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Economics argues for domestic oil drilling
Wednesday, July 2, 2008 | 2:04 a.m.
In response to Terry E Peele’s Monday letter, headlined “An easier way to lower gas prices in the U.S.”:
He states: “Many are arguing that opening offshore drilling and drilling in the Arctic National Wildlife Refuge will result in lower prices for a gallon of gasoline and our being less dependent on foreign oil. If domestically produced crude is priced the same as imported oil, where is the difference in the price at the pumps?” Mr. Peele is ignoring the law of supply and demand. If supply is dramatically increased, prices will fall. The domestically produced crude, as with all world crude, will sell for less.
He states: “What (President Bush) should be doing is asking companies producing domestically to withhold their crude from the world market and sell to the American consumer at a lower price. That would have a more immediate effect on the price at the pump.” Again Mr. Peele is ignoring the law of supply and demand. If supply is decreased, world prices will rise. How can we require a publicly owned company to sell to the lowest bidder? How would the stockholders, including millions in the United States, feel about that?
He states: “What is really happening in this debate is the American consumer is being sold a ‘red herring.’ The oil companies want to drill in these environmentally sensitive areas to put more crude on the world market, taking advantage of the growing demand by China.” If these oil companies put more crude on the world market, the United States would benefit with lower gas prices and more profits to U.S. companies, enriching their stockholders.
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A few big problems here.
1) Giving the oil companies more of our land on which to drill does not mean they will start digging holes right away. Or ever, for that matter.
2) Worldwide oil consumption is 85 million barrels per day and increasing at an annual rate of 5%. US oil production is about 6 million barrels per day. Even if we doubled US production overnight, it wouldn't introduce enough new oil into the world market to have a significant effect on the price of crude.
3) You will all notice that even though demand for oil has been increasing by 5% per year, the supply has managed to keep up. Nobody has run out of oil. So the notion that we face a short-term supply issue is flawed. We face a long term supply issue.
4) The long term problem of oil supply is much better addressed by finding alternatives to oil rather than by trying to find more oil.
5) Mr. Stockhausen asks, "How can we require a publicly owned company to sell to the lowest bidder?" The more appropriate question is how can we require a publicly owned company to sell anything at all? That's what's happening with our domestic oil supply right now; the owners of it (the oil companies) are sitting on it until its profitability can be maximized.
6) Let's assume that there is enough oil here in the US so that we could put enough new oil on the worldwide market to have an effect on the price (even though there isn't). Let's also assume that we open up every inch of federal land to drilling so that all possible oil is there for the taking and that we could start drilling all of it tomorrow. Ask yourselves, who's going to do it?
Use your heads, folks. The oil companies understand supply and demand as well as any of us. So why would they cooperate in increasing the supply of oil beyond the demand? It will only lower their profits. They're perfectly happy with things just the way they are.
Obamanomics.....demand is sharply increasing every day so freeze supply.
High gas prices.....courtesy of the Obama, Reid and the Democratic party.
You don't get it, Mr. Nance.
WE can't do anything to increase the supply of oil. Only the people who control the supply can do that, in other words OPEC and the major oil companies.
We've already given over hundreds of millions of acres of this country to the oil companies to drill on AND THEY"RE NOT DOING IT. What is it about 86 million acres of unused leases that you fail to comprehend? How is it that opening up more acreage for drilling will increase the supply of oil when the oil companies won't drill on the acreage they already have?
"demand is sharply increasing every day so freeze supply"
The oil companies get this, that's why THEY are not increasing the supply. They could be drilling on those 86 million acres right now, but they're not. That ain't Obama's fault, or Reid's fault, or Bush's fault. It's simple economics. The oil companies don't stand to profit by it, so they're not going to do it.
How is opening up even more land for drilling going to change that simple fact?
"How is opening up even more land for drilling going to change that simple fact?"
I bet $10,000 if one opens the gulf of Mexico and ANWR to drilling that somebody will start the process to get drilling setup within 1 year.
Let's at least try.
"Obamanomics" is doing nothing to help gas prices.
"Obamanomics" is a 30 year plan that is based on wishes for new technology that may never come to past.
This absolute no drilling stand by liberals is stubborn silliness.
"This absolute no drilling stand by liberals is stubborn silliness."
That's a straw man argument. There is no such thing as an absolute no drilling policy. Liberals would simply like to see the oil companies use their existing leases before opening up new ones.
"Let's at least try."
