A Magic Formula for Gas Prices?

Is there a magic formula to fix soaring gas prices? A Washington Examiner editorial claims to have found it.

The Washington Examiner has an editorial which states the following:  There is a ‘magic’ formula for lower gas prices

“There is no magic formula to driving gas prices down,” President Obama told a Pennsylvania crowd earlier this month. Although he was literally correct that there is no magical concatenation of words involved, there is a formula. It involves either persuading Obama to reverse his opposition to significant expansion of domestic energy production, or replacing him in the Oval Office in November 2012.

I will state for the record that I am not opposed to more drilling and in some cases think that we should have been more actively pursuing more drilling for years.  However, having said that, the above paragraph is utter nonsense.

First, even if drilling started today, the effect on price would not be seen for a while.  I am not well versed in the intricacies of the oil futures market, but it seems to me that it would take more than just the president changing his position on drilling to create much of an effect on price.

Second, there is the ongoing question of exactly how much potential oil we are talking about.  The degree to which it would affect the price at the pump substantially is questionable.

Third, the editorial seems not to understand the problem is massive increases in demand in places like China.  In other words, global price has not shot up because of unwillingness to drill in the US.

Fourth, even if Obama was defeated in 2012, these policies writ large are unlikely to change.  One might recall, for example, that drilling in ANWR was blocked with a Republican in the White House.   Further, many of the offshore drilling bans are state-based (see, e.g., Florida and California).  Yes, Obama installed a moratorium on deep water drilling after the BP oil spill (a move likely, I would argue, by any occupant of the WH at the time).  However, to pretend that that moratorium is responsible for high oil prices is absurd on its face, regardless of what else one may think of the policy.  Indeed, despite the numbers cited in the piece, it should be noted that the current surge in prices did not take place in concert with the moratorium, but rather because of unrest in North Africa and the Middle East (and in the context of global economic recovery and therefore increased energy demands).

Understand:  my point here is not defend the Obama administration’s policies on drilling, but rather a response to simplistic reasoning on behalf of the Examiners‘ editorial board.

As a general matter I will say that while more supply would be good, let’s not pretend that we are going back to super-cheap gasoline if we increase domestic drilling.

FILED UNDER: US Politics
Steven L. Taylor
About Steven L. Taylor
Steven L. Taylor is a Professor of Political Science and a College of Arts and Sciences Dean. His main areas of expertise include parties, elections, and the institutional design of democracies. His most recent book is the co-authored A Different Democracy: American Government in a 31-Country Perspective. He earned his Ph.D. from the University of Texas and his BA from the University of California, Irvine. He has been blogging since 2003 (originally at the now defunct Poliblog). Follow Steven on Twitter

Comments

  1. mpw280 says:

    Obama and his people could quit debasing the US $, that would help. Gold, silver, oil, commodities and other currencies are all going up as the supply of US $’s is going up. That might be the problem but let’s ignore that elephant and blame everything else. mpw

  2. Rick DeMent says:

    We could drill flat out in the most irresponsible way we know how, and it would not make one bit of difference on world oil prices. The only real practical tool we have right now to make any changes in the price of oil is to start using less. Period end of story. I have another term for the phrase “drill here, drill now” and that’s Drain America First. Not a good idea in my book.

  3. john personna says:

    Felix Salmon wrote an important piece: The option value of not drilling for oil

    This is the critical bit:

    Under something known as the Revised Program Outer Continental Shelf Oil and Gas Leasing Program 2007-2012, the Bureau of Ocean Energy Management, Regulation and Enforcement does a very basic cost-benefit calculation when deciding whether or not to allow drilling in a certain spot: it looks at the costs, and then at the benefits, and then if the benefits outweigh the costs, it gives the go-ahead.

    What this calculation misses is the significant option value of doing nothing. The oil is, after all, not going anywhere — and if you don’t drill for oil right now, there’s a good chance that the costs of drilling for oil in the future, both economic and environmental, will be lower than the costs of drilling for oil in the present

    The “drill everything now” folk are really, really, shortsighted.

