This year's surge in oil prices and resulting high gasoline prices have many calling for more U.S. oil production as a solution.
Rising oil prices have pushed the U.S. average price per gallon of gasoline to $3.98. Oil prices, despite a recent slip, are up about 11% this year. West Texas Intermediate crude oil hovered around $99 a barrel yesterday (Thursday), and many experts expect it to hit $150 a barrel this year.
Many consumers want an increase in U.S. oil production to lower oil and gasoline prices, as well as reduce U.S. dependence on foreign oil for a national security benefit. Domestic activity has slowed since BP PLC's (NYSE ADR: BP) Gulf oil spill last April. Critics claim that U.S. President Barack Obama hasn't done enough to support a U.S. oil industry that provides needed jobs and revenue and could help keep oil costs from rising much higher.
Republicans won House approval Wednesday for a bill requiring decisions to be made on offshore drilling permits within 60 days, but some want more support for U.S. oil production.
The following reader letter asks why the U.S. government isn't supporting a production ramp up to reduce costs.
Tell me again why the government doesn't encourage more U.S. oil production…Until we really start using other energy sources, shouldn't we just rely more on domestic supply, and then we all won't be saving up paychecks to fill up our tanks?
— Steve R.
An increase in U.S. oil supply would not reduce the prices at the pump.
Money Morning Contributing Writer and Editor of The Oil and Energy Investor newsletter Dr. Kent Moors examined in an article last month why oil prices are not the direct result of how much oil each country produces.
Moors said that the oil market is now controlled by demand from developing countries, and developed regions like the United States have much less impact on oil prices than they have in the past.
"Regardless of how much surplus inventory may exist in an individual national economy, prices for gasoline are still fundamentally driven by what occurs elsewhere in the world," said Moors. "Neither 'Drill, baby, drill' nor 'Fortress America' will have the impact their proponents anticipate. In fact, the idea that domestic crude oil can reduce gasoline prices is fundamentally incorrect."
Moors said when considering extraction costs, domestic crude is "considerably more expensive" than imported oil, and does not help reduce the costs of refined products.
And although many Americans would like to reduce the country's dependence on foreign oil, it would come at a steep cost that many aren't willing to pay.
"If Americans were to accept paying more at the pump (and we are talking way more here – well over $5 a gallon) as a necessary cost of weaning ourselves from Middle East sourcing, then the solution would be simple," said Moors.
Many have also blamed the greed of U.S. oil companies for hiking gasoline prices while pocketing sky-high profits.
Leaders of the five largest oil companies defended their businesses against this accusation Thursday at a Senate Finance Committee hearing. BP, Exxon Mobil Corp. (NYSE: XOM), Royal Dutch Shell Plc (NYSE ADR: RDS.A, RDS.B), Chevron Corp. (NYSE: CVX) and ConocoPhillips (NYSE: COP) attended the meeting to discuss a proposal from Democratic senators to end about $4 billion in tax subsidies for oil companies.
The senators argued that oil companies' profits indicate they can operate successfully without the government's assistance, and the tax revenue was needed to reduce the federal deficit. Exxon's first-quarter profits were up 69%, ConocoPhillips rose 44%, Chevron was up 36% and Shell climbed 30%.
The senators said the country couldn't afford to keep shelling out taxpayer money to oil giants that are doing nothing to ease gas price pain while consumers suffer.
But the oil companies argued they are not responsible for higher gasoline prices.
"No one person, organization or industry can 'set' the price for crude oil," Marvin E. Odum, president of Shell Oil, wrote in advance remarks. Instead, the culprits are world economic growth and the weak U.S. dollar, he said.
While political parties and frustrated consumers continue to point fingers at whomever they feel is responsible for higher gas prices, Moors said the main cause is the oil market itself. And the way to relief is to explore new energy sources.
"We will continue to bounce from crisis to crisis until we recognize this fact – and begin the genuine, difficult, exasperating, long and incredibly expensive process of moving from a crude-based economy to a more balanced energy model," said Moors.
On one front, at least, we're already making strides.
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(**) Money Morning editors reserve the right to edit responses for grammar, length and clarity when posting on our Website. Please include your name and hometown with your email.
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