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More Oil, but Higher Prices

Bill Roth | Monday July 15th, 2013 | 10 Comments

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


▼▼▼      10 Comments     ▼▼▼

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  • http://ianbrettcooper.blogspot.com/ Ian Brett Cooper

    “Please repeat the words “more oil, higher prices” as you stand at the gasoline pump.”

    I don’t go anywhere near gasoline pumps, because I’m not a masochist,
    nor am I stupid. Anyone who uses their own hard-earned cash to pump
    gasoline into anything in this day and age is a fricken moron with more
    money than sense.

    • earlrichards

      Electric cars (Tesla S) can be plugged into your home’s solar array and be recharged overnight.

      • http://ianbrettcooper.blogspot.com/ Ian Brett Cooper

        Yes, those who can afford a solar array have one more layer of ‘green’ fantasy between them and the fact that they are living an unsustainable lifestyle. Last time I checked, solar panels are produced using fossil fuels. Greenhouse gases and toxic chemicals are involved in manufacturing, and there is a lack of regulation regarding recycling.

        The Tesla S weighs 4,647.3 lbs. It is mostly used to transport a single 200lb human. Anyone who thinks it’s a rational use of resources to use any form of electricity generation to drag around 2 tons of dead weight on a single person’s daily commute is delusional.

        We no longer have the time or resources for these delusions.

        • earlrichards

          The Tesla S is a 4 door hatchback sports sedan, so with 4 doors, the Tesla S must be able to hold 4 people.

    • joe rice

      We don’t have a shortage… Several shieks and oil executives have repeated that many times…. The MAIN reason we are getting killed on oil prices is the speculation in the crude oil futures market which has been created, protected, and encouraged by the federal government…simply put, a future is a bet on the future price of oil…. Goldman Sachs for example will agree to purchase a milllion barrels of oil at what they think the future of oil will be…Obviously, this creates a false demand which screws the 290 million Americans not involved with oil…. The difference between speculation now, and before the year 2000, is back then when prices were 25 dollars a barrel, you would physically have to take delivery of shipments.. you didn’t see demand rise 10 dollars in a day because of and invented fear of future supplies……In other words, the supply and demand principles of the free market dictated the price… Does it make any sense to allow a handfull of billionare gambling attics to screw the masses on a commodity that dictates the entire financial stability of the economy…people, know that the next time you’re sitting at the gas pump crying and screaming about having to put $80 dollars of gas in your car… have the satisfaction of knowing that you’re paying those ridiculous prices for the sole purpose of allowing a few billionaires to manipulate and rig the market through an artificial demand created by speculation…I have been reading a kindle book I can’t put down called Gas, 1.25 a gallon in six weeks… Its about allowing the free market to dictate the price of gas…

      • earlrichards

        Google the “$2.5 Trillion Oil Scam – slideshare” and Google “Goldman’s, Global Oil Scam.”

      • http://www.triplepundit.com Nick Aster

        By “speculation” I believe you mean the free market. That’s how it works when everyone’s addicted to something.

  • earlrichards

    Global supply and demand are not responsible for higher oil and gasoline prices. The Big Oil trading desks, the oil traders and the financial speculators control and manipulate the oil price, the oil supply chain and the oil markets. Google the “$2.5 Trillion Oil Scam – slideshare” and Google “Goldman’s, Global Oil Scam.” The US and most of the world are victims of this scam. Mid East tensions are not responsible for high gasoline prices, because the Cairo protests are 100 miles from the Suez Canal, so there is no possibility that the Canal will be shut-down. West Texas Immediate oil is not shipped through the Suez Canal, so Mid East tensions does not affect the WTI oil price, because WTI oil does leave the US. WTI is not part of the global, supply-chain. The WTI oil price is determined in Cushing, Oklahoma. Brent oil is the the global oil, outside the US. Plug your Tesla S, electric car into your household, solar array.

  • http://www.fuelfreedom.org/ Zana Nesheiwat

    What you choose to fuel
    your car with is just as important as which car you choose. Why risk everything
    on one transportation fuel? No matter how much oil we produce or where we
    produce it, having one source to power our cars and trucks makes us vulnerable
    to a volatile global market.

  • Chelsea Richards

    Somehow, it appears another version of the “law of supply and demand”… obviously the air pocket will blast and the bolstered will rescue their misfortunes and gas will go even higher. So now we get the seasonal value buildup and alarm plus the affront of added edges setting off to the stations by not removing the value of the tax.
    NorthernHydraulics.net