Sunday, March 18, 2012

The Myth About Drilling For Oil

In the current election cycle, we’ve heard from Republican candidates about how we can reduce high gasoline prices by drilling more domestic oil wells here in the US. You should know that suggestion is nothing short of campaign myth.

Refining capacity and domestic consumption aside, the price of crude oil is the single biggest factor affecting gasoline prices. As oil prices rise, gasoline prices rise, too. However, prices for crude oil are not set by a national market. As a general rule, oil produced from a well in Texas goes into the global bucket with oil from every other region in the world. Minor variations in price are based on sulfur content of the oil and transportation costs, not simply on the region from which it came. For more US drilling to change the price of oil, we would have to increase our production to a level high enough to lower the global market price (by increasing the amount of oil available in the market, therefore driving down prices). Based on oil production alone, moving gasoline prices from $5 per gallon to $2.50 per gallon would require a doubling of current global oil production.
Global oil production stands at a rate of 74 million barrels per day. In order to double global oil production, thereby reducing the cost of oil by one-half, the US would have to produce 74 million barrels of oil per day. US production, already the third largest in the world, is currently 6 million barrels per day. Moving the global market price low enough to drop oil prices to half the current price would require the US to raise its production by 12 times its current rate. The US currently has about 530,000 oil wells in production. Increasing production levels to twelve times the current rate would require more than 6 million new wells. Even if the US had the reserves to exploit, drilling that many new wells would be physically impossible.
Merely meeting US demand with US oil, a presupposition behind the call for additional drilling, would be equally impossible and do little to affect the price of oil. Currently, the US consumes about 19 million barrels of oil per day. With production at 6 million barrels per day, the US would have to triple domestic production in order to meet current demand. That alone would require the addition of a million new wells and would still not insulate US consumers from the effect of global oil prices. Simply producing as much oil as we consume would yield no market dynamic that would force oil companies to sell their oil at prices below that fixed by the global market.