Pump Prices Defy Conventional Wisdom

For years, almost any time there was unrest in the Middle East, the world oil market responded with a spike in price.  This spike reverberated through the supply chain and gasoline prices soon followed suit.  This pattern held through the Arab Spring, threats in the Strait of Hormuz and all during the unrest in Iraq.  Political unrest, threatened military actions, and often just plain old rumors started the domino effect from world oil market to the pump.

Today we have military action concerning ISIS, selected bombing in Syria and Iraq, dams and oil refineries under attack, and thousands of refugees putting the strain on Middle East resources.  Conventional wisdom should put the price of oil above $100 a barrel with gasoline prices flirting with $4 a gallon.

The opposite is true.  Oil prices are declining and pump prices are nearing the price range many politicians promoted when seeking votes in the last few elections. The world is watching as OPEC meets to discuss reducing the supply of oil to stabilize the market.  Most predict they will not do so. Conventional oil and gas wisdom is on its head.  Is this just a blip on the radar screen, or is the stage set for a new conventional wisdom?

What has changed?  Could it be that the Middle East is losing some of its bite when it comes to dominating the world oil markets?   Unlikely. That region of the world remains pivotal, and political turmoil there causes real consequences, but I posit that such a change is on its way.

OPEC is losing its monopoly on the world oil market because there is a new global supplier of oil and natural gas: the United States.  That is what has changed.  The United States went from an all-time high level of dependence on foreign energy just 8 years ago, the producing 87 percent of its own energy in 2013. That is a level not seen since before the days of Ozzie & Harriett and Leave it to Beaver.

What has brought about this change of direction?  Simply put, the production of “home grown” oil and natural gas.  The United States is surging ahead of the pack to the be the world’s leader in natural gas production, and most market prognosticators say it may not be long before we lead in oil production as well.

There are many causes of this boom, but unfortunately, the Federal government is not one of them.  Nearly all the new production of oil and natural gas is coming from state and private lands.  According to a Congressional Research Service study, since 2012, 96 percent of new oil production has come from private and state lands.  Overall production from Federal lands has been stagnant at best and gas production from offshore federal lands has actually declined.

Some of this can be explained by geology.  The Bakken, Marcellus and Eagleford plays are largely found on private and state lands.  However, Federal lands in North Dakota are lagging behind their counterparts located on private and state lands.  Geology cannot completely explain the discrepancy.

Federal bureaucracy and antipathy towards oil and natural gas is likely a better answer.  Typically, state permits for various exploration activities take much less time to process than do similar Federal permits.  The time factor contributes to it being far more cost effective for oil and gas companies to concentrate their efforts with state and private leaseholders.  For example, many states have successfully regulated the practice known as hydraulic fracturing for years.  Permits for this process are regularly granted along with the safeguards insuring that oil and gas development is done wisely and safely.

Contrast this with the Federal approach, which may seek to undermine the state efforts and is taking months, if not years, to decide how and when to regulate.  Uncertainty is the antithesis of long term business plans.  Again, oil and gas companies are only able to plan for effective production by relying upon the consistent approach by state and private leaseholders.

Access is also a key element.  Federal lease sales are fraught with delays and potential litigation.  Such factors contribute to more uncertainty, and less enthusiasm for jumping into the Federal morass. And in the offshore world, the access is far worse.  Thanks to Federal policies, almost 87 percent of the Outer Continental Shelf is currently closed to any form of oil and natural gas exploration.   This has been the case for over 40 years.

As the nation seeks a path to continued energy independence, new offshore resources could add a significant milestone.  Although we really don’t know, because we haven’t looked for over 40 years, it is estimated that there are significant offshore oil and gas resources – over 40 billion barrels of oil and over 187 trillion cubic feet of natural gas.  What a help those resources would be in making and keeping the U.S. ahead in the energy race.  Coupling that resource prediction with the renewable energy potential of wind, wave and current reveals the great potential offshore energy offers the United States.

Our nation is on the verge of being able to meet its own energy needs and could have the ability to export to the rest of the world.  That enhances our diplomatic clout as well.  Imagine no longer being held hostage to decisions by other countries regarding the delivery of oil and natural gas.  Imagine assisting our allies by supplying badly needed energy.  Imagine true energy security.

It is not a pipe dream, nor a fantasy. We have already seen that we are importing less and less energy.  We have already seen what the United States can produce, when allowed to do so. The country needs only to decide to pursue that option.  Unfortunately, we have yet to make that decision.


Randall Luthi is President of the National Ocean Industries Association.



Morning Consult