Gas Prices

Take the Drill-Baby-Drill Challenge: Can You Guess Right?


 You know the story. When Obama took office:

  • Gasoline cost $1.95/gallon and oil, $45

But now (3/2/12)

  • Gasoline costs $3.72/gallon and oil, $125


Incredible. And we understand—because our politicians explained it to us, like so ...

  1. We should've drilled.
  2. But Obama and his EPA stopped us.
  3. So the supply of oil went down.

And, that pushes the price up, and high oil prices cause high gas prices. If we had drilled, supply would be up and the price would be down. Maybe down to $1.00/gal like under Clinton ([#March 1999]).

Free. Many Varieties

So I dare you to guess which Obama scenario on the graph above is correct. Don't cheat. Guess before you click to see the answer. Don't believe it? — See for yourself where the data comes from.

Shocking but true:

  1. We did "drill baby drill" — like never before.
  2. Obama didn't stop us.
    • Just ask the [#upset Sierra Club].
  3. The US supply of oil went up the most since 1970.

Under Obama, drilling has skyrocketed as never before, and the price of gas went from $1.95 to $3.95 (April 1, 2012).  There's a reason.

A Historic Reversal

More surprising facts:

[#PopNotes] Used Above

[=March 1999] Regular gasoline actually got down to $0.90/gallon in early March, but I like round numbers.
[=upset Sierra Club]Sierra Club President, Michael Brune quotes Obama saying "we are drilling all over the place," and headlines his op-ed "Obama’s energy March madness." (March 25, SF Chronicle)  But, Obama was right, and I say this as a member of the Sierra Club.
[=gas price widget]Enter a 2-letter State Abbreviation at the bottom of the widget to find your state's prices. Many variations are available for your website. 
[=PopNotes] Just hover over green-underline links above to see the "pop" notes.


Drill, Baby, Drill !!!

Obama does not get or claim credit for all the drilling. But ...

  1. He sure has let it rip.  (Did they strike oil?)
  2. Amazing as it is, it did not bring gas prices down. Click here for why.


zFact:  This is the biggest oil-drilling surge in 30 years, and likely the [#biggest ever].

  • This is the best oil-industry data — Baker Hughes. ([#exact data])
  • If you see data that shows a much [#lower drilling spike].

See the unprecedented impact of Drill-Obama-Drill. 

[#PopNotes] Used Above

[=PopNotes] Just hover over green-underline links above to see the "pop" notes.
[=biggest ever]The 1981 surge may have involved more rigs, but today's rigs can drill much faster, more flexibly and more accurately. (Before 1987, oil & gas rigs are not separated in the data.)
[=exact data]See North American Rotary Rig Counts, tab 9, "US Oil & Gas Split."
[=lower drilling spike]Look closely and you will find that it includes drilling for natural gas. That has been slowing down because the price of natural gas has plummeted. This graph is for oil drilling, and that's what counts for gasoline. 


Drilling Works

Drill-baby-drill is supposed to work like this:

  1. more drilling means more oil pumped (Right, see graph.)
  2. more oil means lower prices. (Wrong. Here's why.)

As you can see, the huge drilling boom under Obama has caused an unprecedented increase in oil production. Step #1 worked. But ...

zFact:  This is the biggest 3-year increase in oil production since US production peaked in 1970.

If you thought drill-baby-drill would bring down the price of gas (and you probably didn't), you were conned. How did they do that?.


Under Obama, US petroleum production has increased more than in any
three-year period since 1970. 
(Source Table 1.2, DOE's Annual and Monthly Energy Reviews)

Drilling Fails

Drilling is not a bad idea; just don't expect miracles at the pump. In fact, with a lot of drilling, count on pain at the pump. Take a look at these prices!     (Find out why.)


This Is Not an Accident — When Drilling is Up, Price is Up.

