“Drill, Baby, Drill!” We have heard this phrase constantly since the Republican convention. The thought behind this chant is that increased American oil production will lead to lower gas prices. This idea is based on supply and demand. With a constant demand, increasing supply should lower the price of a resource. Drilling in the US produces more oil, so prices should go down. This reduces the cost of energy and lessens our dependance on foreign oil from often unfriendly countries.
This is silly.
The idea that increased domestic oil production will lower prices has several flaws. “Drill, baby, drill” oversimplifies supply and demand. It ignores physics. It assumes that oil companies are altruistic. It forgets that oil is a fungible commodity on a world market.
I’ll start with physics. Oil is called a fossil fuel for a reason. It was deposited in the past. The supply isn’t increasing. The law of conservation of mass doesn’t make a special exception for oil. There is only so much petroleum in the earth. Oil doesn’t magically reappear some time after a well runs dry. Once we use oil, it is gone. Oil isn’t produced, it is tapped from limited reservoirs. Increasing the rate of withdraw doesn’t increase supply, it decreases the time the fixed supply lasts.
“Drill, baby, drill” forgets that oil companies are for-profit businesses. It assumes that an increase in their ability to tap oil means they will increase availability, lowering prices. This action wouldn’t make sense for oil companies. As dealers of a limited resource, their goal is to make as much money as possible off the resource before it is gone. They need to maximize their lifetime profit per barrel. Increasing the rate of delivery to higher than demand lowers profits. Lowering the rate of delivery leads to higher prices. Using this basic supply and demand idea, it is in the interest of oil companies to decrease the rate of production.
This is also an oversimplification. Increases in oil prices encourages people to look into alternatives. As more people switch to alternatives, the demand for petroleum decreases, leading to lower prices. The profit maximizing strategy for oil companies is to keep delivery as low as possible to maximize the price per barrel, but high enough that demand doesn’t decrease. This is what they are doing.
To make this strategy more effective, they are also pursuing political and public relations. They admit that we need more than oil, but then claim that alternatives aren’t ready yet. This helps lower the interest in alternatives, keeping oil demand high. The high price and demand encourage people to think that increasing availability will lower prices. This lets oil companies claim that they would increase production, but these pesky taxes and environmental regulations are in the way. So the call goes out to practically give them public land and have the public take the responsibility for cleaning up later. Now they are not only maximizing profit and ensuring demand, they are lowering future costs. The calls for drilling now are exactly what the oil companies need to maximize their long term petroleum profits.
The calls for “increased domestic production” to lower prices also ignore the fact that oil is a fungible commodity. The oil tapped in the US isn’t reserved strictly for use in the US. Increasing delivery rate in one country increases the rate for the world. Any price change in the US would be the result of a price change on world markets. While the remaining supplies of petroleum in the US sound large compared to American consumption, what matters to price is how they compare to world supplies. While American oil consumption is very high, consumption outside the US is increasing faster. This means that any change in American delivery is becoming less important.
The call for more drilling ignores the fact that it takes time to create the infrastructure to make newly tapped petroleum useful. Most estimates I have seen say that the soonest we would get oil from new American wells would be ten years. Then the oil would be withdrawn over several years. So the best case is we add a little oil to the world market from ten to twenty years from now. There no short term decrease in gas prices. Only a ten year delay. We are then left in the same position as now, but with no reserves.
The solution to the cost of energy in the US isn’t increased tapping of oil. The lag between drilling and delivery would be better used to increase efficiency, decrease demand, and switch to renewable energy sources.