Domestic Drilling Doesn't Decrease Gasoline Prices 736
eldavojohn writes "As the political rhetoric heats up, there's something puzzling about drilling inside the United States. Essentially, it doesn't reduce what we pay at the pump. From the article, 'A statistical analysis of 36 years of monthly, inflation-adjusted gasoline prices and U.S. domestic oil production by The Associated Press shows no statistical correlation between how much oil comes out of U.S. wells and the price at the pump.' If the promises that politicians made when they opened U.S. drilling were true, then we should be paying about $2 a gallon now. Instead it's $4 a gallon. Minnesota Public Radio pulls some choice quotes from both parties and wonders why this decades-old empirical observation goes seemingly completely unnoticed."
Whoops! Solely AP Not MPR (Score:5, Informative)
Minnesota Public Radio pulls some choice quotes ...
Submitter here, my mistake on that above source. When I read this in my news feed yesterday, I didn't see the AP markings all around this story. All of it appears to be completely and solely Associated Press sourced [google.com]. I apologize if that confused anyone.
Noticed that when I was looking to see if anyone had come up with a sufficient rebuttal to this empirical link but aside from a few [kansascity.com] insane pundits [rushlimbaugh.com], I didn't find much. The remaining arguments for "drill here, drill now" probably rests on "job creation" (waiting on that fact check) and, according to Thomas McClanahan from the Kansas City Star, it "means fewer dollars going to nasty, unstable regimes and more revenue for the Treasury, especially if the drilling is on public lands." He might be right about lowering the trade deficit but I think there are other things we could stop doing to prevent unstable regimes [wikipedia.org].
Re:One word (Score:5, Informative)
Please spell it out: what are the mechanics of speculation driving up gas prices?
Speculators buy and sell futures contracts. Every time they buy a contract, they are betting that the price of oil will go up. But, whenever they buy, somebody else is selling, betting exactly the opposite - that prices will go down. And, recall that speculators eventually have to sell those future contracts (or have 100 tanker trucks pull up to their homes.) When they do, the price will be determined by the actual facts on the group -- how much demand is there, and how much oil is being produced at the time.
Yeah, the AP Is Really Shilling for Obama, HA! (Score:5, Informative)
you now have glowing articles in the state-controlled Associated Press shilling for the administration
Really? Did you catch this part of the article:
Politicians - especially those in the party that's not occupying the White House - have long harped on high gas prices when expedient. Then-Sen. Barack Obama said in 2008, when he was running for president, that "here in Ohio, you're paying nearly $3.70 a gallon for gas, 2-1/2 times what it cost when George Bush took office."
But Obama, who has seen gas prices go up 73 percent since he took office, was singing a different tune last week in his weekly radio address: "The truth is: The price of gas depends on a lot of factors that are often beyond our control. Unrest in the Middle East can tighten global oil supply. Growing nations like China or India adding cars to the road increases demand. But one thing we should control is fraud and manipulation that can cause prices to spike even further."
Sort of makes him sound like a two-faced idiot to me. On the campaign trail he promised to fix all this and now he's in the same spot as Bush with the same damned effect on gas prices!
And the idiocy of calling the AP "state owned" is really funny considering you just said they ripped on Bush and Cheney about a conspiracy. Hello! For 8 years, Bush and Cheney were president and vice president. If the AP was state owned and if they ruled for 8 years, why didn't they just dissolve it after publishing all those "conspiracy theories" you stated? The AP is a Not-for-profit cooperative that has been around since May of 1846 -- 15 years before the start of the American Civil War!
Re:One word (Score:5, Informative)
I congratulate you and wish you well in your asbestos underwear!
Speculation is not the problem. The safety net provided by government bailing out the biggest speculators (the big banks) is the problem. Let those folks go out of business like they ought to, and we wouldn't have a speculation problem.
cej102937
Re:One word (Score:5, Informative)
Speculation and futures bend the rules of supply and demand. Gas prices are not determined by actual supply and demand, they are determined by speculators hedging on low supply in the future. Would you care to explain why despite supply being at an all time high just a few years ago, prices never came down to match? You can't say that it has anything to do with our oil coming from unstable nations; it's been that way for a long time, decades before we ever saw gas prices climb above the $2 mark.
I take it what you're asking is how futures contracts actually impact the market price of anything since they are essentially an artificial market not bound by the laws of supply and demand. When speculators buy enough contracts at above the current market price, oil producers see this and start artificially limiting their supply in hopes that they'll be able to sell it all down the road at that higher price, and that causes the price of oil to go up now. We had an agency called the CFTC put in place specifically to prevent this sort of thing from happening, but what happened? Enron happened.
You remember Enron, don't you? They were instrumental in exploiting a loophole in the CFTC's regulatory powers to allow oil speculators to trade outside of those regulations. As the CFTC lost power, the futures market exploded, and as it has continued to increase dramatically over the past decade, so too have oil prices. You have to be out of your mind to argue that oil prices coincidentallyskyrocketed with the futures market.
Re:One word (Score:4, Informative)
So, under your system, if I need to buy oil for some purpose, am I allowed to predict that it will be cheaper in a month and wait until then? This really makes no sense to me so I must be misunderstanding.
Surely you troll (Score:5, Informative)
Re:A Few Notes on Your Suggestion (Score:5, Informative)
Re:One word (Score:4, Informative)
Speculation also lowers prices when speculators think the future price will be lower.
