The U.S. is now selling more petroleum products than it is buying for the first time in more than six decades. Yet Americans are paying around $4 or more for a gallon of gas, even as demand slumps to historic lows. What gives?
Americans can be forgiven for doubting the U.S. is producing more oil today than anytime in the last eight years – a fact President Obama has hammered home again and again in his latest rounds of campaign stumping. Meanwhile, Republicans point to the rising price of gas, which seems to indicate a less-than-plentiful oil supply.
Despite all appearances, Obama is telling the truth. The U.S. is enjoying an energy boom. In North Dakota alone, shale oil drilling over the past year led to a greater volume of crude oil production than at least one OPEC country.
Americans have been told for years that if only we drilled more oil, we would see a drop in gasoline prices. (Speaking to voters last month, Newt Gingrich made the curious assurance that more oil drilling could drive down gasoline prices to $2.50 a gallon, prompting the White House to accuse him of “lying.”)
But more drilling is happening now, and prices are still going up. That’s because Wall Street has changed the formula for pricing gasoline.
Until this time last year, gas prices hinged on the price of U.S. crude oil, set daily in a small town in Cushing, Oklahoma – the largest oil-storage hub in the country. Today, gasoline prices instead track the price of a type of oil found in the North Sea called Brent crude. And Brent crude, it so happens, trades at a premium to U.S. oil by around $20 a barrel.
So, even as we drill for more oil in the U.S., the price benchmark has dodged the markdown bullet by taking cues from the more expensive oil. As always, we must compete with the rest of the world for petroleum – including our own.
This is an unprecedented shift. Since the dawn of the modern-day oil markets in downtown Manhattan in the 1980s, U.S. gasoline prices have followed the domestic oil price (which, for the most part, has been more expensive than oil from the North Sea, a slice of the Atlantic between Great Britain, Germany, Scandinavia, Belgium and the Netherlands).
However, heightened drilling in the U.S., combined with the flood of oil from the tar sands in Canada, has consistently pressured the U.S. oil price below its counterpart in the North Sea. The two types of oil once traded in lockstep, but have recently deviated so much that many do not believe they will trade neck-and-neck again. In the past year, U.S. oil prices have repeatedly traded in the double-digits below the Brent price. That is money Wall Street cannot afford to walk away from.
To put it more literally, if a Wall Street trader or a major oil company can get a higher price for oil from an overseas buyer, rather than an American one, the overseas buyer wins. Just because an oil company drills inside U.S. borders doesn’t mean it has to sell to a U.S. buyer. There is patriotism and then there is profit motive. This is why Americans should carefully consider the sacrifice of wildlife preservation areas before designating them for oil drilling. The harsh reality is that we may never see a drop of oil that comes from some of our most precious lands.
With the planned construction of more pipelines from Canada to the Gulf of Mexico, oil will be able to leave the U.S. in greater volumes. This may eventually smooth out energy prices globally, but in the short term it will probably mean more of our North American petroleum products will be lost to competition from abroad.
Demand for oil in the U.S. has eased with this year’s higher prices – a situation dubbed “demand destruction” by industry insiders – but overseas demand has not cooled. That means America will have to fight to keep oil on its shores instead of seeing it shipped to another country – by paying dearly for that privilege.
Energy independence may be within our reach. But it comes at a price.
Leah McGrath Goodman is the author of The Asylum: The Renegades Who Hijacked the World’s Oil Market.