Telling the Simple, Hard Truth About Oil Drilling
Posted May 3, 2011
With wrongheaded bills offered in the House of Representatives as described by my colleague David Goldston, I think it's worth reviewing evidence of the effect of drilling on how much we pay for gasoline every day.
First, there is the basic question of the possible effect of bringing additional supply online assuming all other factors remain constant (which is foolish, but I'll get to that). This requires looking at the new Outlook from the Energy Information Administration (EIA), as writer Ben Jervey did here. It takes years for new drilling to come online, just as it takes years for our vehicle fleet to turn over to a more efficient one, so Ben did the logical thing -- he looked out to 2025 and contrasted the effects of more efficiency and more driling in the Outlook. The upshot is that a 60 mile-per-gallon average for new autos by 2025 could ease the price at the pump by 20 cents. A scenario maxed out with offshore drilling, on the other hand, could cut the price by a mere five cents a gallon.
Economists and energy experts from across the political spectrum agree that any possible effect of drilling on prices would be delayed, and miniscule. Thanks to the diligent staff at Media Matters, which has taken the time to interview such experts, here are a couple of noteworthy quotes:
- Tom O' Donnell, Professor of Graduate International Affairs at The New School: "The amount of extra oil that the U.S. would produce would have an "almost insignificant" effect on prices. [Phone conversation with Media Matters, 3/14/11]
- Fadel Gheit, energy analyst at Oppenheimer & Co.: "[o]nly the naive would think that (the deep water moratorium) would have a direct impact...it doesn't even move the needle. Is 100,000 barrels (a day) going to make a difference? It's not. A cent or two per gallon? It might. But there are much bigger factors." [FactCheck.org, 3/24/11]
In order to have an effect on prices, as my colleague Brian Siu says, the U.S. needs to make a credible claim about spare production capacity being available. This is highly unlikely, given not just geological realities but economic behavior of the oil industry. It is also worth keeping in mind that another, much bigger player in the world market -- the Organization of Petroleum Exporting Countries or OPEC -- could trump any additional U.S. drilling by closing its spigots. Energy economist Philip Verleger put this most bluntly in a recent inverview: "Suppose the U.S. were to boost production 1 million barrels a day...OPEC has the capacity to cut 1 million barrels." [Greenwire, 1/4/11]
The bottom line here, though, was recently and startlingly admitted by Ken Green of the American Enterprise Institute, and Doug Holtz-Eakin (economic adviser to John McCain). Holtz-Eakin's statement was captured by Joe Romm on his blog here. Ken's words are worth reprinting, because they are the simple, hard truth:
- "The world price is the world price...Even if we were producing 100 percent of our oil...[if prices increase because of a shortage in China or India]...our price would go up to the same thing...We probably couldn't produce enough to affect the world price of oil...People don't understand that." [Greenwire, 1/4/11]
The oil market is globalized with prices "discovered" through a complex set of interactions between futures traders, benchmark prices for types of crude oil, geopolitical considerations, currency exchange considerations and other factors. We could only increase drilling modestly, with a substantial time lag, and other factors are unlikely to stay the same so it wouldn't dent a global price anyway. As I've written about before, we're already drilling like crazy, more that all other nations combined, and yet we consume more than twice what we produce. And we have real-world examples that show that changing that ratio so we produce more won't unshackle us from a volatile, giant oil marketplace -- Canada and the UK.
"Drill baby drill" is a nostalgic, foolish bumper sticker. It's time to get real about energy independence, which can be achieved with tools such as fuel-efficient vehicle technology and development of clean, renewable substitutes (so it's no longer a strategic commodity).
Let's get to work.