 1993 and now imports about half the roughly 8 million barrels of oil it consumes daily. The U.S. imports a bit more than twice as much oil as the Chinese, but their import volume is growing rapidly while that of the U.S. has been declining—surprisingly so.

Net U.S. imports of crude oil and refined products peaked at 12.5 million barrels a day in 2005 and have dropped continuously since. Better mileage for both cars and trucks are partly responsible, but the severe recession that began in 2007 has played a larger role in curtailing demand. Meanwhile, domestic production of crude oil and the liquids that come from natural gas have increased as well. In the first three months of this year, net imports were down to 8.9 million barrels daily, a 29 percent decline from the 2005 average.

In other words, it hasn’t been either an increase in U.S. demand for oil or a drop in production that has caused gasoline prices to soar. Nor was U.S. production or demand a significant factor back in 2008, when world crude prices briefly topped $145 a barrel and gasoline prices took off just as they have this year. The short-term spike in prices wasn’t President George W. Bush’s fault then, and it’s not Obama fault now.

The claim to the contrary is nothing more than a political cover as the Republicans try legislatively to undo all of the tighter regulation of off-shore drilling that either has been or might yet be put in place to prevent another environmental disaster such as occurred in the Gulf of Mexico. Ignoring that risk is dangerous and doing so wouldn’t do anything to lower gasoline prices.

Actually there’s nothing anyone can do in the short run to ease the pain the public feels as they stand watching the numbers on the gas pump’s dials spin around.
Citing the high oil company profits that have flowed from the jump in crude oil and gasoline prices, Obama and Sen. Max Baucus, the Montana Democrat who is chairman of the Senate Finance Committee, want to eliminate some large oil industry tax breaks. That's an excellent idea but it won’t bring down prices.

Neither will the Justice Department investigation of whether “speculators” have committed illegal acts that have contributed to the price increases. Of course there is speculation by investors in crude oil or gasoline futures contracts. But remember, there are two sides to each futures contract. For each investor placing a bet that crude prices will go higher, there’s another betting the opposite.

Higher gasoline prices may encourage some savvy consumers to think about changing their driving habits or the car they are driving. At the same time, many of the politicians who are also struggling at both the national and the state levels with serious budget issues ought to be thinking about raising motor fuel taxes to bolster their budgets while encouraging that kind of consumer thinking.

Another chart shown at the recent energy conference compared car fleet efficiency standards among the U.S., California, Canada, Australia, China, Japan and the European Union. The EU standard is the most stringent, around 48 mpg for 2015, and Japan’s is almost as high. China's will be 38 mpg that same year. This country’s standard is just over 25 mpg, a figure slated to rise to 35 mpg by 2016.

It will cost auto manufacturers more to produce the more efficient cars to meet that 2016 standard. However, consumers will save about $3,000 over the life of those cars and light trucks. 

That’s a way really to help ease the pain at the pump down the road.

Related Links: 
High Oil Prices Don't Endanger the Recovery—Yet (TFT) 
Charge! Electric Cars Fueled by Higher Gas Prices (TFT)  
Mideast Protests Drive Up Oil, Threaten Recovery (TFT)  

covered the Federal Reserve and the economy for 25 years at the Washington Post before joining Bloomberg News in 2004. In 2009 he began writing freelance pieces for, among others, Thomson Reuters, and is widely recognized for his ability to interpret the Fed.