Saturday, November 30, 2013

A Demonstration of Why Drilling or Fracking More American Oil Will Not Lower Gas Prices

It seems obvious that if American oil companies produced more oil in America, gasoline prices for Americans would come down.

But that isn't the case.

Why not? Oil is sold all over the world. And oil prices are set by OPEC (here's how that works). So every oil company — including every American oil company — sells its oil at the going rate. That is, they sell it at the world market rate, no matter who they're selling it to.

In the midst of our recent Great Recession, with people driving much less, with more fuel efficient cars on the road (in other words, Americans were buying less gasoline) the second-largest American oil company, Chevron, enjoyed "a 43 percent jump in quarterly profit," according to a New York Times article.

"The numbers released on Friday were the latest in a string of huge profits from the industry, which got a lift from the highest oil prices in nearly three years...Chevron’s profit rose to $7.7 billion...from $5.4 billion...a year earlier."

In other words, this American oil company benefits greatly from the global high price of oil that OPEC sets. The oil Chevron pumps from American oil fields is sold to Americans at OPEC's price, which generated obscene profits at a time Americans were suffering financially. They didn't sell their oil at "competitive prices" as they could easily do. They didn't give Americans a better deal than they could get anywhere else. They sold it at OPEC's prices, which was so high above their costs for production, their profits runneth over. And they were not alone.

Drilling or fracking more American oil will not lower gasoline prices at the pump.

This is not to say it will be any cheaper to import it from somewhere else. Yes, as long as we are using oil, we should drill it in America. It will at least improve the trade deficit and create American jobs. But if we want to pay less at the pump, gasoline needs competition. Drilling more will not provide that.

But the Open Fuel Standard will.

Author: Adam Khan, the co-founder of and co-author of the book, Fill Your Tank With Freedom. 

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