  4. john personna says:

    @mpw280, I have no problem with repairing the balance sheet, but you might also look to China for your elephant. You know they are now buying more cars per year than we are, right? GM even sold more cars there recently (2010?) than in the US.

  5. Jay Tea says:

    First, even if drilling started today, the effect on price would not be seen for a while. I am not well versed in the intricacies of the oil futures market, but it seems to me that it would take more than just the president changing his position on drilling to create much of an effect on price.

    I recall the president saying that it would take 10 years to see any benefits from opening up ANWR, and using that as a rationale for continuing the ban.

    President Bill Clinton, that is, when he vetoed a bill opening up ANWR in 1996.

    Let’s see… 1996, plus ten years, equals… um… er… carry the seven…

    Five years ago.

    Dang…

    J.

  6. jwest says:

    There are arguments both ways as to Obama’s culpability concerning oil prices, but it doesn’t matter. In the political sense, perception is reality.

    Just as Bill Clinton gets credit for balancing the budget because he happened to occupy the White House during an incredible tech boom, Obama will take the bulk of the blame for high gas prices. Fair or not, that’s just the way it is.

  7. john personna says:

    Yeah Jay, and the Chinese could really use that price reduction.

    (You do understand that in our economic system, ANWR oil would have to move the whole world price, including Chinese pump prices, to help you, right?)

  8. john personna says:

    Just as Bill Clinton gets credit for balancing the budget because he happened to occupy the White House during an incredible tech boom …

    Wait, it wasn’t the tax cuts?!?!?

  9. wr says:

    Gosh, jwest, I seem to recall gas prices hitting these heights when W was president. Can we assume that was Obama’s fault, too?

  10. john personna says:

    In California we’re about 40 cents shy of our record. FWIW, I put it down to emerging markets demand back then too …

  11. john personna says:

    (With speculators doing “unfortunate price discovery”)

  12. jwest says:

    Wr,

    It probably was Obama’s fault, but it doesn’t matter.

    I kind of alluded to that when I said in the comment “…but it doesn’t matter”.

  13. Vast Variety says:

    There is also the small problem of the fact that of the 90 million or so acres of land leased by oil companies for drilling, about 70 million of those acres are sitting idle becuase the oil companies have made the choice to sit on them and do nothing.

  14. mpw280 says:

    jp, China has nothing to do with the debasement of the US $ that is being perpetrated now. There is oil for sale and orders aren’t going unfilled. China demand has raised the base price of oil from the 30-40 range to 70-80 range but if you watch the correlation of the QE1 and proposed QE 2 and the value of the US $ against everything else you see that the $ has plunged and that prices have risen. You can’t flood the world with $’s and hope that prices won’t go up, the only thing it accomplishes is the cheapening of paying back your debt, which this president has increased threefold. This is why the holders of US debt are starting to bail on the US $ because they know we are going to debase their investment and they are going to lose money as we inflate our debt away.
    Drilling won’t hurt, but I have always said that the democrats long term energy policy is for the US to use other peoples oil first and then when things get real tight they will open the US to drilling. . It is little known that Clinton made the largest deposit of high grade coal off limits by making the ground it was under into a national park, some say at the behest of the Indonesian businessmen who owned the other large deposit of high grade coal, maybe maybe not, but the fact that we have high grade coal that is going undeveloped because it was made into a national park doesn’t help our situation. It also shows the dem’s mo in regards to national resources, don’t use them.

    mpw

  15. Vast Variety says:

    How about the oil companies use the land they all ready have leased before we open up places like ANWAR.

  16. PD Shaw says:

    If it were up to me, we wouldn’t drill in ANWR, but I don’t think that Salmon piece is very persuasive, or at least the implications of the argument are quite broad.

