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Gas Prices and Oil and Gas Resources: Myth vs. Fact

MYTH: The government can control gas prices (i.e., high gas prices are the government’s fault).

FACT: The primary driver of gas prices is crude oil prices. Crude oil prices are set by supply and demand on the world market, a well-established fact that even the American Petroleum Institute agrees on.1 A 2009 U.S. Energy Information Administration study found that even considering both proven and unproven, or “undiscovered”, oil reserves, opening all areas in the Atlantic, Pacific and Eastern Gulf of Mexico to drilling would only lower gasoline prices by 3 cents per gallon, and even that wouldn’t happen until 2030.2

MYTH: The government can deliver $2.50 per gallon gasoline.

FACT: Crude oil prices, which drive gasoline prices, are set on the world market. As explained above, the U.S. has no significant ability to shift world crude oil prices, especially through production.

MYTH: Allowing more drilling on the U.S. Outer Continental Shelf will decrease U.S. gas prices in the near future.

FACT: More offshore drilling can not lower gas prices because of the scale of the world market and the limited amount of oil that the U.S. could produce. A 2009 U.S. Energy Information Administration study found that even if the U.S. opened all areas in the Atlantic, Pacific and Eastern Gulf of Mexico (including unproven reserves), there would be no change in gasoline prices from now until 2020 and prices may decrease but by only 3 cents per gallon by 2030.3 The reason for this time lag is simple – it takes years to begin exploration once a permit is secured, and even more years to begin producing oil once a viable reservoir is found. In addition, the oil industry is already positioned to do more drilling as it is sitting on more than 4,000 leases sold to them by the government, but that they have not yet begun or even applied to begin exploration or production on.4

MYTH: Eliminating subsidies to the oil and gas industry will raise gas prices.

FACT: Variations in gas prices are driven by the world market, and are not dependent on U.S. government policies. This includes the existing subsidies for the oil and gas industry according to multiple studies that have found that repealing oil 

and gas subsidies would have only a marginal impact on gas prices. Assistant Secretary of the Treasury Alan Krueger estimated in 2009 that “eliminating [oil and gas subsidies] would have an insignificant effect on world oil prices.”5 Analysis by the think tank Resources for the Future arrived at a similar conclusion, finding that eliminating oil and gas tax preferences would increase the world oil price by just 10 cents per barrel in 2030.6 This minimal increase in cost would translate to an extra expenditure of $2.17 per year on petroleum products for the average U.S. consumer.7 At the same time, the U.S. government – by eliminating unnecessary subsidies for oil and gas - would be saving on the order of $10 billion per year8 that could be invested in other national priorities like defense, transportation, or alternative energy. A Congressional Research Service report corroborates these findings.9 Gilbert Metcalf, Deputy Assistant Secretary for Environment and Energy at the U.S. Department of Treasury, also has said that removing U.S. tax subsidies for oil and companies will have an “imperceptible” effect on world oil supply.10 The reason why eliminating subsidies would not raise gas prices is simple – the U.S. produces only a small portion of world oil, so any change in U.S. oil production would have an insignificant effect on the world oil market, which drives oil prices and therefore gasoline prices.

MYTH: The U.S. has 1,442 billion barrels of undiscovered technically recoverable oil, enough for the next 200 years of domestic consumption.

FACT: While it’s true that the U.S. has an estimated 1,442 billion barrels of “undiscovered technically recoverable” oil, it’s extremely misleading to suggest that that this oil could meet U.S. demand for the next 200 years. “Undiscovered technically recoverable” oil is any and all oil across the United States that is thought to exist, but has not yet been discovered, and that can theoretically be extracted using currently available technology. This may include oil that is too expensive to produce, or oil that is located in areas that cannot be accessed. The majority of “technically recoverable oil” in the United States is oil shale.

The U.S. has roughly 800 billion barrels of technically recoverable oil shale,11 which is a substantial portion of the U.S.’s total technically recoverable oil. However, no commercial-scale production of oil from oil shale exists in the U.S. due to technological and economic constraints.12 To count this as available for use is misleading, as it and similarly uneconomical oil reserves would not be produced by the oil industry unless gas prices go above current levels. Of the oil that is left, not all of that is available. For example, some could be underneath a neighborhood or in the middle of a national treasure like Yellowstone National Park, places where we shouldn’t drill. Clearly, for one reason or another, most of the “undiscovered technically recoverable” oil can not or should not be pumped out of the ground. To truly understand the opportunities that exist, it simply makes more sense to focus on what is economically recoverable – substantially less than what is technically recoverable.  

MYTH: We are a nation rich in energy resources with poor policies that do not allow us to access them.

FACT: The government’s most recent Five-Year Plan allows access to over 75% of estimated undiscovered technically recoverable oil and gas resources on the U.S. Outer Continental Shelf, including in fragile ecosystems like the Arctic.13 That is clearly enough to keep the industry busy given that the oil and gas industry is sitting on a large number of inactive leases in federal waters. According to a March 2011 U.S. Department of the Interior report, oil and gas companies hold over 4,000 leases for which exploration or development plans have not been submitted or approved.14 These leases, roughly 67% of all leases held in the Gulf, represent significant opportunity for exploration and development. Offshore drilling permitting in deepwater has also nearly returned to pre-Deepwater Horizon levels. In the year after February 28, 2011, the government issued 61 deepwater permits, compared to 67 in the same time frame between 2009 and 2010.15

 

Please see PDF for references