More Oil, but Higher Prices

IMG_0576Please repeat the words “more oil, higher prices” as you stand at the gasoline pump. These four words are key to solving your pain at the pump because they underlie oil price reality. “Drill, baby, drill” through hydraulic fracturing is pumping out more oil. It will not deliver sustained lower pump prices.

Why gasoline prices are high, going higher

There are two reasons why more oil does not mean lower pump prices. The first reason is that oil is a global commodity and its prices are a result of global supply and demand. Oil prices are higher because the incremental growth of global demand continues to exceed the incremental growth of global supply. More oil production does not lower prices if the rate of demand for oil rises faster than the rate of new supply.

Supply chain risk is the second reason for higher pump prices. Middle East unrest restricts supplies. Oil refineries are highly complex and they will have serious breakdowns that restrict supplies. Oil pipelines will leak, oil tankers will run aground and rail lines will have accidents. The fact that the world is pumping more oil than ever before in its history, also means it is more at risk. Higher risks and larger scale disruptions will generate higher prices at the pump.

Your gas pump reality is that the price will not go down and stay down. It is very likely you will be paying even more for gasoline five years from now. The only sustainable cost saving alternative is to use less gasoline.

Higher prices because U.S. oil is again part of the global supply chain

The big news for your pump pain this month is that the U.S. oil supply has rejoined the global oil supply chain. For the last four years, the U.S. price of oil was consistently lower than the global price for oil because it was “trapped” behind a logistics system that had limited sales access in the global market. That has now ended. A system of pipelines and rail lines has now opened the door for U.S. oil to be sold to the highest bidders around the world.

Oil independence through hydraulic fracturing is a myth

Hydraulic fracturing for oil will not deliver U.S. oil independence. Oil is a commodity and it will be sold to the highest bidder in the global market. U.S. oil will be sold to Asia and Europe.

New supplies of U.S. oil produced from hydraulic fracturing will deliver improved balance of trade benefits through the sale of U.S. oil to our trade partners. It will improve our trade balance because we will buy less oil from overseas oil producers.

The new flow of oil from hydraulic fracturing is creating U.S. jobs at U.S. refineries and chemical plants that are processing U.S. crude oil to sell gasoline, diesel, chemicals and jet fuel in the U.S. and overseas. But what hydraulic fracturing will not deliver is lower pump prices or energy independence.

Canadian tar sands will not lower U.S. pump prices

Building a pipeline from Canada to Houston, Texas, for Canadian oil extracted from tar sands (called oil sands by Canadians, and now by the oil industry) will not lower pump prices in the U.S. The U.S. government may approve this pipeline because Canada is a close ally, but it should not be approved based upon a promise of lower pump prices. The price of oil is a reflection of a global demand growing faster than global oil supplies. The economics of Canadian tar sand oil is that it will make money for Canada and the oil companies as an export to other countries and their growing demand for oil.

Your oil future

When I coined the phrase, “green economic revolution” in an Entrepreneur.com article five years ago, the reader response was exceptionally focused upon the word “green.” But what my economic analysis identified was not a green revolution. It is an economic revolution that would create green results.

That revolution reached a milestone of $1 trillion in global revenues in 2012. The economics driving this revolution is a shift in competitiveness where less sustainable goods and services like fossil fuels are increasing in cost while more sustainable goods and services gain cost competitiveness. The economic driver is cost competitiveness. The result is green.

Evidence of this trend applied to our pump pain is the record-setting sales growth of fuel-efficient cars and trucks. Consumers are buying higher miles per gallon gasoline vehicles and hybrid cars to avoid higher pump prices. Toyota has sold 2 million Prius hybrids in the U.S. Ford has sold more hybrids in the first five months of 2013 than they sold during any other full year. An electric car price war is raging as auto manufacturers fight for emerging market share over a disruptive auto technology that enables consumers to avoid pump price pain.

The millennial generation’s procurement trends are the wave of the future. This generation now has $1 trillion in annual buying power and by 2017, their buying power will exceed the boomer generation. Millennials are shaping their lifestyles to be more affordable and sustainable. They are creating millennial urban hubs in U.S. cities and are adopting walking, biking and mass transit as lower cost and emissions alternatives to using an automobile and buying gasoline. They are saving money while also taking actions to address their climate change concerns.

More pollution, higher costs

Fossil fuel pollution has hit the wall of big numbers. Pollution is costing consumers more as they pay higher insurance rates charged by the insurance industry that believes man-made climate change is increasing water and wind property damage. Consumers are paying increased medical costs in part because pollution is contributing to increased incidents of heart and respiratory illness. People are losing income from respiratory disease like asthma that reduces their productivity.

We are paying higher income taxes to fund more pollution regulation and litigation. Our economy is near a tipping point where a majority of consumers will benefit if the externality costs of pollution are reflected at the cash register, meter and pump so they can vote with their pocketbook through a free market system to chose products, services and energy supplies that cost less and mean more. The combination of pump pain and pollution economics are driving consumers toward a disruptive shift into electric cars, renewable energy, urban lifestyles, energy efficiency and healthier behaviors that enhance their economic and physical well-being. It is an economic revolution with green results.

Bill Roth is an economist and the Founder of Earth 2017. He coaches business owners and leaders on proven best practices in pricing, marketing and operations that make money and create a positive difference. His book, The Secret Green Sauce, profiles business case studies of pioneering best practices that are proven to win customers and grow product revenues. Follow him on Twitter: @earth2017

First Green Business Coach for Entrepreneur.com. Founder of EARTH 2017, a website posting economic analysis on disruptive trends impacting communities and businesses. President of NCCT, a consulting company that coaches CEOs and business owners on pricing and marketing best practices proven to win the millennial generation, and their moms, as customers.