Morici: High Gas Prices and the Wisdom of Drilling for Oil
Professor, Smith School of Business, University of Maryland
Gasoline prices are zooming passed $4 a gallon, and the nation is hardly freer from the grip of imported oil or closer to robust economic recovery. With his approval ratings dropping precipitously, President Obama is blaming speculators and investigating fraud and at the pump, when this mess is the direct result of failed federal energy policies.
By word and deed, the Obama Administration has sought to limit off-shore oil exploration and development, and hasten the commercial viability of solar, wind and alternative vehicle technologies.
All this is based on two erroneous, but strongly-held beliefs among liberal policymakers, academics and pundits: increasing U.S. oil production would do little to lower U.S. gas prices, and but for the vested interests of multinational oil companies, mankind would have long ago harnessed renewable energy sources and freed itself from the sin of burning hydrocarbons.
Oil prices paid by U.S. refineries in the Gulf do move with global prices, but not in lockstep. Despite a reduction in U.S. refiner capacity, increasing North American production would lower refinery acquisition costs.
U.S. refineries, like others around the world, are built to handle the special characteristics of oil produced by their primary sources of crude supply. And gasoline produced by individual refineries is not wholly fungible — differing fuel characteristics are required across the United States and Europe to meet regional environmental standards.
Although tensions with Iran are growing and pushing up oil prices everywhere, prices have diverged, for example, between U.S. and European markets. For years, prices for West Texas Intermediate and North Sea Brent moved closely, but now WTI sells for $20 less than its North Sea counterpart. This indicates that the U.S. market is becoming somewhat separate and less determined by global conditions, and more domestic production and increased access to Canadian oil would lower U.S. oil prices — more drilling in the Gulf and elsewhere in North America, and the Keystone pipeline would significantly lower gas prices.
Instead of acknowledging these realities, the Administration first shut down deep-water drilling in the western gulf of Mexico by all oil companies for the sins of one — BP — and now is slow-walking new permits. As importantly, it continues bans on developing rich deposits in the Eastern Gulf, off the Atlantic and Pacific coasts, and in Alaska to pacify the president’s liberal base, which appears comfortable with Secretary Chu’s statements about raising U.S. gas prices to European levels.
At the same time, Secretary Chu has invested taxpayers’ money in Solyndra and a dozen other alternative energy projects that independent investment analysts advised were very poor commercial bets. One by one those are failing, but the administration refuses to acknowledge mistakes or relent, and pours money into battery technologies, even though with a $7,500 federal subsidy, Nissan and GM can’t persuade car buyers to purchase Leafs and Volts.
The facts are 50 years from now, mankind won’t be taking oil from the ground on nearly the scale that it does now, as science will have found better ways to capture hydrogen atoms to run more cleanly internal combustion engines, turbines and fuel cells, but oil companies are not conspiring to block the march of science and reckless federal spending won’t hurry the pace of discovery and commercialization.
In the meantime, whether Americans pay $115 a barrel for oil from Saudi Arabia and Nigeria, or obtained it from U.S. sources, does make a profound difference for the economy.
The annual trade deficit on petroleum is about $300 billion. Raising U.S. oil production to its sustainable potential of 10 million barrels a day would cut import costs in half, and directly create 1.5 million jobs. Applying Administration models for assessing the consequences of stimulus spending, it would indirectly create another 1 million jobs.
Overall, attaining U.S. oil production potential would boost GDP about $250 billion. Not bad, considering that it could be accomplished by reducing dependence on foreign oil, increasing federal royalty and tax revenues, and cutting the federal deficit.
Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission.