Neither McCain nor Obama seems to grasp gas pricing

Offshore oil could become a larger part of America's energy mix.
REUTERS/CDIC
Offshore oil could become a larger part of America’s energy mix.

It’s puzzling that Republican presidential hopeful John McCain continues to push the notion that opening the country’s offshore areas to oil exploration would do anything to affect gasoline pump prices in the near term, if at all.   
 
It’s also puzzling that Democratic hopeful Barack Obama would think that prices would be affected if the U.S. tapped 70 million barrels from the Strategic Petroleum Reserve when a legally required supply emergency doesn’t even exist.
 
And it’s disturbing that a solid majority of Americans agree that prices would come down with offshore drilling, something that even the Bush administration’s own experts dispute.

The U.S. government’s recognized experts in the Energy Information Administration (EIA) say that any price effect of offshore oil development wouldn’t show up until 2030 — when oil fields, if approved today, would be at full production.   
 
Offshore oil and nuclear power
Yet there McCain was on an oil rig in the Gulf of Mexico pushing the “drill here, drill now” mantra just as the day before his national campaign chair and potential vice presidential pick, Minnesota Gov. Tim Pawlenty, was in Madison, Wis., pushing the drill plan and also plugging McCain’s call to build 45 nuclear power plants by 2030. 
 
Some numbers: 
 
The EIA reported earlier this month that oil consumed by U.S. motorists dropped to the extent that Americans now use 800,000 barrels of oil less each day. It’s a big number, and the fact that consumption is down for the first time in 26 years is news indeed. 
 
However, the United States goes through nearly 22 million barrels a day, so the reduced consumption is only about 3.5 percent of what Americans daily consume — and less than a percent of world oil consumption.   

And regarding Obama’s plan to pull 70 million barrels from a reserve that’s to be used for a supply emergency (it’s fair to wonder whether there’s an emergency when U.S. pump prices are one-third what Italians pay), the amount represents only a 3.5-day supply at current U.S. consumption rates. Reducing the reserve now, moreover, will mean that less would be available in the event of a true emergency, like a hurricane shutting down oil rigs in much of the Gulf of Mexico or, worse, a terrorist’s bomb sinking a giant oil tanker in the Strait of Hormuz.
 
Amount of oil available is in question
Back to the offshore situation: 
 
With a lifting of the offshore drilling ban (something once backed by McCain along with President Bush’s father, George H.W. Bush, and Bush’s brother Jeb as governor of Florida), it doesn’t mean that production could start anytime soon.  For starters, no one really knows how much oil is there. 
 
The amount of oil in reserve under the near-shore areas of Florida, Virginia, and California is, at best, a guess by geologists who have been notoriously wrong, said Houston energy expert William Simmons in an interview with MinnPost.  Simmons noted, for example, that there have been 220 dry holes in areas of Alaska that the U.S. Geological Survey said were “oil rich.” 
 
Regardless, the best guess by “experts” is that at full production the new offshore zones “could” produce 200,000 barrels a day. That’s a quarter of the amount that Americans currently are NOT consuming and a teeny fraction of the U.S. daily consumption. 
 
As well, the EIA says it would take 7 to 10 years to get initial production from the offshore areas: It’ll take a while to lift the ban and ready a lease sale — and then sit back and wait.  That’s because there’s a multiyear lag in getting drill ships to enable exploration to begin.  
 
That’s why the EIA says it will be at least 2030 before there’s full production. 
 
Impact on pump prices unknown
Even then, can production of such a small amount some two decades out have any impact on pump prices?  Consider that a few months ago Saudi Arabia announced that it was increasing world supply by 500,000 barrels a day, which it can do by turning a couple of spigots. 
 
And yet, world prices rose.  
 
While U.S. oil consumption was dropping by 800,000 barrels per day, the EIA reported that world consumption is up by about the same amount, which means the supply/demand situation was little changed.   
 
It is, after all, world oil consumption that’s at stake here. That’s because oil industries in most producing nations — Saudi Arabia, Russia, Iran, Iraq, Venezuela, Mexico, Brazil — are state-owned, which means those states can help themselves first to what is produced under their soil and price it as they wish for their domestic users. That’s exactly what they’re doing, Simmons said, and that leaves less available for oil importers like the United States — and in the process puts upward pressure on world prices.   
 
U.S. oil sold at world prices
Oil produced in America, on the other hand, is by private companies that own the oil and sell in the world market at world prices. Americans pay the same for oil pumped in Alaska or off Louisiana, as would China or India or anyone else. 
 
It all comes down to simple economics of scale.  And despite the political hype, anything that may one day be pumped from U.S. offshore zones or taken from the Strategic Petroleum Reserve is so small in the grand scheme of world consumption that it’s unlikely either McCain’s or Obama’s plans would affect pump prices. 
 
As Michael Noble at the St. Paul based advocacy group Fresh Energy http://www.fresh-energy.org/ says, the best way to improve supply is to reduce demand, and “every barrel that we don’t burn counts the same as every barrel that is produced.”

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Comments (4)

  1. Submitted by Nadav Tanners on 08/21/2008 - 12:42 pm.

    This column does an excellent job of clearing up the most widespread misconception in the offshore drilling debate: that oil produced by U.S. oil companies will directly benefit U.S. consumers.

    However, the quote you end with from Fresh Energy unfortunately continues this error with its claim that “every barrel that we don’t burn counts the same as every barrel that is produced.” The truth is that every barrel that we don’t burn counts MORE than every barrel that is produced, because energy savings accrue directly to U.S. oil consumers, whereas increased oil production is sold — as you note — by private companies at global prices.

  2. Submitted by Beth Wright on 08/21/2008 - 07:20 am.

    I just wanted to draw your attention to an error in the headline. It should read “Neither McCain nor Obama seems to grasp gas pricing.” The neither/nor construction requires that the verb agree with the second subject, which is singular.

  3. Submitted by Rod Loper on 08/21/2008 - 09:54 am.

    I think Obama should get McCain to sign a pledge
    that all oil from the new wells would go to the U.S. market and the profits from new, renegociated leases be funneled to renewable energy. Right now, 15% of “our”
    oil is exported. Kline and Bachmann know this. The
    republicans and their talk radio machine keep spreading
    their lies unchallenged.

  4. Submitted by Don Gulseth on 08/21/2008 - 04:56 pm.

    Nadav Tanners

    You are correct Nadev. But the things you are forgetting is the COST to the consumer in loss of required commute time, equity in average size American vehicles, replacing the current vehicle with a higher mileage vehicle, insulating housing and building green. All of this is important to engage in immediately.

    We need the consumer to understand energy. Therefore one should not point to other people trying to help the consumer and politician understand energy. It is not easy to understand the moving factors of any part of the industry. What people do understand is how it affects them personally.

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