It is impossible to drill our way to $2.50 gas
Last edited Sun Mar 18, 2012, 09:30 PM - Edit history (6)
It is impossible to drill our way to $2.50 gas, meaning drill our way to a 40% reduction in the price of gas, all things other than US production being equal.
In a free market, transportable goods are worth what somebody will pay in Place X minus the cost of shipping the good to Place X.
A Chinese factory makes a widget to sell for $1.00. An American factory makes the same widget to sell for $1.25. Since it is costly to get the widget from China to the US the American product is fairly competitive. If the American product cost $2.00 it would not be competitive. It would still be cheaper for the US consumer to pay to haul the widget halfway around the world. (Unless it was something so big and heavy that the transport costs were exaggerated.)
Our inability to compete on price is a factor of low wages paid elsewhere, and also low transportation costs. Though energy is expensive, global transport is much more efficient than it used to be.
Now, if oil was $1,000/barrel it would hurt the US economy, since we are net energy importers, but it would make American manufacturers more competitive in the US marketplace because the cost of transporting goods from foreign nations would be much, much higher. At $1,000/barrel you would even see a factory in Seattle being substantially more competitive in California than a factory in New Jersey. There might be a need for small factories spaced out.
The less transportation costs the more centralization there is, and visa-versa. Since oil is fairly easy to ship it is a global market.
Why does the US rely on imported oil much more than imported natural gas? (We are a big natural gas producer.) Because it is very expensive to ship natural gas and fairly easy to ship oil. Why are so many existing US oil leases not being developed? Because the price of oil isn't high enough to make it worthwhile. (Would you rather pay $90, including delivery costs, for a barrel of oil from Iraq or $95, inluding delivery costs, for a barrel from Texas? When the Euro was weak, at 85 cents in the 90's, I used to buy some products on the internet from Europe because even with the high postage the delivered cost was lower than buying it here. Local is only cheaper if it is actually cheaper.)
It is almost irrelevant how much oil we drill in the USA. Drilling in the US is typically more expensive than drilling in Suadi Arabia or Iraq, not cheaper. And when a barrel of oil shows up at a refinery in Texas it costs the price plus the cost of getting it to Texas, no matter where it started out.
Since transportation costs are a relatively minor factor in the total price of oil it is impossible to drill our way to low gas prices. There is no reason for domestic production to be cheaper in the US than oil form somewhere else. (A barrel of oil is the same size and weight no matter the price. At $20/barrel tranportation costs would be a major factor. Say it costs $5 to ship a barrel somewhere. At $20 that's 25% of the price. At $100 it is only 5% of the price. And at that price a $94 barrel from Timbuktu is cheaper than a $100 barrel from your next door neighbor.)
Say we stipulate that the USA drills precisely as much oil as we use in the USA. How would that affect the price of gasoline in the USA? Very little… how could it? The oil companies are not charities. They will sell that US drilled oil to whoever will pay the most for it (minus transport costs), no matter where they are.
There would be some reduction due to lower transport costs. There would be some increase because American oil workers and truck drivers probably make more than in some places. On balance, very little effect.
Because if you want to make gasoline cheaper in place X ([font color=green]and are unwilling to nationalize the energy companies—if the government took control of all domestic energy the domestic production could have a distinct effect on domestic supply, and thus price. But I don't think the Republicans are planning to socialize US energy so that doesn't help there argument[/font color]) you have to make gasoline cheaper throughout the whole world. (Lowering gas prices in America is like lowering the water level in only 10% of your bathtub. It has to be lower everywhere or the oil will just flow to where people will pay the most money for it, until some equilibrium is reached.)
So there is no such thing as drilling enough in the US to make gas cheaper in the US. We would have to drill enough to greatly increase the supply of oil in the entire world marketplace, at or below current prices (production costs) which is absurd.
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All the easy oil is gone.
Places like Los Angeles used to export huge amounts of easily extracted, easily refined oil.
There were no multi-billion dollar deep sea oil platforms. U.S. oil companies would drill simple holes in the ground and the oil would flow out like water.
http://en.wikipedia.org/wiki/Signal_Hill,_California
Now the world's easy oil is all gone. Extracting and refining what oil remains is a very expensive technical challenge, and often has extreme political consequences requiring very expensive military and paramilitary support and huge payouts to corrupt political systems.
Even without market speculation, regulatory frictions, wars, and the political corruption, gasoline in the U.S.A would still cost more than it did during peak U.S. production. Whatever people like Newt Gingrich claim, these extra costs are not going to be reduced greatly, not even by extremely competent political leaders like Barrack Obama.
If anything a rotten Republican Administration would increase the cost of oil far beyond the basic technical costs of extraction and refining.
