If you think your gasoline fill up was expensive today, just be glad you don’t live in California, where on October 8 the price of gas hit an all-time average high in the state of $4.67 a gallon. (And if you do live in California, well, at least you’ve got sunshine and this.) The Golden State’s sky-high gasoline prices—nearly a dollar a gallon more than the current U.S. average of $3.81—is an outlier. A power outage last week at a refinery in Southern California cut the supply of gasoline in a state market that was already fragmented and volatile, the latest in a series of refinery disruptions. Indeed, while gas prices in California jumped 50 cents in just a week, action in wholesale markets indicate that pump prices should be dropping just as dramatically as refineries return to action.
Still, gas prices throughout the U.S. have remained high throughout much of 2012, even if they never quite reached the $5-plus a gallon range that some analysts warned about earlier in the year. There’s a simple reason for that trend: oil is expensive. Brent crude—a trading benchmark that includes oil in Europe—is currently at $111 a barrel, and has remained in the triple digits for most of the year. That’s despite the fact that the global economy has remained sluggish, which would usually depress the demand for oil, and with it, the price. But 2012—in part because of the tightening embargo against Iran, which has taken millions of barrels off the market, and in part for reasons no one quite understands—has been different. The question going ahead is whether expensive gas is simply the new normal.
All of which is to say that gas prices are on American voters minds again, just a few weeks before the Presidential election. At last week’s debate, Mitt Romney and Barack Obama clashed over domestic oil production, with Romney chastising the President for holding back American drilling:
Mr. President, all of the increase in natural gas and oil has happened on private land, not on government land. On government land, your administration has cut the number of permits and licenses in half. If I’m president, I’ll double them, and also get the — the oil from offshore and Alaska. And I’ll bring that pipeline in from Canada.
That’s part of Romney’s much-touted energy plan, which he promises will enable North America to become energy independent by 2020, chiefly through massive increases in domestic oil and gas production, and the fast-tracking of pipelines that will carry Canadian oil sands crude to gas stations in the U.S. “This is not some pie-in-the-sky kind of thing,” Romney said when he announced the plan in August. “This is a real, achievable objective.”
But increasing domestic oil production almost certainly won’t be enough to achieve energy independence—let alone significantly lower fuel prices. That’s because—as we’ve said in this space many, many times—oil is a global commodity, and it’s price is set on the global market as a product of global supply and demand. If China and India keep using more and more oil—and there’s every reason to expect they will—oil is likely to remain costly into the future even if the U.S. and Canada can pump more crude out of the ground.
In fact, whatever the U.S. does or doesn’t decide to do with its potential oil supplies probably won’t be that important to the global crude equation. That’s one lesson of a new report out today from the International Energy Agency (IEA) that forecasts the potential for vastly increased oil production out of Iraq. Iraq used to be a major oil power, but years of anti-Saddam sanctions in the 1990s and the 2003 U.S. war and its destructive aftermath reduce production to nothing. Oil production has picked up significantly recently, however, reaching 3 million barrels a day, enough to help offset the loss of Iranian oil.
Now the IEA suggests that Iraq could produce much, much more. The report suggest that with the right investment, Iraq can be expected to double oil production to 6.1 million barrels a day by 2020, and could reach up to 8.3 million barrels a day by 2030. If that happens it would make Iraq—not the U.S., Canada or any other country—by far the largest contributor to global oil supply growth. For a thirsty Chinese economy, Iraq—well situated geographically—could be a major supplier. “In the supply side of the global oil equation, Iraq is by far the most important player,” IEA chief economist Fatih Birol told me by phone. “How much additional oil Iraq can bring to production will have an enormous effect on oil markets.”
It’s not just that Iraq has a lot of oil—the third-largest conventional resources in the world. It’s that Iraqi oil is much cheaper to produce than the costly unconventional oil that politicians like Romney are counting on in the U.S. and Canada. That means Iraq can scale up productions significantly without bankrupting itself—and it can sell that oil at the world market without fear that they might lose money should prices suddenly drop. (Unconventional oil like Canadian oil sands and U.S. shale oil tends only to be profitable if oil prices remain high, which is one reason why tapping those supplies won’t automatically lead to cheap gasoline at the pumps.) “Iraq is a major new energy powerhouse,” says Birol.
Of course, projections are just that, and the IEA also includes scenarios that would see Iraq increase oil production at a much slower rate. Skeptics will also note that predictions of vast increases in Iraqi oil production have been made—and broken before. In 2009 Iraq’s oil minister told reporters that his country would be pumping 12 million barrels of oil by 2015, which, it’s safe to say, will not happen. The IEA estimates that Iraq will need over $500 billion cumulative investment over the next couple of decades to reach its full potential on oil production—and more than money, it will need social stability and a solid government, neither of which is assured.
But Iraq’s potential demonstrates just how unpredictable global oil markets are likely to remain, and underscores the fact that the price of crude will still be mostly set by other countries—no matter who wins the election in November. Which means that if we really want to protect ourselves from California-style gas prices, we have one really effective policy: energy efficiency. That’s something only one Presidential candidate is really offering—and it’s not the one with the North American energy independence plan.