    Over one-hundred years of conservationism has held to the principle that resources can be managed rationally and scientifically to conserve supplies for the future. Arbitrarily setting aside areas for non-use is not rational or scientific, it will simply encourage less efficient use in other locations under conditions of waste. Waste does not help the future.

    ANWR is being protected under the competing ideology of preservationism. You either believe at least some areas should be set aside for non-use or you don’t.

    Felix Salmon’s critique is from the right, based upon the Tragedy of the Commons. When a resource is held collectively with mere rights of private use, the incentives point towards extracting immediate benefits from the use of the property without concern for the potential long-term values the property may provide. You can address this through privatization or creating a market for trading the licenses.

  17. Jay Tea says:

    john personna, you might not have heard about it, but oil is a very fungible commodity. An overall increase in supply brings down all prices. We might not get ANWR oil, but we would get the benefit of having it on the market. Not to mention the revenues…

    vast, a LOT of that land has little oil, or little economically-accessible oil. Or no reliable estimates on how much oil there is, and if it’s economically feasible. You seem to wonder why the oil companies would prefer greater odds of economic success?

    J.

  18. ponce says:

    I don’t think prices would rise quite so high if the name of the people and companies bidding up the price of oil were made public.

  19. Rick Almeida says:

    john personna, you might not have heard about it, but oil is a very fungible commodity. An overall increase in supply brings down all prices. We might not get ANWR oil, but we would get the benefit of having it on the market. Not to mention the revenues…

    * This is not what “fungible” means. At all.

    * One actor increasing supply of crude oil should result in another actor DECREASING supply to preserve the equilibrium price and preserve its own supply of this very valuable resource. Please remember that much of world oil production is controlled by a cartel. Also, take some econ.

    * “We” would receive very little revenue. The oil companies would receive it. “We” would receive very little benefit.

  20. mpw280 says:

    ponce Obama probably knows most of them personally. Guys that donated to his campaign from NY banking houses that run trading desks, you know the banks that get sweetheart deals. Guys like soros who was an early sponsor of Obama. With liberals it always blame the evil speculators as they take campaign cash from them, just like Obama. It isn’t anything he could have done it is always those evil speculators. Same with the corn market, use it for fuel then complain that the evil speculators are driving prices up and starving people, the whole time it is the stupid ethanol program that is causing the tightness in the markets. mpw

  21. ponce says:

    “Obama probably knows most of them personally”

    Maybe so, but the American (and world) public does not.

    During the last spike in oil prices, fully one third of the price was attributed to speculation

    Simply requiring that the names of the people and corporations bidding up the price of oil be made public would have a remarkable dampening effect of the price of oil.

  22. mpw280 says:

    rick, JT isn’t too far off in using the word fungible. http://en.wikipedia.org/wiki/Fungibility In a market term it would mean being able to deliver one market contract against another which isn’t really true in the oil futures markets, but in actual tanker cargoes it is pretty fungible, oil is pretty much oil within certain grade parameters. Oil from the tar sands and the heavy crude from Venezuela are similar and light sweet is pretty much swappable from all over.
    Domestic oil companies would receive the money, not terror supporting muslim theocracies in the middle east, when you develop domestic sources of oil. mpw

  23. mantis says:

    john personna, you might not have heard about it, but oil is a very fungible commodity. An overall increase in supply brings down all prices.

    That was quite obviously his point. ANWR oil production wouldn’t only affect U.S. fuel prices, but world fuel prices. That’s a drop in a much larger bucket, and thus will have a smaller effect.

    Your pedantic pissant posture is amusing when you don’t even understand the comment you’re responding to.

