Big Oil has Little to do with Pump Prices

Every time the price of gasoline shoots up, the U.S. finds itself in the same plight, yet we never learn from it.

Before we make the mistake of blaming oil companies for high prices, we should consider who the real culprits are.

If ever there was a time for an honest look at oil and gasoline prices, it's now. And what that inquiry concludes is that the American oil industry is not the instigator of higher prices.

The spike in gasoline prices is the latest reminder of the cost to America of not having a comprehensive energy policy. By relying so heavily on imported oil, we are held hostage to events halfway around the world.

Part of what lies behind soaring prices is turmoil in North Africa and the Middle East which has been spreading. After demonstrators took to the streets in Egypt, protests broke out in Tunisia, Kuwait, Yemen and Libya. Oil-rich Libya sends only a small fraction of its oil to the United States, but because oil is a world commodity, Americans are not immune to the shock waves.

Are other oil-producing countries like Bahrain and Oman next? Is even Saudi Arabia at risk? Saudi Arabia alone sits on a quarter of the world's oil reserves.

This uncertainty about tomorrow is reflected in oil prices today. Call it the fear factor. Investors are worried about the situation because no one knows where the turmoil will end. The risk is geopolitical instability in the Persian Gulf that has widespread effects.

Another problem: oil supplies are getting harder to replace once they've been consumed-and the demand for oil keeps growing, particularly in China, India and Brazil. In 2009, the last year for which figures are available, the world consumed 11 percent more oil than a decade earlier.

Oil imports now cost Americans $1 million a minute. Crude oil prices, which are set on the world market based on market forces, fluctuate substantially and unpredictably.

It's time for the administration to realize the urgency and to set the country on a clear strategy of boosting oil production at home. President Obama's recently announced steps to lease some new areas, while worthwhile, fall short of what needs to be done. Congress should lift the moratorium on oil development in the Atlantic, Pacific and eastern Gulf of Mexico now.

This would make it more difficult for foreign countries to cut production to force up prices. The potentially unreliable countries of North Africa and the Persian Gulf, Venezuela and Nigeria supply a combined total of 5 million barrels a day-about a quarter of U.S. consumption. That is the amount we ought to replace with an increase in our own domestic production.

Fortunately, geologists say there is still plenty of oil in the ground and beneath the sea in the United States. According to the federal government, an estimated 67 percent of undiscovered oil resources are located on federal lands, a good part of which are off-limits to exploration and drilling.

But Obama and many Democrats in Congress have other plans, which directly contradict all their talk about achieving energy independence. The administration's moratorium on exploratory drilling in new offshore areas has locked away billions of barrels of oil. Oil production in Alaska, which has been in decline for decades, could be doubled by opening up the Arctic National Wildlife Refuge and Arctic waters that are currently closed to drilling.

Combine these restrictions on drilling with instability in the Middle East and it's no wonder consumers are gritting their teeth at the price of gasoline. But we shouldn't blame oil companies for soaring prices, when they have nothing to do with the restrictions on domestic energy sources or the geopolitical events elsewhere that are the real culprits for higher gas prices.

Mark Perry is a visiting scholar at AEI.


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Mark J.
  • Mark J. Perry is concurrently a scholar at AEI and a professor of economics and finance at the University of Michigan's Flint campus. He is best known as the creator and editor of the popular economics blog Carpe Diem. At AEI, Perry writes about economic and financial issues for and the AEIdeas blog.

    Follow Mark Perry on Twitter.

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