“Drill Baby, Drill” Leads to Cheaper Gasoline? Think Again

The United States is undergoing an upsurge in crude oil production as shown by the first and second headlines below. Further, this significant production uptick permits east coast refineries to utilize less expensive crude oil obtained by horizontal drilling and “fracking” from the Bakken region in North Dakota (See the third headline) in contrast to more costly, imported crude oil pegged at the Brent index. These first three headlines constitute “Drill, Baby Drill” (i.e., a useless Republican mantra on energy “policy”).

In spite of this domestic crude oil “glut,” U.S. gasoline prices at the pump are increasing almost daily. A possible explanation, albeit incomplete, is that some refineries are currently shut down for seasonal maintenance according to the fourth headline.

A more compelling explanation for sky rocketing gasoline prices is due to ever increasing gasoline exports (See the fifth and sixth headlines). Gasoline exports were the subject of one of my previous blog posts. Obviously, less domestic supply caused by exports would tend to have an inflationary effect on gasoline consumption, which has remained more or less constant during the period over which gasoline prices have climbed.

Summary: Energy companies will do whatever it takes to maximize profits and shareholder value. However, please don’t insult my intelligence with the disingenuous phrase, “Drill, Baby Drill.” It does nothing for the average worker’s gasoline costs and keeping the environment safe from “fracking” pollution.

1. U.S. Oil-Production Rise Is Fastest Ever

Wall Street Journal, 11/18/13

“U.S. oil production grew more in 2012 than in any year in the history of the domestic industry, which began in 1859, and is set to surge even more in 2013.”

2. Better Days Ahead For North American Oil Producers

Forbes, 2/1/13

“Over the past four years, US oil production has posted strong gains after nearly 40 years of steady declines. US oil production rose above the 6 million barrels per day (bpd) mark in late 2011 for the first time since 1998, according to the Energy Information Administration (EIA). By the end of last summer, production had risen by another half million bpd.”

3. US shale oil reviving East Coast refineries

Boston Globe, 2/17/13

“A year ago, the shutdown of several refineries serving the Northeast and the possibility they would not reopen threatened to boost New England’s already­ high gasoline prices by as much as 15 cents a gallon. But an influx of cheaper crude oil extracted from shale rock formations in the United States has helped save most of those facilities and stabilized gas ­prices.”

4. Gasoline Prices Set to Keep Rising with Summer Blend Switch

Wall Street Journal, 2/15/13

“Futures prices on the New York Mercantile Exchange have zoomed to their highest levels since late September on concerns that seasonal refinery maintenance will reduce production and drive up prices, as more drivers take to the roads when the weather warms.”

5. U.S. fuel exports grow to historic levels

Los Angles Times, Nov. 12, 2012

“Energy experts say increased fuel exporting by U.S. refiners is one of the reasons that gasoline and diesel prices have been so high.”

6. The Effects of Surging Gasoline Exports

InvestorPlace, August 8, 2012

 “Refineries make money on the “crack spread,” or the difference between the price of crude oil and the gasoline, jet fuel and other petroleum products that are extracted from it. Higher oil prices coupled with dwindling demand crippled refiners’ margins, and many firms within the sector struggled.”

“However, times are a-changin’ for the downstream sector. The refiners are realizing a huge boost to their bottom lines, not only from lower crude oil prices — but from exporting record amounts of gasoline.”

JHEverson Consulting by Jeff