We have tried. We've opened up tens of millions of acres of land for drilling. Eighty-six million of those acres are sitting idle. Obamanomics, as you call it, may or may not do anything to help gas prices, but neither will opening up more areas for drilling as long as those areas don't get drilled, and nobody is going to force the oil companies to start drilling. The best thing we as consumers can do to mitigate the high cost of oil is to stop using so much oil.
You still haven't addressed the most salient fact: oil companies will not take steps to increase the supply, and therefore lower the price, of oil because it's not in their best interest to do so. Since they have achieved vertical market integration they will always manage supply as to maximize profit. So tell me, if the oil companies won't take steps to increase supply beyond demand (which is what it will take to lower the price of a gallon of gas), who will? And how?
jfnance32 - "I bet $10,000 if one opens the gulf of Mexico and ANWR to drilling that somebody will start the process to get drilling setup within 1 year." You must NOT understand what it takes to set up drilling! It will take at least 10 years (estimate from the DOE) to start producing the oil! How is that going to help you drive your SUV today or even five years from now??????
" It will take at least 10 years (estimate from the DOE) "
You guys say that every 5 years.
ANWR and gulf was ready to drill 20 years ago.
It will help 10 years from now. They say that the they can have rigs pumping oil in the gulf in 5 years.
Your magically electric car and the power energy plants needed to keep them charge are according to Obama plan's 20 to 30 years away. That is if they can make an electric car that go more than 200 miles and take more than 2 passengers plus other stuff like baggage.
I guess we can cross our fingers and pray that gas prices do not put us all out of work before 2038.
If drilling off the coast and in ANWR will help us in 10 years why shouldn't we do it? We should also develop alternatives to oil. Finding new oil and developing alternatives aren't mutually exclusive. Why not support both ideas?
We can lease whatever land we want to the oil company, but they won't drill unless they can economically get the oil. That's if there's any oil under the land they've leased at all. Apparently ANWR and some other places have oil that can be tapped economically. Why not pick this low hanging fruit?
Our dollar is very week right now in the world market. Drilling our own oil and selling it on the world market will help us out enormously by increasing supply of oil and increasing the value of the $.
JohnF, you say in #2 that doubling domestic oil production wouldn't effect the price, but in #6 you say the oil company profits by keeping supply constant. If #2 were true, the oil company would double their profits by doubling production. Please explain this contradiction.
We should open up drilling. Even if it doesn't effect the price we pay at the pump, at least American companies are getting the $$$ rather than everybody else we have to import oil from. When the dollars say in America the world wide supply of U.S.dollars falls making our money more valuable on the world market. Keep in mind when the value of the dollar falls, the more dollars you need to import a barrel of oil!
The oil companies are sitting on 10,000 approved leases for drilling that they are not using. How much more "open" can you get?
"It will help 10 years from now. They say that the they can have rigs pumping oil in the gulf in 5 years."
1. "They?" Who says five years? A Chevron spokesperson told NPR differently:
http://www.npr.org/templates/story/story...
2. How much will it reduce the price of gasoline in 10 years? Quantify your argument. I've asked you the same question in other comment threads but you've never answered it.
Those who want to drill for oil need to answer some simple questions before we hand over federally-protected land.
reubenhwk,
What I should have said to be more precise is oil companies make money by keeping supply constant relative to demand. Since worldwide demand is increasing by 5% per year, next year's worldwide consumption will increase by over 4 million barrels. In 2010 worldwide consumption will be about 94 million barrels per day. If we double America's output during that time it won't be enough to compensate for the added worldwide demand. Hence, the price we pay for oil will not decrease. Worldwide supply will increase as demand does because OPEC and others will keep production equal to demand, but if we add more to the supply they will simply add less.
The people controlling the worldwide oil supply (OPEC and the major oil companies) have every reason to see to it that our supply of oil is always enough, but only just enough, to meet our demand. They're walking a bit of a tightrope here; they want to squeeze every penny out of us that they can, but they don't want to make it so painful that we finally get serious about looking for ways to do without oil altogether.
That's also why the people who say we should just drill more are living in a fantasy land. The oil companies and OPEC will never drill so much that it will depress the amount of money they can get for a barrel of oil. The only way we'll get them to lower the price of gasoline is to stop paying the price they're asking, but in order to do that we'll have to have some alternative to oil in place.
