Drilling More will Lower Oil Prices and Lower the Price at the Pump but it won’t Win Votes on the Left

Posted by PITHOCRATES - May 6th, 2012

Week in Review

Global warming alarmists and environmentalists have a friend in President Obama.  They represent a large swathe of the voting electorate.  Including some very high profile names in the entertainment industry.  Whose expertise in energy policy is nonexistent but persuasive nonetheless.  Because of an unwritten law in society.  If you sound and look good you are a de facto expert on the subject.  Which comes in very handy in making bad policy popular.  As demonstrated by the high price at the pump (see The 3 biggest benefits of producing more oil by Shawn Tully posted 5/3/2012 on Fortune CNNMoney).

President Obama argues that a campaign to substantially raise domestic crude oil production would provide miniscule benefits in lower prices and enhanced growth…

In fact, tapping the potential gusher within reach would enrich our future in three ways. First, despite the President’s declarations to the contrary, the extra output could be large enough to lower world prices by several dollars a barrel, chiefly through exploiting the enormous promise of shale oil. Second, adding to capacity would provide a sort of catastrophic insurance policy by cushioning shocks in supply that are especially damaging in the kind of tight, vulnerable market we’re experiencing today. And third, raising production means lowering our oil imports, and hence greatly improving our balance of trade. By pure GDP math, shrinking “net imports” would lift America’s growth trajectory…

Tight capacity means that almost all wells are pumping full tilt. To bring on more oil, producers that could react quickly may choose not to. A country like Saudi Arabia would need to spend lots of money uncapping old wells, and upgrading old fields, investments it’s now unwilling to make, in part from fears these high prices are temporary.

That leaves oil-hungry consumers to bid for the fixed number of barrels entering the market each day. In effect, someone commuting by car in London outbids a Chicago driver for scarce gasoline, and the Chicago driver saves by taking the train. That bidding is now driving the price far above the cost for the producer drilling the world’s most expensive oil, creating what’s called in economics a “scarcity premium.” And it’s why Exxon Mobil (XOM) and other oil giants are generating such huge profits.

How did the market reach this bind? From 2003 to 2008, demand for oil rose sharply, driven primarily by rapid industrialization in China and India. “The oil rich nations matched the rise in demand by producing more until around 2006,” says Lutz Kilian, professor of economics at the University of Michigan. “Then, production went flat, and even when demand started increasing again after the recovery began, production didn’t keep up…”

Well, there you have it.  Oil is expensive because demand is greater than supply.  So to reduce the cost of oil all we have to do is bring up supply to match or exceed demand.  And down goes the price of gasoline.  Elementary, really.  So why aren’t we doing this already? 

Because of the global warming alarmists and environmentalists who simply hate fossil fuels.  And the current president is appealing to these demographics for campaign funding.  And votes.  Neither of which he will win if he stops attacking Big Oil.  So he continues to attack Big Oil.  Buying campaign funding and votes.  All paid for by everyday Americans at the pump.  Who are cutting back everywhere in their lives to afford the high cost of gasoline the president is using as vehicle to reelection.

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