Hot Air Over Gas Prices Print
Dean Baker and Bruce Bartlett
Politico, May 30, 2012

See article on original website

There is a serious risk that way too much time will be wasted in the fall presidential campaign on arguments over the price of gas. The issue is that we are paying close to $4.00 a gallon today, which is considerably more than the $2.50 or so that we were paying when President Obama took office.

No one can be happy about paying more money for gas, but the question is what President Obama or any other president can do about this. The answer, which may disappoint people, is not much.

Governor Romney apparently plans to make a big issue out of environmental restrictions on drilling that President Obama has imposed and blame these restrictions for the high price of gas. This is wrongheaded for two reasons.

First, President Obama has not imposed many restrictions on the energy industry. In fact, production of both oil and natural gas has increased sharply since President Obama took office. According to data from the Energy Information Agency, U.S. crude oil production has increased by close to 20 percent from around 5 million barrels a day in 2008 to over 6 million barrels a day this year. The story with natural gas is even more striking. Production is up by more than 25 percent from 50 billion cubic feet a day in 2008 to more than 63 billion cubic feet a day this year.

These increases in production are extraordinary by any measure. These sorts of increases don’t take place with an environmental dilettante in the White House. In fact, some of us may wish that he paid more attention to environmental concerns.

The other reason why the complaint is silly is that U.S. production has a minimal impact on the price of oil in any case. The price of oil is determined in a world market. Even with the increase in production over the last four years, U.S. output only accounts for about 9 percent of the world market.

If the oil industry was given its full wish list and allowed to drill absolutely wherever it wanted tomorrow it is almost inconceivable that it could increase production by more than 20 percent above current levels. And even this increase would take several years, since drilling in places like the Arctic Ocean off Alaska’s coast requires considerable lead time.

A 20 percent increase in U.S. production would imply an increase of less than 2 percent in world production. Part of increased U.S. production would certainly be offset by reduced supply elsewhere, but even if it were not, we would likely only see a reduction in the price of oil of 6-7 percent. This decline in the price of oil would save us less than 20 cents on a gallon of gas. And, this is a story based on assumptions that are almost ridiculously optimistic from the standpoint of the drill-everywhere crowd.

The fact that oil prices are determined in a world market that is largely independent of domestic production and consumption should not sound strange. There is a similar story with agricultural commodities like wheat. In the case of wheat, prices have risen sharply in recent years due to rapidly growing demand from countries like India and China. In this case, people in the United States still must pay more for the wheat we consume even though the country is a huge exporter of wheat.

The logic is simple; no one is going to sell their wheat in the United States for a lower price than they could get from India or China. The same logic applies to oil production. If we produce more in the United States, but world demand pushes the price of oil higher, we will still have to pay more for our oil. The fact that a larger portion of the world production comes from the United States really doesn’t make a difference.

There is one part of this picture that goes against one of the claims from President Obama. He has often implied that we would be able to get the price of gas down through conservation measures. While these measures may be desirable from the standpoint of curbing global warming, they also will have little impact on the world price of oil.

The U.S. consumes a bit less than 19 million barrels of oil a day. If it could reduce its consumption by 15 percent (a huge feat, which would require many years), it would be equivalent to adding 2.8 million barrels of oil a day to the world market. This would lower world oil prices by 9-10 percent. That could save us at most 25 cents on the price of a gallon of gas. This is also based on almost ridiculously optimistic assumptions.

It is worth noting that conservation measures will reduce the burden of high gas prices. If our cars get 40 miles a gallon then $4.00 a gallon gas is only half as much of a burden compared to the scenario in which they get 20 miles a gallon. That may be a reason to prefer the conservation route, but it is not the same thing as cheaper gas.

The public should recognize that whatever measures we may or may not take to promote drilling or conservation will have little impact on the price of gas. Other factors should determine these decisions and politicians who promise cheap gas are just playing games.

Dean Baker is a co-director o the Center for Economic and Policy Research. Bruce Bartlett is a former economist with the Treasury Department under George H.W. Bush.