Who is to Blame for High Gas Prices?

As the presidential election’s silly season continues, as the most outrageously pandering promises are made to all people across the political spectrum, a single issue seems to have outdistanced the rest — who is to blame for high gas prices?

Republicans, for their part, seem to enjoy blaming Obama who, supposedly, is keeping millions of magical drilling rigs hostage. If only freed from their bondage, republicans claim these rigs all alone, all by themselves, could, in a puff of faerie dust, reduce the price of gasoline to $2.50 per gallon.

But do the republicans have a rational leg to stand on in their endless drill, baby, drill diatribe? To find out, we’ll have to examine some facts.

Obama brings massive increase in drilling

Since Obama entered office, there has been a massive increase in US drilling. And the sad truth, despite republican rhetoric, is that the US would be engaged in increased drilling regardless of who held the office of president. The US is so addicted to oil that it can’t afford, at this time, not to exploit every economic source. As a result, drilling has increased by over 350% under Obama.

Huge drilling efforts result in only moderate supply increases

Considering tripling US extraction efforts, one would think that US oil production would rise dramatically. In truth, production has risen, but by only a small amount. The net result of a massive 350% increase in drilling has only been a moderate bump in oil production of 14%. US crude oil production increased from a 2008 level of about 5 million barrels per day to today’s level of 5.7 million barrels per day.

Moderate increase in supply does not result in oil price drops

So all out drilling under Obama has resulted in some increase in supply. And you would think, all things being equal, that the price of oil would also fall. But all things are not equal. Oil is traded on the world market and there are an expanding number of factors keeping the price of oil high.

First, Saudi Arabia has claimed that $100 per barrel is a ‘fair’ price for oil. Saudi Arabia produces more than 10 million barrels each day and is the world’s second largest oil exporter. They are the only country in the world left with substantial spare capacity. This means that Saudi Arabia is the only oil producer with much influence on supply or price. But Saudi is saying it will defend $100 oil. And the means Saudi has to defend this price is through cutting supply. So should oil prices decrease, Saudi will cut production. In fact, it did this during 2009-2010. And since Saudi cut production at that time, prices have risen from $40 per barrel to over $105 per barrel now. As the world economy recovered in 2010-2011, Saudi Arabia brought production back. But demand was so high that the new oil didn’t result in substantially reduced prices.

Second, the reason Saudi Arabia is the only producer with spare capacity is the fact that all other oil producers are pumping oil flat out. And despite this all-out production, the world’s supply of crude oil has remained flat at around 74-75 million barrels per day (blue line on graph) since 2004. This means that despite the highest average price for oil ever, for eight years running, world crude oil production has structurally leveled off. The reason for this plateau is that new production of crude oil is only enough to keep pace with the rate of production decline from existing wells. In short, when it comes to crude oil production, the world is running to stand still.

Third, high cost unconventional oil fills in the gap. Today, the world produces 18 million barrels per day of unconventional oil along with other substances such as wet gas and condensate (condensate is usually included in the crude oil figure, but it’s a different substance altogether). This includes supplies of tar sands from Canada, deep water oil, natural gas liquids, and biofuels. Much of this oil costs $50 dollars per barrel or more to produce. And the fact that the world is reliant on this ‘oil’ means prices will never fall below the high cost of a marginal barrel.

Most unconventional oil isn’t really oil at all. For example, Canada uses 8% of its entire natural gas supply to hydrogenate tar and ship it to us as ‘oil.’ The fact that we are calling hydrogenated tar ‘oil’ is a certain sign of how desperate we’ve become. And biofuels certainly aren’t oil. They’re fuels interchangeable with oil derived from crops. And it is through the production of these very expensive and difficult to produce fuels that the world has been able to increase production at all.

Fourth, the nominal demand for oil is about 98 million barrels per day, this is ten million barrels per day higher than the combined total production of crude oil plus unconventional oil. What this means is if prices go down, demand will keep going up until we hit a level of consumption of around 98 million barrels per day. The reason for this very high nominal demand is the fact that so many machines using so much oil are operating around the world. Oil-consuming automobiles alone are being produced at a rate of 80 million each year with more than one billion of these machines in existence around the world. With so many hungry machines, any new oil produced will be rapidly snatched up.