The point I'm trying to make is that we won't be able to drill ourselves out of this situation either in the short term or the long term. Conserving, and finding alternatives to, oil are what we have to do to get out of this mess.
jfnance,
You STILL haven't addressed the most salient fact: oil companies (and OPEC) will not take steps to increase the supply, and therefore lower the price, of oil because it's not in their best interest to do so. Since they have achieved vertical market integration they will always manage supply as to maximize profit. So tell me, if the oil companies won't take steps to increase supply beyond demand (which is what it will take to lower the price of a gallon of gas), who will? And how?
Answer that question satisfactorily for me and I'll agree that you are correct when you say we should open up more leases for drilling right now.
What is the problem then?
It is a win/win for you.
According to you, nobody will drill on the now closed sites, because they want to restrict supply. (It is funny. You are OPEC's best friend. I am sure they are so happy each time a greenie gets elected. It makes the price of oil go up by $10 a barrel.)
So open it to drilling. If nobody drills then you will be happy.
If somebody drills then it will bring additional supply.
Also you say, "is what it will take to lower the price of a gallon of gas".
What about not letting the price go even higher.
Again, "Obamanomics"....demand going up so freeze supply.
You should shout, scream and demand....DEMAND "No drilling!!!! No matter how high the price gas goes and even if millions lose jobs!"
JohnF
If OPEC withholds one barrel of oil for every barrel we pump, then we should pump every barrel we can! It adds to our GDP and subtracts from the GDP of OPEC nations.
Not drilling oil in the US because OPEC would withhold from their oil wells what we extract from ours is irrational.
reubenhwk,
You might have a point if we were making a serious effort to get ourselves off of oil. If we use only our oil and do nothing to find alternatives then we'll find ourselves back where we are now, only worse. Remember, the US has only about 4% of the world's known oil reserves while we use 25% of the world's oil.
jfnance,
I am OPEC's best friend??? What was the price of a barrel of crude when GW Bush took office? Remember when Bush warned us that if we elected Al Gore President we'd have $2 a gallon gas? OPEC is living in fear of the day we get serious about finding ways to live without oil. It's people like Bush, McCain, Cheney, and their sycophants who keep that from happening.
You constantly misquote me or put words in my mouth. Please stop. I did not say additional supply alone would bring lower prices; I said supply increasing faster than demand would bring lower prices. But as I explained, the people who control the supply will only allow it to expand as fast as demand.
Further, you consistently misstate the reasons for the increase in the cost of oil. Supply is not the issue here; there is enough oil on the market to meet demand.
"demand going up so freeze supply."
Baloney. The supply of oil has been increasing every year along with the demand, without our having to sell off more leases. Of course, with demand increasing exponentially this can't last, no matter how much we drill. Therefore, finding alternatives to oil should be our primary focus.
You also try to put words in my mouth by saying that I'm opposed to all drilling. Nothing could be further from the truth. I simply believe we should drill on the land and in the offshore areas we've already opened up before we start selling off more leases.
On top of that you assume I am opposed to opening up these leases on environmental grounds. If you'll read my posts, however, I never once said that. I'm opposed to selling additional leases for two major reasons, neither one of which is environmental. First, I oppose selling more leases because I believe we ought to hold on to our assets until it's advantageous to us to sell them. Selling off these leases in a panic right now is not judicious. Second, as we've already noted, selling off more leases will not bring us more plentiful, less expensive gasoline. So why do it?
" simply believe we should drill on the land and in the offshore areas we've already opened up before we start selling off more leases."
This is a Democratic talking point. Most of the leases have no drillable energy resource on them. The leases are for exploration of energy. Most turn out not to energy resources that are worth drilling for. Most will expire and will be return to the Federal government.
But there is a gold mine of known oil in ANWR and in the Gulf of Mexico, off the coast and in shale oil.
"Second, as we've already noted, selling off more leases will not bring us more plentiful, less expensive gasoline. So why do it?"
So you are OK with losing millions of jobs.
Give up and do nothing.
Instead of $7 a gallon gas, you say do nothing and get $15 a gallon gas.
You and Obama are determine to destroy the econmomic life of this country over a silly stubborn idea of not drilling in ANWR, off shore drilling or shale oil drilling.
"Most of the leases have no drillable energy resource on them. The leases are for exploration of energy. Most turn out not to energy resources that are worth drilling for. Most will expire and will be return to the Federal government."
Back that up with a citation.
Energy companies don't spend millions of dollars on leases without any notion of whether they contain resources. These areas are thoroughly surveyed before any bids are even accepted.
"So you are OK with losing millions of jobs."