  24. mpw280 says:

    ponce, why so dems can sick the union attack dogs on them when they need a public hanging to show they are doing something about the problem. They are causing the problem by not allowing energy production, constraining better uses of energy, and their monetary policies that are destroying the value of the US $. All the policies that Obama has shown so far lead to the conclusions that oil will be priced higher in US $. Why blame the guys showing you that Obama’s policies have “unexpected” effects, you can’t hide from the effects of his policies. If you think the evil oil speculators are bad wait until the bond vigilantes ride into town and force the Fed’s hand, then Obama will be known as the guy who brought us back to triple double, double digit inflation, double digit interest rates and double digit unemployment. We can’t continue down this road without paying a price, you can’t have social programs supported by borrowing, you can’t print money like toilet paper and you can’t tell just 10% of the population to support 70%. The markets are showing you this now, whether you believe them or not doesn’t matter, they are showing you what will happen if things continue to go down the path they are on now. mpw

  25. ponce says:

    “why”

    The concept of shame would be the main purpose, mpw.

    Nobody is going to stop people from bidding up the price of oil in the hopes of profiting from it…but everyone in the world will know what you are up to.

    And perhaps some mild government pressure, such as denying federal contracts to companies engage in oil speculation.

    It beats politicians shaking their heads and vaguely blaming “the markets” for skyrocketing gas prices.

  26. TG Chicago says:

    An overall increase in supply brings down all prices.

    Right. But how much?

    If Clinton had opened ANWR, what would be the difference in the prices we see today?

  27. john personna says:

    @mpw280, if this were primarily a currency debasement issue then oil would be rising less in other currencies than it is in the dollar.

    That’s not true is it?

    Oil prices are way up, when paid in Yen or Euros.

  28. Ben Wolf says:

    There’s less than a billion barrels of oil in ANWR. That’s eleven days of oil at current rates of consumption. There is nowhere left to drill that will make a significant difference.

  29. yetanotherjohn says:

    The problem with at least part of your reasoning is that while increasing the drilling wouldn’t solve the problem immediately, not increasing drilling will make the problem worse in the future. Further, we could replace out dependancy on mid-east oil by allowing a pipeline from the Canadian shale oil. While this also won’t immediately bring prices down, it will open up new supplies so that increased demand in China and India is at least partly balanced by new sources.

    To put it another way, if we have another gas spike 5 to 10 years from now, then we can use this column as prime evidence you aren’t a long term thinker as you trot out the same argument that increased drilling won’t solve the problem.

  30. mpw280 says:

    jp, oil is priced in US $ world wide, if your British Pound is now worth 1.75 US $ vs 1.25 several years ago then you aren’t paying as severe an increase in oil prices, I think you can figure it out from there. The US $ has tanked vs nearly every other currency in the world, even the South African Rand has fallen from the high 8’s to the mid 6’s, what would that do for the price of oil in US $ for them? Yes oil has risen from the 30-40 range to the 70-80 range baseline but the debasement of the US $ has pumped it even further.

    ponce, what’s next you can’t make a profit doing anything? The idea that traders are evil is bullshit pure and simple, if you think the price is too high and only due to speculators, open an account and sell it to them, if you are right you will make a ton, but at least you will have put your money where your mouth is. Government intervention is why we are in this state so your solution is to make more intervention sounds like more dem lip sync to me not a solution. As to shame, the guys who trade and gave Obama money have no shame, they make a living in a free market and they give money to the party that thinks like you, that markets should be constrained by all sorts of government rules. We all know how those government rules work as soros, ge, goldman sachs and other well connected dems make a ton while the rest get the shaft. Maybe it is time to look at throwing the rules and the government support of selected firms out the window and try something else. mpw

  31. An Interested Party says:

    …you can’t have social programs supported by borrowing…

    Who knew that defense spending was a “social program”…

    …you can’t tell just 10% of the population to support 70%.

    Care to provide some evidence to back up this ridiculous assertion?

  32. john personna says:

    @mpw280 – “jp, oil is priced in US $ world wide, if your British Pound is now worth 1.75 US $ vs 1.25 several years ago then you aren’t paying as severe an increase in oil prices, I think you can figure it out from there”

    Several years ago? Where is your data?