These combined issues mean that the US would have to produce more than ten million barrels per day of additional low-cost oil in order to create a situation where long-term gas prices of $2.50 cents per gallon or less were possible. But, in truth, achieving this feat is a bald impossibility.

All new oil is expensive oil

The reason why drilling cannot dramatically bring down the price of gasoline is that the cost of producing all the new oil is dramatically high. ‘Conventional’ oil from fracked wells costs $50 per barrel just to produce. Prices for biofuels, deep water drilling, polar drilling and Canada’s hydrogenated tar are about the same. But even the most wildly optimistic projections from all these sources show only slow increases in production requiring massive expense and effort.

Options for drastically increasing production do exist, however, if you’re willing to pay much more for gas. Oil shale contains 1.5 trillion barrels of potentially recoverable goop called kerogen. The US kerogen, however, is even less energy-dense than Canada’s tar. So the cost of producing this ‘oil’ is around $100 per barrel. And this cost hides the fact that a huge amount of natural gas would be needed to hydrogenate the kerogen. Furthermore, the oil shale is in a water poor region. Massive volumes of water would be needed to produce this goop. But the water doesn’t exist in the high volumes needed, so it would have to be piped in.

The result is that a immense and terrifying industrial effort would be needed to rip an enormous hole in America’s heartland to produce this ‘oil.’ And the irony is that, if we are forced to produce the oil shale, it will only result in even higher prices than today.

New drilling can’t dramatically lower prices, even though that’s what oil companies want you to believe

So, in short, the republicans are either misinformed, or they’re not telling the truth. This is hardly surprising considering that oil companies paid 18.5 million dollars into republican campaigns this year alone. Money to democrats from oil companies was substantially lower — only 2 million dollars. And what this oil company money is going to is keeping us all dependent on increasingly expensive oil.

Oil companies don’t want us to realize that even more drilling can’t radically reduce prices. But they do want to continue their dominance in the energy markets. They do want to continue their position as the dominant provider of transportation fuels. And in order to do this, they must convince us that the best solution to high gas prices is more drilling, even if it is not.

Real solutions — increased efficiency, alternatives

The only real solution to the oil depletion problem is switching away from fossil fuels and dramatically increasing efficiency. And even though republicans aren’t very good at proposing sustainable solutions, they are very good at demonizing policies and technologies that actually help.

This was recently demonstrated by republican efforts to demonize the Chevy Volt. Number 1 in customer satisfaction in 2011, the Volt dramatically reduces dependence on oil by making commutes all-electric. Since 80% of all gasoline consumption occurs in commutes, a transition to electric vehicles like the Volt would drop US oil consumption by 7 million barrels per day. If these vehicles became common-place around the world, oil consumption could fall by as much as 35 million barrels per day. And that would dramatically lower oil prices as well as eliminate the need for new oil production. This powerful new technology represents a potential future oil companies and republicans most definitely do not want. A future, however, that would be dramatically more prosperous for the rest of us.

But republican attacks aren’t limited to demonizing revolutionary American technologies like the Volt. Republicans have also worked to de-fund all government incentives to produce solar energy, wind energy, and to increase vehicle efficiency. Solar and wind energy reduce dependence on fossil fuels and since gas and coal are increasingly interchangeable with oil, they indirectly reduce oil prices. Finally, republicans attacks on energy efficiency directly increase the price of oil by increasing demand.

Republican policies push high prices higher

Only a dummy or someone bought and paid for would make the argument that civilization should remain dependent on an increasingly expensive and scarce resource like oil. And that’s just what republicans are doing. Though republicans aren’t to blame for the fact that oil itself is more expensive because it is depleting, they are to blame for pushing policies that enforce dependence on oil, for fighting at every turn to reduce efficiencies, and for doing their best to demonize and destroy any alternatives to oil.

Foremost, the republican push for drilling as the only solution is doomed to failure. At best, new drilling is a temporary stop-gap. Long term, without alternatives, it dooms the world economy to spiraling increases in energy prices. This policy is one born out of the myopic special interests of oil companies and their continued drive for dominance and outrageous profits. A true allegory to this failed policy was the conservative/republican push for deregulating the banks and the housing market in the 1990s. The result was a world financial collapse in 2008. We don’t want to see the same thing happen in energy. But blinded by profits and donations, republicans are,once more, trying to force us down a dangerous path.

 

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