Speculation also puts money into a market when the speculators get it wrong. If speculators really are pushing up the price of oil above what it "should" be then the oil producers (part of the market) are taking money from the speculators by taking them up on their promise to buy.
Re:A Few Notes on Your Suggestion (Score:4, Informative)
It's a world oil market, Wall Street is only one input. Also, OPEC, while weakened, does control a good part of the supply. Other producers more or less keep in line with OPEC because to dump a lot of oil on the market would decrease the price. There is a long term push for an oil supply crunch due to China, India, and the rest of SE Asia become more industrialized. Add to that the instability of the mideast pushing up insurance rates, that the price remains high is not too difficult to comprehend.
As someone above mentioned, the U.S. is also a net exporter of refined oil products, i.e., gas. There isn't any mystery here either. American consumption is down because of the recession and increased use of more fuel efficient cars. Gas is also an international market. So refiners sell into that market, not strictly the domestic market.
Re:Whoops! Solely AP Not MPR (Score:5, Informative)
Re:Obvious (Score:5, Informative)
You really shouldn't trust Wikipedia. In 2010 the U.S. produced 9,688,00 BBL/Day which ranks us third in the world behind Saudi Arabia and Russia. Those two did 10,520,00 and 10,270,00 respectively. If you add up the numbers in the link below you will see thats 15% not 9%. For some reason you refuse to believe the U.S. is "major producer". A relatively modest increase in production would have an impact on world supply.
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2173rank.html [cia.gov]
Oil is fungible? (Score:2, Informative)
I'm sorry, that one is *so* wrong, I can't let it go.
OIL IS NOT FUNGIBLE!
It looks that way to a fool or an economist because they conveniently don't think about the physical details. There is no meaningful way that a "barrel" of sulfur-laden tar extracted from a deepwater well off the coast of Brazil is in any way equivalent to a barrel of light sweet crude from a Saudi well a few thousand feet deep. Refining costs are much higher and energy return are much lower for the former.
In the la-la land of economics, this is all hidden in the aggregate price defined by the world market and encourages the delusional belief that low energy return, expensive oil is as useful as high energy return, cheap oil.
Re:A Few Notes on Your Suggestion (Score:5, Informative)
Re:A Few Notes on Your Suggestion (Score:5, Informative)
Re:One word (Score:5, Informative)
Please, do correct me if I'm wrong about this, but when I read 'speculation' I don't think 'Waiting for the price to come down to buy the goods'. I think 'buying paper or digital numbers that represent goods'.
First, speculation can take many forms, and not all of them involve options contracts. Hoarding is also speculation. At the moment, it is quite profitable to hire Suezmax tankers (day rates are quite low), fill them with crude oil and have them travel very, very slowly to their destinations.
Second, there is no objective way to distinguish between hedging and speculation. Selling and buying futures is an essential mechanism for both producers and consumers to manage risk. Wildly fluctuating prices, which is what you would have in the absence of futures contracts, are bad for everyone. Producers would be less inclined to invest (and less able to secure capital) in growing crops or extracting raw materials because they would not know if they could do it profitably. Consumers would not be able to plan their businesses properly, because they would have no control over their input costs. In other words, prices would be much higher across the board in the absence of futures contracts, because of the greater risk aversion of both producers and consumers.
Third, futures contracts do not tie up nearly as much capital as putting a commodity into inventory (hoarding), which is what would happen in the absence of futures contracts.
Fourth, in anything other than the short term, futures contracts have neutral effect on commodity price. Futures contracts are written in brackets above and below the expected market price. All the futures do is smooth out the fluctuations. Sometimes that works to the benefit of the producers, and sometimes it works to the benefit of the consumers, but neither can hold prices artificially high or low through futures contracts for very long, because the contracts do expire. When new futures contracts are written, the premium at which they are sold reflects the reality of the new supply and demand conditions.
Fifth, this has absolutely nothing to do with "The Wall Street". Energy commodities are traded at the NYMEX, which is on the opposite side of Manhattan from Wall Street, and agricultural commodities futures are traded in Chicago.
In the case of gasoline, part of the problem is that the individual consumer does _not_ have any way of hedging the fluctuations in price through options at the retail level. Individuals have no negotiating power and and must _always_ pay the spot retail price at the pump. It would be very interesting to see what would happen if fixed-price gasoline contracts were offered to individuals (or if individual consumers themselves formed a co-operative to negotiate gasoline contracts with distributors).
Re:A Few Notes on Your Suggestion (Score:4, Informative)
No, it isn't. If you can't export it then the refineries will just lower production and/or close down. Supply will decrease to meet the lesser demand.
And just wait to see what happens if gasoline becomes significantly cheaper in Mexico and Canada and people are screaming that your proposed U.S. law is keeping prices HIGH.
Re:A Few Notes on Your Suggestion (Score:5, Informative)
Another thing to consider: The world added 80.1M cars to the gasoline leech line last year alone, every one of which was outside the US (PDF documentation [oica.net]).
Face it, we've exported our bad habits to the world, and now we're going to have to compete for resources we've taken for granted for decades.
Re:Obvious (Score:4, Informative)
well, the 9.6MMbbl/day figure is 'all liquids', which includes natural gas liquids, LPG, ethanol and 'refinery gain' (which is an accounting trick used to inflate our domestic petroleum numbers). the actual crude number is noticeably lower.