    This page shows the pound running at $2.00 in 2007 and 2008. Back in 2004 it was at $1.80. Now it is at about $1.60.

    We can buy more pounds, not less.

    While we can buy more pounds, we can buy less oil. It was at say $70/bbl in 2007 and $110 now.

    Seriously dude!

  33. john personna says:

    I must have done a quote when i wanted a link.

    currency page

    oil page

  34. mpw280 says:

    ip is obviously willfully ignorant, welfare, pension, health are double the defense budget, and the defense budget hasn’t had the doors blown off of it like the rest of the budget and the boomers haven’t even totally hit the system yet.
    http://www.usgovernmentspending.com/budget_gs.php

    Again willful ignorance must be a great place to be. Top 10% pay over 69% of the income taxes so the bottom 70% pay very little at best with the bottom 50% actually a net drain rather than a source on the system.
    http://www.ntu.org/tax-basics/who-pays-income-taxes.html

    Here is a nice easy to read graph to enlighten you as to where the money goes:
    http://sadhillnews.com/wp-content/uploads/2011/02/obama-budget-deficit-spending-forecast-chart-illustration-wsj-proposal-sad-hill-news.jpg

    I don’t expect any of this to help because there seems to be a grab and distribute mentality settling in. You can only grab so much before the people begin to quit, look up the reaction to Maryland millionaires tax.

    mpw

  35. Jay Tea says:

    ANWR was a single example, but a valid one. And the oil produced would generate plenty of revenue for the US — leasing fees, taxes, royalties, and all the zillions of other ways the government gets its cut.

    Not to mention the income taxes of all the workers hired to work the oil fields, as well as all the auxiliary businesses that support the businesses and workers.

    I realize that it’s heresy, but private industry can do a hell of a lot to improve the economy when the government just steps back and lets it.

    J.

  36. ponce says:

    “Top 10% pay over 69% of the income taxes so the bottom 70% pay very little at best with the bottom 50% actually a net drain rather than a source on the system.”

    mpw,

    The obvious flaw in your toady for the rich argument is that income taxes aren’t the only taxes Americans pay.

    But you knew that already, didn’t you?

  37. john personna says:

    Basically Jay, you are reduced to saying we should drill ANWR now, because it might help. (Though it might not.)

    What about those grandkids? The ones we are already sticking with our taxes?

    “No oil for you!”

    Again, basically, if you don’t really care about anything but yourself, and the few cents a gallon that you “might” save, then you’ll call for ANWR to be drilled. For those pennies.

  38. Peterh says:

    “you might also look to China for your elephant. You know they are now buying more cars per year than we are, right?”

    I just saw today that China has passed the US in beer consumption…..not on a per capita basis….I think Ireland still has that….just shear consumption…..stock up people….and/or start brewering

  39. Ben Wolf says:

    Folks, it doesn’t matter how much new drilling, or how fast it is extracted. The cheap stuff is gone and can’t be replaced. That’s why we’re drilling under two miles of water, or basically squeezing rocks for oil in shale country. Those sources are far more expensive to extract and always will be.

    Only two things can be done to lower gasoline prices. Another recession, major increases in efficiency. Don’t worry, you’ll get both whether you want them or not.

  40. Jay Tea says:

    actually, john, those children and grandchildren of ours just might appreciate having that ANWR drilling well under way by the time they reach maturity, as well as the jobs that will come with them. As well as other energy developments.

    When it comes to energy, I believe in what I call “shotgun problem-solving.” Shoot off a bunch of solutions at once, then see how things look. And opening up more areas for development — including offshore, ANWR, shale, and whatnot — certainly fits in that.

    J.

