The Washington Times Discovers The "Global Oil Bucket"

The Washington Times Discovers The "Global Oil Bucket"

Blog ››› ››› JOCELYN FONG

A Washington Times editorial criticizes the Obama administration's June decision to sell 30 million barrels of oil from the Strategic Petroleum Reserve, stating that the move "produced nothing more than a brief pause in the steady rise in prices at the pump." According to the Washington Times, 30 million barrels is "little more than a drop in the global oil bucket":

The International Energy Agency did its best to help Mr. Obama, releasing 30 million barrels of its own. Though that may sound like a lot, it's little more than a drop in the global oil bucket. Such moves have no lasting impact because oil traders are looking at the big picture. There isn't enough supply to meet the world's demand. Even if consumption has softened in the United States and Europe due to the persistent economic slowdown, the thirst for crude in places like China and India is growing.

So we all agree that the price of oil, and thus gasoline, is determined by a global market? Apparently, the Washington Times only accepts this fact on a case-by-case basis. Just a couple months ago, the Times editorial board declared that Obama was responsible for the spike in gasoline prices:

Worst of all is President Obama's chokehold on fossil fuels. By squeezing off oil drilling, he has driven up gasoline to $4 a gallon, cutting into the economic recovery and threatening the nation with a second recession.

In fact, last month the independent research group Headwaters Economics reported that, far from being "squeez[ed] off," oil and gas drilling activity is nearing a twenty year high. This chart from the Energy Information Administration shows that the number of crude oil rigs in operation is greater than at any point since 1987, when the data begins:

Monthly U.S. Crude Oil Rotary Rigs in Operation

While the Obama administration's temporary moratorium on deepwater drilling decreases oil production in the Gulf to some extent, the effect is not large enough to cause a decline in total U.S. production. After all, offshore oil represents only 32 percent of the oil extracted in the U.S. and the deepwater drilling moratorium did not apply to shallow water or wells already producing oil.

EIA's most recent projections show that "Domestic crude oil production, which increased by 150 thousand bbl/d [barrels per day] in 2010 to 5.5 million bbl/d, increases by a further 50 thousand bbl/d in both 2011 and 2012" [emphasis added.] As the following chart from EIA shows, oil production also increased in 2009 and 2010 after falling since 2001, indicating that you can't blame a decrease in U.S. oil production, much less Obama's deepwater moratorium, for the $4 gas we saw this year.

U.S. crude oil and liquid fuels production

EIA's longer-term "business as usual" projection also shows "increased domestic crude oil production from 2009 to 2035."

But the specific numbers for U.S. oil production aren't as important in this debate as the basics of the oil market. I could not find a single energy economist who would entertain the notion that U.S. drilling policies are to blame for the spike in gas prices "because of the relative scales involved," in the words of Michael Canes, former chief economist of the American Petroleum Institute.

As EIA explains, "Changes in domestic oil production tend to have only a modest impact on crude oil and petroleum product prices, because any change in domestic oil production is diluted in the world oil market. In 2009, the United States produced 5.36 million barrels per day of crude oil and lease condensate, or 7 percent of the world total of 72.26 million barrels per day."

This point is not controversial among economists. Doug Holtz-Eakin, who served on George W. Bush's Council of Economic Advisors, said recently that "you can't change the oil price very much with the U.S. exploration." Tellingly, lowering prices is not one of the reasons given by the American Petroleum Institute for expanding drilling in the U.S.

Nevertheless, after seemingly acknowledging that oil prices are set by a global market and not by the United States, the Washington Times editorial concludes:

The real solution is to increase production to boost supply. America has an abundance of black gold in places the administration has put off-limits. The very real prospect of $5 gas by Election Day ought to inspire Mr. Obama to reconsider the error of his ways.

EIA administrator Richard Newell explained in testimony earlier this year that "the vast majority of estimated technically recoverable OCS [Outer Continental Shelf] resources" are located in areas that are already available for leasing. Newell also stated that expanding drilling on federal areas would not have "a large impact on prices":

In the short-term, oil markets react to many competing factors in a global context, and it is extremely difficult to disentangle the near-term impact of mid-to-long-term developments in the context of oil markets that see typical daily price movements in the range of 1-2 percent, and much higher fluctuations at times. Long term, we do not project additional volumes of oil that could flow from greater access to oil resources on Federal lands to have a large impact on prices given the globally integrated nature of the world oil market and the more significant long-term compared to short-term responsiveness of oil demand and supply to price movements. Given the increasing importance of OPEC supply in the global oil supply-demand balance, another key issue is how OPEC production would respond to any increase in non-OPEC supply, potentially offsetting any direct price effect.

In other words, increasing U.S. oil production is not a "real solution" to gas price spikes -- contrary the Washington Times' claim. As long as the United States remains heavily dependent on oil, there is simply no way of protecting our economy from volatile oil and gasoline prices, no matter how comprehensively we drill for oil to throw into the global bucket.

Posted In
Environment & Science, Drilling, Energy
The Washington Times
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