No, that would make me George W. Bush. If you can demonstrate in any meaningful way that selling more leases will lead to lower gas prices and therefore save "millions of jobs" I'll agree that we should start selling those leases right now. But your say-so isn't substantial enough proof.
Oh yeah. Since you didn't want to answer the question, I will.
When George W. Bush took office, the price of a barrel of crude was a little less than $30 a barrel.
So who, exactly, is OPEC's best friend?
Here are some sources:
“Companies don’t know how much oil is under the lands they lease, so they buy up large swaths in hope that a fraction will work out. Much of the area that isn’t producing, they say, doesn’t have oil or gas in commercially viable quantities. Moreover, bringing a new field into production can require years of mapping, testing, drilling and construction – during which time the land would show up in statistics as being ‘not in production,’ even as companies spend millions or even billions of dollars to bring it on line.”
http://online.wsj.com/article/SB12135852...
“There’s the misconception that every lease has oil,” added David Curtiss, director of the association’s Washington office. “A lease is a line on a map. It has nothing to do with the geology of where oil is.”
“Oil geologists say the Democratic legislation ignores the long-term realities of oil leasing, which takes years of studies to find and drill for reserves.”
http://www.cq.com/document/display.do?do...
“Under existing law, producers can lease a block for up to 10 years, but a company typically must begin producing oil or gas in that time or lose the lease. “
http://www.chron.com/CDA/archives/archiv...
"Baloney. The supply of oil has been increasing every year along with the demand, without our having to sell off more leases. Of course, with demand increasing exponentially this can't last, no matter how much we drill. Therefore, finding alternatives to oil should be our primary focus."
You are arguing with youself here.
Is it supply = demand or supply < demand?
(Obamanomics 101)
If, one day, supply is less than demand then freeze supply.
Did I get the last statement correct?
"Therefore, finding alternatives to oil should be our primary focus"
How long and how much money to get this point of magical replacement?
Would it not be prudent to drill in the US where known large quantities of oil exist to help us bridge this time while we search for this magical replacement?
Or is it "HELL NO WE WILL NOT DRILL"?
I heard it somewhere, that the mere threat of us drilling more of our oil will drive prices back down, due to OPECS fear of us reducing our demand of foreign oil. Personally I am all for drilling our own, taking Iraqi oil to pay us back for liberating that crappy country, and Mexico should be giving us oil for all the American dollars that are pumped into that economy due to all the illegal aliens from that country. Those 3 things alone would reduce the cost of oil in a heartbeat. So where is the logic in preventing our own drilling. If it wasn't for libs in the mid 90's stating it was pointless to drill in ANWR and offshore because it would take 10 years to produce any results. If we looked to the future no for just immediate appeasement of whacked out lobbyists, we would still most likely be at $1.25 to $2.00 a gallon for gas. So why repeat the cycle. If it takes 10 years to get 1 barrel, who cares. We will not be so advanced with alternative fuels, that our dependence on oil will decrease enough to justify not producing more of our own.
I find it idiotic that we don't allow pumping oil out of the ground in uninhabited (excluding bears and deer) areas such as ANWR when we've pumped over 700 million barrels of oil into the ground in Louisiana and Texas!
http://en.wikipedia.org/wiki/Strategic_P...
Why the big fuss about ANWR? Why is the environment around ANWR so much more important and that much more delicate than the wetlands that we already drill in Louisiana?
If we can safely drill and pump oil into caves in the Louisiana swamp (and we can. I lived there for 20 years) then we can safely do it in ANWR. The bears and caribou will be fine.
JohnF said:
"We've already given over hundreds of millions of acres of this country to the oil companies to drill on AND THEY"RE NOT DOING IT. What is it about 86 million acres of unused leases that you fail to comprehend? How is it that opening up more acreage for drilling will increase the supply of oil when the oil companies won't drill on the acreage they already have?"
Mr F:
What is it that YOU fail to comprehend. What do you mean we've "given" hundreds of millions of acres to the oil companies?! Oil companies PAY hundreds of millions of dollars for those leases. And who does the money go to? The federal government. I am a geologist for a major oil company and I am intimately familiar with the processes necessary to get a prospect advanced from the the time a lease is purchased to the moment it hits the pipeline. In the deep water Gulf of Mexico it takes literally years and it costs hundreds of millions of dollars to build and move the hardware. I could go on here but instead I am sending a link to an article that I suggest you read before you continue spewing misinformation about how oil companies are just sitting on all of this acreage
http://www.relocalize.net/the_idle_oil_f...