The two times (early 1980's and now) when drilling has set records, the price of gas has gone through the roof. When drilling was at it's lowest in 50 years under Clinton, gasoline got down under $1.00/gallon. Sarah Palin probably doesn't know this. Newt probably does. He's smart and a liar. 

zFact:  With a lot of drilling, the price will be high. With little drilling, it will be low.


Drill-Baby Fallacy

click to enlarge
Puzzle: Why is the price of gas up, when drilling is up?
  1. It was $1.00 under Clinton when drilling was lowest.
  2. It was $3.30 when drilling peaked under Bush.
  3. It was $3.90 with drilling sky high under Obama.


What's Wrong with the Drill-Baby-Drill Theory?

Newt's $2.50 gas for China⇒
  1. It's only about US Oil Supply (drilling).
  2. But supply and demand determine the price.

Here's What Happens Instead:

  1. Demand for oil goes up (think, China, India and Japan).
  2. The price of oil goes through the roof.
  3. Big Oil smells profit and starts to drill like crazy.
  4. Drilling keeps the price about a nickle lower than "it would have been."
  5. You get the nickle, Exxon gets $10 billion.

In a nut shell, here's the awful truth:

  • China uses more, and Our gas price goes up.
  • We use less and drill more.
  • Exxon ships the extra gasoline to China! -- See for yourself.

zFact:  US drilling is 10% of half the story. We pump 10%. Demand is the other half.

[#PopNotes] Used Above

[=used in politics]Newt told FoxNews, "I have a $2.50 goal as a maximum price. ... we outline step by step how to do it. I think it is doable."  Doable?!  $2.50 for gas means $1.50 for oil (see the Iron Rule). And $1.50 times 42 gallons/barrel = $63/barrel -- a little over half what it costs now. And Newt will make that the maximum price of oil for the world from now on. Sure thing.
[=PopNotes] Just hover over green-underline links above to see the "pop" notes.


US Gas to China

As the price has risen over the last three years, US exports of gasoline to China, India, Europe and South America have tripled to 20 million gallons per day.


We'd like the gasoline to stay here and drive the price down. That's not gonna happen. No oil company will sell to you for less than China or Europe will pay. That means two things:

  • Gasoline prices (before taxes) are set world wide.
  • If Newt could bring the price down to $2.50 for the US he would also be bringing it down for China and Europe.

His unworkable plan is to bring the price down for the whole world.

Gas Price = Oil + $1

The Iron Law of Gas Prices

Price of Gas  =  (World Price of Oil)  +  $1.00/gal

The price of gasoline (in 2012 dollars) has been [#$1.00 more] per gallon than the price of oil for the last 25 years (see graph below). There were some small deviations, but nothing systematic. There's nothing we can do about this unless we change the [#world oil price] — or we subsidize gasoline like Iran and Venezuela.

The Iron Law of Gas Prices (click to enlarge)
gas price oil prices graph


PopNotes Used Above

[=gas price widget]Enter a 2-letter State Abbreviation at the bottom of the widget to find your state's prices. Many variations are available for your website. 
[=$1.00 more] The $1.00 value is just a lucky coincidence. It covers the cost of refining, delivery and taxes. Three or four years from now, after about 10% more inflation, this will be $1.10 or so.
[=world oil price] The US price or the World price of oil?

This graph uses the world price of oil which is best represented by the Brent (North Sea) price of Oil.

[=bets on the future]All about Speculation:  If your skeptical of this claim, good for you. But then you should check this out. It's the clearest explanation you'll find anywhere.


Gas Price Graph

Data from DOE's weekly survey ([#Sources]).
  • See today's gas prices, use the free widget at the right ⇒.
  • Prices in the graph are corrected for inflation.
  • The 1981 gas-price spike happened during the biggest drilling boom ([#maybe]).
  • More drilling means higher prices. Learn why.
  • We're pumping more oil and selling more gasoline to ... find out who.

