follow us like us subscribe contact us
Loading, please wait

Why, Despite the Boom in Oil Production, are Gasoline Prices Still High?

By Climate Progress | Thu, 14 February 2013 20:23 | 7

On Monday, USA Today reported that the price of gasoline hit $3.60 a gallon for the first time since October — an early start in comparison to the usual price rise seen in the spring. The increase occurred despite world oil production climbing to 88.8 million barrels per day in 2012, about 2 million barrels higher than two years ago according to the Washington Post’s Brad Plumer. And about half of that increased production is due to an oil boom in the United States that’s driven imported oil to its lowest level since 1987.

That increased oil production will bring down gas prices is one of the most reliable Republican canards when it comes to energy, so what gives?

As Plumer points out, “The big thing to remember is that oil prices are a function of both supply and demand. If world demand for oil rises faster than producers can pump the stuff out, prices will go up.” Plumer cites a piece by James Hamilton of UC San Diego, which shows China’s consumption of oil is booming, and that the world economy as a whole is growing apace — and thus demanding more oil — even as fuel efficiency increases.

Technically, the world isn’t even producing enough oil to keep pace with the rise in global incomes. Oil supply has risen by 2.3 percent since 2010. But the world economy has grown by 7.1 percent since then. The only reason that oil prices haven’t soared to record highs, Hamilton points out, is that countries have been undertaking new conservation measures. Americans, for instance, are buying more fuel-efficient cars in droves.

Related article: Driving Doldrums: Gas Prices on the Rise - Again

Granted, oil prices would almost certainly be even higher than they are now without the drilling boom over the past two years in places like North Dakota. But at this point, the extra drilling is struggling to keep up with the pace of global economic growth.

Here are the global production and consumption numbers for the last few years from the U.S. Energy Information Agency (note the numbers to the left start at 84,000 thousand barrels per day):

Global Oil Consumption v Production

And despite forecasts from BP and the International Energy Agency that domestic and global oil production will continue rising, Plumer notes that high gas prices aren’t going away anytime soon:

Related article: If Oil Production is Growing Why are Pump Prices not Falling?

The [IEA] recently projected that U.S. oil production would continue rising through 2020 and beyond, as companies extract more “unconventional” oil from shale rock and other sources. But global demand was also expected to rise 35 percent between now and 2035, with China on pace to become the largest oil consumer in the world in the next two decades.

And that’s the optimistic scenario. Raymond T. Pierrehumbert, a geophysical sciences professor at the University of Chicago and a lead author on the third IPCC Assessment Report, recently pointed out in Slate that while going after unconventional oil remains profitable, and thus likely to continue, it requires ever greater effort to retrieve the same amounts of oil:

Technological developments have made it possible to tap into tight oil, but these are not the same kinds of technological developments that have given us ever more powerful computers and cellphones at ever declining prices. Oil production technology is giving us ever more expensive oil with ever diminishing returns for the ever increasing effort that needs to be invested. According to the statistics presented by J. David Hughes at the [American Geophysical Union] session, we are now drilling 25,000 wells per year just to bring production back to the levels of the year 2000, when we were drilling only 5,000 wells per year.

We have to keep increasing drilling just to keep production steady, and the faster you drill in a particular area the faster production peaks and drops off. That future is an economy pouring ever greater amounts of energy and money into efforts “to extract the last drop of profit through faster depletion of a resource that’s guaranteed to run out.” So the structural economics of continuing to pursue oil are shaky, even if further industry profit is possible.

It remains the case that the best way to avoid high gas prices and supply shocks — not to mention avoiding catastrophic damage to the global climate — is to move away from oil as an energy source.

By. Jeff Spross

Leave a comment

  • Rademaker on February 15 2013 said:
    Cornucopeans want it both ways... First they make the argument that rising prices will enable increased production. That has happened in really diminutive and unimpressive way. But then they want that same increase in production to suppress the price rise that brought it about in the first place. Sorry, but that's just a bridge too far.
  • Kevin Muldoon on February 15 2013 said:
    I believe that the present price of Oil and the products that are produced form it is more a reflection of "supply and demand" of the US Dollar and other Fiat Currencies. They are being created in such quantities that it takes more of them to buy almost everything...including Oil.
    Gold, Silver, Oil, and other commodities are not going "up" our precious Dollar is becomong less precious at a pace that greatly exceeds our official CPI.
  • Younis Mourabi on February 15 2013 said:
    Author's view is flawed to the point of rendering his conclusions laughable. The graph with US EIA data is suspect, and frankly how can anyone conclude that a delta between GLOBAL estimated oil consumption and production of less than 2% represents anything other than market balance? What dataset is THAT accurate in measuring storage draws/adds?

    Implying economic (GDP) growth must be a lockstep linear relationship to oil consumption is absurd. It hasn't been over the last 70 years, and won't be int he future. GDP is a nominal, somewhat abstract figure, whereas oil consumption is real.

    Careful analysis of extraction technology would lead to alternative conclusion regarding the incrasing efficiency curve thru time. Is it as steep as Moore's Law in tech-land? No, but it is hardly linear.

    US oil production is currently at its highest level since the 1970's, courtesy of shale oil extraction. The fruits of these efforts can be tangibly measured by the magnitude of WTI discount to Brent. The fact is the production has overwhelmed the transportation and refining infrastructure. As this technology is applied in China, and other continents, we are likely to witness a shift in the supply/demand balance.

    That said, OPEC is a cartel, and they DO adjust output (representing 25-35% of world total) in order to keep prices 'stable.'
  • a.wells on February 15 2013 said:
    Impressive production vs. consumption chart. In just four years it covers, there is more than one year production deficit. What made the consumption possible?
  • MrColdWaterOfRealityMan on February 15 2013 said:
    Oil and gas may be plentiful, but net energy from oil is declining. Like any commodity shortage, it produces higher prices.

    Other factors matter are in play, of course. The oil that's left is more expensive to locate, extract, refine and distribute, but in macroeconomic terms, the major factor in oil price increases is scarcity of the real commodity we purchase with oil, positive net energy.
  • john tucker on February 16 2013 said:
    You, and/or your readers,might find it interesting to do a comparison of the production cost of a barrel of oil coming out of a conventional land-based well in Louisiana, versus the cost of a barrel from a deepwater well, or distilled and upgraded from a bucket of oil sands in Alberta, or from a fracked well in North Dakota. One of the serious influences on the price of gasoline at the pump is their cost to bring that gallon to you. the new methods which have brought the US the welcome increases in production, are many times more technically complex and downright costly, than the old ways .... ad that trend is only gonna get worse from here ....
  • Norman on February 17 2013 said:
    One point I do not quite understand is how can we continuously consume more than is produced? Since what has not been produced can not be consumed. (Unless you are talking about the Fed's creative monetary process)

Leave a comment