Gas Prices continue to Rise as the Number of Working Oil Rigs in the U.S. Fall

Posted by PITHOCRATES - September 15th, 2012

Week in Review

The law of supply and demand tells us when prices rise demand rises.  Causing supply to rise to meet that demand.  And it typically works when the free market is left to market forces.  Apparently that isn’t happening in the U.S. oil business.  So if you ever wonder why gasoline prices are so high this is the reason (see U.S. rig count unchanged at 1,864 by The Associated Press posted 9/14/2012 on USA Today).

The number of rigs actively exploring for oil and natural gas in the U.S. remained unchanged this week at 1,864.

Houston-based oilfield services company Baker Hughes reported Friday that 1,413 rigs were exploring for oil and 448 were searching for gas. Three were listed as miscellaneous. A year ago, Baker Hughes listed 1,985 rigs…

The rig count peaked at 4,530 in 1981 and bottomed at 488 in 1999.

The president may say we are drilling for more oil than ever before but the number of active rigs fell this year to 1,864 from last year’s 1,985.  A drop of 121 rigs.  At a time of increasing gasoline prices.  The rig trend appears to be trending in the wrong direction.  Rising prices mean demand is greater than supply.  So the number of rigs should increase not decrease.  To meet that rising demand.

The last time gasoline prices were soaring like this was during the Carter years.  Because gas prices were so high oil companies rushed in to meet that demand.  So that by 1981 (the first year of the Reagan administration) the number of rigs peaked at 4,530.  Which gave us the steepest fall in gas prices in U.S. history.  Falling from a high of $3.31 to about $1.75 a gallon (prices are in 2007 dollars).  All of those rigs (as well as others throughout the world) created a glut of oil in the market.  And that glut of oil brought gas prices down.

Gas prices are about as high as they were in 1981.  And yet we have fewer rigs drilling for oil.  Far fewer.  President Carter may have asked us to turn down our thermostats and wear a sweater to help in the energy crisis.  But he at least allowed the oil companies to drill for oil.  And they would drill today like they did under Carter for gas prices are as high as they were under Carter.  And the only reason that they are not can be that it is not as economically beneficial for them today as it was under Carter.  Or that the Obama administration is just not letting them drill.  And with prices and demand being as high as ever it suggests the latter.


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