PopNotes Used Above

[=Sources] Recent weekly prices (year 2000 and after) for regular gasoline from U.S. Department of Energy (DOE xlnk.gif)
Gas prices 1973-1999 from Bureau of Labor Statistics (BLS xlnk.gif)
Gas price before 1973 (annual) from DOE xlnk.gif
Consumer price index from BLS xlnk.gif - U.S. All items, 1982-84=100 - CUUR0000SA0
[=maybe]They probably added oil rigs faster, but they were not as good as today's. (We're not sure because they didn't count oil and gas separately back then.)


The oil-speculation myth holds that dastardly Wall-Street speculators are buying up our oil cheap, driving the price up, and making tons of money. Then I suppose, they sell high priced oil to you and me. Well, I'm not buying this story. This is lot of nonsense, because, for the most part — 99% — speculators don't buy any oil at all! They just buy oil futures.

zFact 1:  Financial Speculation Is Just Gambling and Has No Impact

What are oil futures? They are bets. Speculators are gamblers. Say you think the price of oil is going to $200 per barrel, and I don't. So we bet. Say we bet on 10 barrels. We agree to bet on a price of $170/bbl. So six months from now, if the price of oil is $200/bbl I will owe you $30 × 10 bbl = $300. And if the price is $120, then you will owe me $50 × 10 bbl = $500, and so on. That's a futures contract. Well, not quite. It's not a standard contract backed by a big commodity exchange, so technically it can only be called a forward contract, but it's the same thing. That's financial speculation.

So does our bet make the price of oil go up?  No.  If one-half the the US bets the other half that the Euro is going to $10 next week, will that make the Euro go up? No.  Betting on the horses doesn't make them run faster.

There is, however, another kind of speculation, but it doesn't happen on Wall Street. And this kind of speculation can have a real effect. Here's how it works.

zFact 2:  Physical Speculation Makes a Little Difference Both Up and Down

If you believe that the price of oil is going to $200 in six months, you could buy a big tank and fill it with $100/bbl oil now. Then in six months you could sell it for $200 — if you turned out to be right. Now, your single tank would not be big enough to make a difference to the oil market, but what if lots of Big Physical Speculators did this? It would affect the price Now. Because buying all that oil Now to put in their tanks would be extra demand for oil Now and more demand always drives up the price. So physical speculation can drive up the price for a while — until the speculators' tanks get full.

But after the physical speculators' tanks are full, they've got to sell to stay in the game, and, of course, the whole point is to sell (at a profit) some time in the future. But selling depresses the price just as buying raises it. So if physical speculation works, the speculators will raise the price when they buy at low prices, and lower the price when they sell at high prices. So if they succeed, they even out the price swings. And if they don't succeed, then they buy high and sell low and go out of business.

On top of that, physical speculators don't own enough storage capacity to have much of an impact. The daily flow of oil on this planet, 86.4 million barrels a day (1000 barrels a second), is just too great.


Newt=Jimmy Carter

Shale oil comes from cooking oil shale — not from fracking shale containing "tight oil," which is ordinary oil that is trapped in shale. Tight oil is what is causing today's oil boom, shale oils is the stuff Jimmy Carter was after and Newt Gingrich is proclaiming to be the wave of the future.

Tight oil comes out of the rock on its own, once the rock is fractured. But shale oil is hydrocarbons that have not been naturally cooked long enough to turn into oil and so we have to finish the cooking process for nature. This requires a lot of energy, and most ways of doing it make a far greater mess of the land than does fracking.

Under Construction

Why Does It Matter?

Newt's second point is "End the ban on oil shale development in the American West." That's the dirty expensive oil Jimmy Carter was after. And yes there's a lot of it. But at $2.50/gallon of gas it's not profitable. The reason Big Oil is after shale oil is because they know the world price of oil is likely to average over $100/barrel. So the real plan is this:

  • Cook the oil out of Western shale.
  • Sell it at World Market prices.
  • Huge profits for Big Oil.

