Thursday, March 15, 2012

Thinking About Oil Prices

I talk often on this blog about how political debate would be much improved if people were acquainted with a few simple facts. But the discussion of oil prices requires even less: just the application of some thought.

1. Premise: Oil is sold in a free market. Therefore,

2. It will be sold wherever in the world the price (net of transportation) is the highest. Therefore,

3. Big disparities in price around the world cannot exist for long. Therefore,

4. There will be a single world price for oil. The price for Americans will be the same as the price for everyone else. Therefore,

5. Increased production and reduced consumption in the U.S. affect the price to Americans only to the extent that they affect the world price.

As logical as this is once you think about it, it's hard to give up the view that it's our oil, so if we pump more of it, we'll have more, and won't have to worry about what foreigners are doing. Alas, not true. Oil we pump becomes part of the world market, financially if not physically. That is, the oil will stay here only if prices here are as high (net of transportation) as prices elsewhere.  When world oil prices rise, prices here must rise as well. Therefore,

6. "Energy independence" is a myth. Even if the U.S. had no net imports, an increase in world oil prices would raise the price to Americans, hurting consumers and helping producers. Conversely, new production in Libya or the South China Sea has approximately the same effect on the U.S. price as new production in  the Gulf of Mexico.

So why all the brouhaha about increasing production in the Gulf of Mexico? Making production easier in the Gulf of Mexico certainly helps Americans. But it's a big help to the Americans involved in oil production, and hardly any help to those filling up at the pump.

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