With the national average for a gallon of unleaded gasoline at $3.68 over the weekend, President Barack Obama used his weekly radio address to reiterate to Americans that “there are no quick fixes to this problem, and you know we can’t just drill our way to lower gas prices.” He went on to state that the Republicans’ plan boils down to more drilling for oil but that will not solve the problem. The drill-first strategy is only "a bumper sticker," the president said, designed to "get politicians through an election." In the Republican radio address, Senator Kay Bailey Hutchison (R-Texas) blamed Obama’s permitting and regulatory policies, saying they are leading to a slowdown of oil and gas production.
The Obama administration is not to blame for rising oil prices and drilling more oil at home cannot solve the pain American’s are feeling at the pump. The answer is fuel efficiency and the development of liquid fuel alternatives like natural gas and biofuels.
But not everyone sees it that way. Like Hutchinson, GOP presidential hopeful Newt Gingrich wants Americans to believe that the Obama administration is to blame for rising oil prices. Last week Gingrich told CBS This Morning that Obama’s “outrageously anti-American” energy policy is aimed at increasing the price at the pump and that if Gingrich were in the oval office gas would cost $2.50 a gallon. Gingrich claims he can do this by eliminating the EPA, building the Keystone XL pipeline, and allowing more drilling.
The trouble is that Gingrich’s plan hinges on a fundamental misunderstanding of the oil market. Oil is a globally trade commodity and its price is determined by global supply and demand. In response to Gingrich’s claims Paul Bledsoe, of the Bipartisan Policy Center says: “This is absurd. Obviously the price of oil is set on a global market.” The other problem with a strategy like Gingrich’s is that it ignores the simple math of U.S. oil consumption versus reserves: as a nation we consume nearly 25% of the worlds oil but only possesses two percent of its reserves.
There is also a great irony in arguing for more drilling while blaming Obama for high oil prices because under the current administration, domestic oil production is booming with the number of oilrigs quadrupling over the last three years.
In fact at that same time last week that republican’s were railing on the president’s energy policy the White House signed a deal with Mexico expand drilling for oil and gas in the Gulf of Mexico. The agreement, once ratified, will open 1.5 million acres of U.S. waters in the Gulf.
If Republicans are wrong about what is driving the rise in oil prices then what is the cause? There are four major factors: growing tensions in Iran, decreased production in Libya, closure of U.S. refineries and increased demand from China and India.
Iran has threatened to cut off the Strait of Hormuz through which 20% of world oil supplies (roughly 17 million barrels) travel every day. On February 19 Iran raised the stakes when the nation announced that it would stop sales to England and France. Though these two countries consume only a small amount of Iranian oil, fear that Iran would stop supplying other nations added to the fear premium Iran is bringing to the global market.
Another factor at play in the Middle East is that Libyan production has yet to return to its prewar level of 1.6 million barrels per day adding constraints on global supply.
The U.S. is also experiencing a bottleneck in oil refining. Over the last three months the U.S. has lost 5% of its refining capacity. In the month of December alone, two large refineries outside Philadelphia shut down: Sunoco’s plant in Marcus Hook, Pa., and a ConocoPhillips plant in Trainer, Pa. Together they accounted for about 20% of all gasoline produced in the Northeast.
Finally, both today and over the longer term, a major factor in rising prices is growing demand for oil in China and India. China and India represented half the global oil demand growth over the past decade and in the next 10 years, China and India are expected together to account for half of global oil demand. In five years, the number of cars on the road in China more than tripled and in 2010 alone 10 million new cars hit the road.
So if drilling won’t solve our problems what will? The answer is using less fuel and finding alternatives to oil.
The Obama administration has already laid the groundwork for increasing efficiency by modernizing vehicle fuel standards for the first time in more than two decades. By 2025 cars and light trucks will go twice as far on a gallon of gas and will save more than 2 million barrels of oil per day.
America’s 100-year supply of natural gas holds great potential to fuel vehicles. The challenge today is that natural gas requires tanks that can stand up to high pressures which are too large and expensive to be usable for passenger vehicles. On Thursday, Obama announced that the Department of Energy will make $30 million available for a new research competition that will challenge scientists and entrepreneurs to find ways to harness domestic natural gas for vehicles.
Another alternative to oil that holds great potential is advanced biofuel. The Obama administration has made a major commitment to biofuels research, development, and demonstration including supporting the construction of commercial-scale, next-generation biorefineries. On Thursday Obama also announced $14 million to support research and development into biofuels from algae. Homegrown transportation fuels from algae have the potential to replace up to 17% of the United States' imported oil for transportation.
Photo Credit: Gage Skidmore