the U.S. Doesn’t Control Gas Prices

This morning CNN is running a story that apes something that I have been saying for years: more oil drilling in the United States will not change fuel prices.  Why?  Because the U.S. doesn’t control gas prices, OPEC does.

Additional oil drilling in the United States might create more jobs, reduce reliance on foreign oil production and help to lower the trade deficit.  However, it is estimated by multiple sources (the government’s Energy Information Administration, Deutsche Bank, and others) that even with a massive investment in more oil drilling in the United States that gas prices will barely drop.  Energy Information Administration estimates put the change of bringing online 500,000 more barrels of oil – which would take until 2030 to accomplish – would only lower gas prices by $0.03 per gallon.

Such a small decrease in the price of oil is because OPEC would likely lower production its production in order to maintain a fixed supply of oil worldwide.  U.S. production is so tiny compared to total worldwide oil production that it cannot dictate prices.  It’s like the local dairy farmer trying to set milk prices by buying extra cows.

Not only that, but the U.S. has no slack oil production, but OPEC does.  All oil produced in the United States is used for domestic production.  That means that the U.S. cannot manipulate oil prices, and hence cannot control fuel prices.

In fact, the U.S. is currently producing the most domestic oil it has in 20 years and is just behind Saudi Arabia and Russia as the world’s largest producers of oil.  Total U.S. production is up 1.5 million barrels of oil now than it did six years ago.

Since the U.S. cannot control the supply of oil, the easiest way for it to change the cost of its oil consumption is to change its demand for oil.  And you know what that means?  It means that the oil industry is not the solution to this problem.

Jason