Debunking a Few Myths About Oil and Gas Prices

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After rising and rising in recent months, oil prices have taken a sudden fall over the past couple of days, sliding beneath $100 a barrel. What happened? Representative Michael Burgess, a Republican from Texas, has an idea:

“What happened yesterday? Oh, the House passed a bill,” Burgess said.

“Here we are in the Senate today, and I would just mention to the Senate that our bill yesterday to expedite lease sales in the Gulf of Mexico, those very leases that have been delayed or canceled by the administration in the past year, The fact that we’re willing to expedite those lease sales had a profound effect on those people who like to speculate and hedge in the oil market,” he said.

So, essentially, Burgess is arguing that global oil markets suddenly fell because the Republican-led House pushed through a bill yesterday that would speed leases in the Gulf of Mexico and open up water off the Atlantic coast for oil exploration. That is, simply, not true—oil prices (along with other commodities) fell largely because investors are worried about the global economy, fearing we could be slipping back into a slowdown, which would likely cut demand for oil. The passage of a single bill in the House—especially one that is unlikely to pass the Democratic-controlled Senate or be signed by President Obama—isn’t going to make much difference for the global oil markets.

But why should we be surprised—when it comes to oil and gasoline, politicians rarely let the facts get in the way of a good narrative. And the truth is, the American public isn’t much better. In a new Washington Post-Pew Research Center poll that was released today, Americans blamed sky-high gas prices—now at $3.98 a gallon, higher than it has ever been at this point in the year—on everything from oil companies, to speculators, to politicians, to Mideast unrest. All of those factors play a role, but the respondents neglected to name the biggest reason: us, thanks to the American addiction to oil. As long as we stay so dependent on oil—along with most of the rest of the world—you can bet that low gas prices will largely remain a thing of the past.

A few other oil myths to debunk on a Friday afternoon:

Domestic oil production has dropped under President Obama: To hear some conservative writers tell it, President Obama is all but waging war on domestic oil production. (Actually, that’s exactly what they’re writing.) The White House is accused of sitting on drilling permits, and blocking efforts to expand drilling off the Atlantic and Pacific shores, along with the eastern Gulf of Mexico. Back in March, Mississippi Governor Haley Barbour earned some headlines when he criticized Obama for what he called a “perma-torium” blocking oil development in the Gulf of Mexico.

Except, here’s the thing… domestic oil production in the U.S. has actually gone up during Obama’s first couple of years in office, as this chart from the Energy Information Administration (EIA) shows. That’s due in part to increased production from onshore shale oil, which has helped make up for the gradual decline in oil from Alaska, as the north shore slowly dries up. But even in the Gulf of Mexico, production rose in 2009 and 2010, as Obama himself has pointed out. Of course, the drilling moratorium, which was lifted months ago, and the general tightening of drilling regulations, id lead to a slowdown in production from the Gulf of Mexico that will likely be felt later this year and into 2012. (Although, hey, there was that whole catastrophic oil spill.) But it’s simply false to argue that Obama has declared war on the domestic oil industry, or that production has crashed under this White House. Although…

Expanded domestic drilling will significantly lower gas prices: … it’s not like it would make much difference. Every time gas prices start climbing, the “drill, baby, drill” chorus kicks in. We heard it back in 2008, and we’re hearing it again. Sounds good. More oil should equal lower prices. Except that’s not quite the case. As this helpful little analysis from EIA shows, even expanded offshore production will do very little to reduce gas prices. But you don’t need fancy math—the reality is that while the U.S. consumes about a quarter of the world’s oil, we have less than 2% of total remaining reserves. Oil is a fungible commodity, meaning there’s really no way to ensure that the oil we produce here, stays here. Instead, any additional production would be absorbed and digested by the global oil markets, with little difference in prices at the pump.

That doesn’t mean there’s no benefit to additional domestic production. As Michael Levi of the Council on Foreign Relations has written, more domestic production means more domestic jobs and economic growth, and reduces the current account deficit that we’re all supposed to be worried about. Does that mean we should drill every orifice in the country? No, for fairly obvious environmental and safety reasons. (And we shouldn’t forget, the U.S. still has one of the biggest domestic oil production industries in the world, even with large parts of the nation’s coastal waters still off-limits to drilling.) But while environmentalists are right that expanded drilling will do little to reduce prices, and that the best way to attack oil dependence is through efficiency and investment in alternative fuels, domestic production should still have a place in energy policy. But we’re not drilling our way out of this one.