Energy

Note to Mitt: More Drilling Will Not Lower Gasoline Prices


Customers gas up at Costco Wholesale Corp. in Burbank, CA.

Photograph by Kevork Djansezian/Getty Images

Customers gas up at Costco Wholesale Corp. in Burbank, CA.

Energy was a big topic in the second presidential debate. The word alone was mentioned 40 times. Gas or gasoline were mentioned 30 times. At one point, Mitt Romney told the audience that President Obama is not “Mr. Gas,” which was meant as an insult but would usually be a compliment in any other setting.

Unfortunately, the debate offered a simplistic view of a complex topic. The most egregious example was the attack that Romney made on the Obama administration’s energy policy, which he boiled down to one key argument: Energy policies are measured solely by the price that consumers pay, and since prices for gasoline, heating oil, and electricity have all risen over the last four years, President Obama’s energy policy has failed. “The proof of whether a strategy is working or not is what the price is that you’re paying at the pump,” Romney said.

That’s good sloganeering, but it’s not accurate.

By such a measure, rising gasoline prices, the energy policy of every president since LBJ—save for Ronald Reagan—has failed. When Reagan took office in 1981, the U.S. was still reeling from the 1979 oil shock, as well as from double-digit inflation. Over the next eight years, as global oil supplies loosened and inflation was tamed, gasoline prices dropped.

You’d think a man as business savvy as Romney would be more attuned to the fact that markets, not politicians, determine the price of crude oil and therefore gasoline. The notion that government can control energy prices, or at least should, seems more akin to the policies of Venezuela’s Hugo Chávez than the free-market principles of the Republican Party.

Energy markets are as complex as any in the world. But complexity makes for bad campaign messaging. So Romney has reverted to a simplistic message that more oil production will lead directly to lower gasoline prices. If only it were that easy.

The U.S. is currently producing 6.6 million barrels of crude oil daily, compared with 5 million when Obama took office. The last time the U.S. was pumping this much oil was in May 1995, when the national average cost of a gallon of regular gasoline was $1.17. Today, it’s $3.81. The difference is the price of a barrel of oil. In 1995, a barrel of oil was $19. Today, it is around $92.

According to the U.S. Energy Information Administration, the cost of crude oil makes up 64 percent of the price of gasoline, and refining is 18 percent. Depending on where the oil is coming from, the refiners that produce your gasoline pay different prices. For example, the cheapest gasoline prices right now are in the middle of the country. (Heat map here.) The reason is that refiners there have easy access to all the cheap, domestic crude being drilled in such places as Texas and Oklahoma and Kansas. Most of that crude is trapped, however, and can’t efficiently reach markets on the coasts.

Meanwhile, the places with the highest gasoline prices—California, Oregon, most of New England—are stuck buying gasoline that has been refined from more expensive imported oil, rather than the cheap stuff coming from the middle of the U.S. A barrel of foreign oil priced against the Brent benchmark that gets shipped over from West Africa or the North Sea is currently $20 a barrel more expensive than domestic crude priced against West Texas Intermediate.

High gasoline prices aren’t a production problem; they’re a logistics problem. The U.S. is currently undergoing the biggest recalibration of its pipeline infrastructure since many of those pipes were laid 50 years ago. But here’s the thing: Building more pipes won’t necessarily bring down the price of gasoline. If anything, it’ll make it more expensive on the whole. Once all that cheap domestic crude starts to find more markets, its price will rise, not fall. A commodity that has access to more markets, and thus more demand, will eventually become more valuable.

In the next decade, the U.S. will continue to become more energy independent. That’s a function of higher domestic production but also due to gains in efficiency. That doesn’t mean, though, that the nation will get to a point where it, and Canada, operate in a closed loop, in which we use only what we make, with nothing going out and nothing coming in.

That’s not only a fantasy; it’s also bad policy. Whether it’s natural gas or coal or oil, energy is global, and therefore so are its prices. To say otherwise is to suggest closing markets and limiting global trade. That’s called protectionism. Which, last I checked, isn’t in the Republican tool kit.

Philips_190
Philips is an associate editor for Bloomberg Businessweek in Washington. Follow him on Twitter @matthewaphilips.

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