RealClearPolitics - The Wisdom of Drilling for Oil

RealClearPolitics - The Wisdom of Drilling for Oil

The Wisdom of Drilling for Oil

By Peter Morici

When Barack Obama assumed the presidency, gas prices were less than $2 a gallon. He proceeded to shut down deep-water drilling in the Gulf, tightened other federal restrictions on petroleum development, and vetoed the Keystone Pipeline. Now, even with Americans driving not a lot more than three years ago and global growth slowing, gas is nearing $4 a gallon.

The liberal theocracy in academia, the media and the Democratic Party leadership relentlessly expounds that drilling for oil in the United States won’t much affect U.S. gas prices, because petroleum prices are set in global markets. And, more domestic oil production or U.S. access to Canadian petroleum won’t much change global supplies, or the pace of economic recovery and unemployment.

Balderdash!

Oil prices paid by U.S. refineries in the Gulf do move with global prices but not in lockstep. Increasing North American production would lower U.S. refinery acquisition costs, because U.S. refineries, like others around the world, are built to handle the special characteristics of oil produced by their primary sources supply. And gasoline produced by individual refineries is not wholly fungible either—differing fuel characteristics are required across the United States and Europe to meet environmental standards

Although tensions with Iran are growing and pushing up oil prices everywhere, prices have diverged between, for example, U.S. and European markets. For years, prices for West Texas Intermediate and North Sea Brent moved closely, but now WTI is selling for $17 less than its North Sea counterpart. This indicates the U.S. market is becoming somewhat separate and less wholly determined by global conditions; hence, more domestic production and increased access to Canadian oil would lower U.S. oil and prices—more drilling in the Gulf and elsewhere in North America, and the Keystone pipeline would significantly affect gas prices and employment.

More importantly, whether Americans pay $115 a barrel for oil from Saudi Arabia and Nigeria or obtained from the Gulf of Mexico and other domestic deposits makes a huge difference. The annual trade deficit on petroleum is about $300 billion. Raising U.S. oil production to its sustainable potential of 10 million barrels a day would cut import costs in half, directly create 1.5 million jobs, and applying Administration economic models for stimulus spending, create another 1 million jobs indirectly.

Overall, attaining U.S. oil production potential would boost GDP about $250 billion. Not bad, because it could be accomplished by increasing federal revenues from royalties and reducing the federal deficit, instead of adding to it through additional stimulus spending and subsidies to questionable solar and wind projects.

Recently, the President ridiculed GOP presidential candidates for urging more domestic petroleum development stating, “Anyone who tells you we can drill our way out of this problem doesn’t know they’re talking about—or just isn’t telling you the truth.”

That’s simply not so—drilling for more oil in the United States could make a big difference.

Under Mr. Obama’s stewardship, the U.S. economy is not recovering as it should. As per usual, the President distracts public attention from poor policy choices by blaming and ridiculing others.

After three years, the President, who promised Americans millions of clean energy jobs in place of a thriving petroleum industry and much lower unemployment, should own up to his mistakes. Most Americans are needlessly paying too much for gas and foreign oil, while federally subsidized solar and wind projects are filing for bankruptcy.

This November, poor judgment and weakness of character—such as the President’s repeated attacks on the petroleum industry and failure to take responsibility for the consequences of his actions—make the most compelling case for change.

Americans should not expect a perfect president but at least one who bases decisions on facts not whimsy, and learns from mistakes. Americans are simply not getting fact-based leadership and good judgment from President Obama.

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.