America takes the environmental hit. Big Oil takes the profits, the whole world gets slightly gas prices, and a bigger risk of climate change.  (Yes this will drive the price of oil down a bit, compared to what -- $120?)  So the question we're facing is, will the voters fall for yet another energy scheme from the politicians?

Cheaper Driving

How to Save on Gas—Use Less

Plenty of sites will tell you how to find a cheap gas station, but lets think big. One big-picture approach is the OPIC described on the oil-price page. But a more direct and complementary approach is to make CAFE standards tougher—or maybe not. New research brings good news and bad news. First, better mileage is far cheaper than we knew. Second, that means CAFE standards have been doing squat.

Better mileage is tantalyzing, not just because the price of gas is going crazy again, but think of the big picture. America has a choice. We can spend our money on better cars which are mainly made in America (even Toyotas). Or we can continue spending a few hunderd billion a year on foreign oil, which pollutes our cities and warms the globe. On top of that, the best way to reduce the price of oil is to [#buy less] oil/gasoline for our cars.

But Fuel Efficiency (CAFE) standards have flopped. They were not raised for 30 years and they left open a huge loophole—sell trucks instead of cars. And sell huge cars (SUVs) that qualify as trucks. The result has been a massive switch to low-mpg "trucks" over the last 30 years, because their CAFE standards are weak. Unfurtunately, to qualify as trucks, SUVs need a high front-end approach angle, which means they kill more people when they crash into mere cars ([#blame it on CAFE]). Sure, they now tell us the standards will get tougher. We've been through this before.

But There's Hope

In the June issue of American Economic Review (a top economics journal) there's a new estimate of how much it costs to build higher mileage cars. This is an age-old mystery because the car makers say it costs a lot, and environmentalists say it costs very little, and both are prone to exaggeration. But this article took a new and very [#clever approach] based on a CAFE loophole. The result was terrific. It costs somewhere between $9 and $18 to get one more mile per gallon. And the car companies are not doing that because the loophole is cheaper.

Let's do the math. Say a car gets 25 mpg and goes 125,000 miles. It would use 5,000 gallons. But at 26 mpg, it will use 4% less—that's 200 gallons less. That's about $700. So GM and Toyota could save us $700 on gas by selling us a car that costs, maybe, $15 more. And they are not making these improvements.

Don't Drink the CAFE

The trouble with CAFE standards is that the car companies have all the advantages when they go before the NHTSA. They have all the data on costs and market "problems," and they have the lawyers. I've read the arguments and they are hundreds of pages of technical stuff the NHTSA cannot check. Plus the car companies are experts at cooking up new loopholes.

The trouble is that CAFE is bureaucratic command and control. Environmentalists love that feeling of control, but it's just a feeling. You know this is true when we see that all this "control" has not even got them to spend and extra $9 to $18 a bucks a car.

There's a Better Way

It goes by the awkward moniker of "feebate." It's not a tax, since the government collects no money. But high mileage cars pay a fee and low-mileage cars get a rebate. Given how cheap it is to give us better mileage, a very low feebate of say $50 per mile/gallon would have beaten the socks off 30 years of CAFE.

What can the car companies say — Oh we can't meet that standard for years? That standard will cost way too much? This standard would cause technical problems? All of their excuses are out the window and there is no use for their technical expertise — because there is no standard with a feebate!!

They can build whatever they want. The only pressure, but it's extreme, comes from competition. If the other car company makes 30 mpg cars and they make 20 mpg cars they are forced to, in effect, pay the other car company $250 per car on average. What could they hate more than paying their competitor?!

So car companies don't have to do a thing, but they will. They will do far more than they ever have.

And it's easy to argue for a strong feebate. Better mileage saves a lot of money, so companies that save us that much should be rewarded handsomely — with a stronger feebate.


Now check out how our biggest oil barons skew our politics.



[=1] Sample
[=PopNotes] Just hover over green-underline links above to see the "pop" notes.


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