  41. mpw280 says:

    ponce again you pull the switch what you are talking about, you lose, so change what I said. You argue like the socialist stooge you are. The bottom 50 don’t pay income taxes, f&^king period. If you are to dense to handle that info, too bad. I am tired of being told I am evil because I make money, which I work hard for, and that because I make money and pay taxes I should pay more taxes so more people don’t have to pay taxes. The opportunity to make something of yourself is the right, not the right to be a leech. If you feel so strongly about paying more taxes, WRITE THE CHECK, don’t demand that others write a check so you can get a bigger one from Uncle Sugar. If you are so in favor of taxes, become self employed, pay your own taxes without taking deductions or using loopholes (unlike Buffet, Kennedy’s, Obama, etc who say but not do) and then just to prove how pro tax you are, overpay. Then maybe I will believe how serious you are about paying higher taxes. mpw

  42. john personna says:

    Jay, ANWR is not big enough for you and your grandkids. See above, “There’s less than a billion barrels of oil in ANWR.”

    You crazy guys. You’re a cargo cult. Instead of bamboo airplanes you just want more drill rigs. With more rigs the oil gods will come.

  43. mpw280 says:

    jp, I will leave you to fly in chinese bamboo airplanes, I prefer Boeing. As to oil, how about off of California? It leaks from the bottom of the ocean there anyway, might as well tap it and turn it to fuel for all the cars in CA. mpw

  44. Jay Tea says:

    john, you’re not an idiot. What part of “ANWR was a single example, but a valid one” and “opening up more areas for development — including offshore, ANWR, shale, and whatnot —” did you not understand?

    You sound like a frakking absolutist — if one solution won’t solve the problem all by itself, why bother? It will help, and can be a part of a big solution. You sound like michael reynolds here — I say “cut the federal budget,” and offer a few starting points, and he dismisses me for not having an entire solution ready to go.

    I don’t recall saying that ANWR would make things all better. But it would help. And so would a bunch of other things.

    But feel free to piss and moan about it. Just stop shutting down others actually trying to get some help.

    J.

  45. john personna says:

    I don’t think there is that much more oil, and the “open ANWR” implies that there must be more, when there really isn’t.

    Serious answer: \US Proven Oil Reserves 1900 to 2005

  46. john personna says:
  47. john personna says:

    Here’s another way to look at it:

    We were the first oil-based economy. We had the first oil well and the first “people’s car” from Ford. We got oil production ramped up and running like crazy in California by the 1920′s, and moved to Texas shortly after.

    We’ve grown at an incredible rate, powered by that chemical energy, but a century of hard work really can make “play out” a resource.

    Drilling more, is not an answer to that.

  48. Eric Florack says:

    There is also the small problem of the fact that of the 90 million or so acres of land leased by oil companies for drilling, about 70 million of those acres are sitting idle becuase the oil companies have made the choice to sit on them and do nothing.

    Mostly because that according to the research they’ve done there’s nothing under that land.

  49. matt says:

    So you’re saying they thought there was oil there so they bought up the leases and only afterwards they found out there was no oil there? Yet you believe these same people when they say there’s oil in anwr? Odd…

  50. Eric Florack says:

    So you’re saying they thought there was oil there so they bought up the leases and only afterwards they found out there was no oil there? Yet you believe these same people when they say there’s oil in anwr? Odd…

    Perhaps some research on your part on how such leases are doled out, is in order.

    As a quick overview, though, these oil leases purchased by oil companies is for exploration and drilling, not just drilling. Meaning, they don’t know if there’s oil there or not when the leases are signed off on. Perhaps you don’t know this, but Oil is not magically distributed equally , there are leases that the land therein contains no oil….. indeed these are the vast majorit.

    Now, let’s assume that the lease holder is lucky enough to have found oil in the exploritry phase. Even in this happy condition, they might still not be drilling. Perhaps you’re unaware of the red tape to get through once you find oil on a site before you start drilling. And of course the amount of red tape has done noting but increase under Obama.

  51. matt says:

    Erik : You’re a funny little condescending fellow. I can just imagine the joy of doing work on your car for you. “You might not know this but there’s a drain on the bottom of the engine where you can drain the oil out”…