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Rising Gasoline Prices: Separating Myth from Fact

March 19, 2012

Myth: Domestic oil production is up because of President Obama.

Fact: Domestic oil production is up in spite of President Obama. One of the President’s very first initiatives in early 2009 was to cancel oil leases on onshore federal lands and to delay the offshore leasing plan, all to ultimately cancel 5 offshore leases even before Deepwater Horizon. The administration’s hostility toward domestic drilling remains in place to this day with a 2012-2017 Offshore Lease Plan Proposal that imposes by Obama DOI actions the same moratorium voters thought was lifted in 2008. The President likes to boast that American oil production has risen, but that is due to production increases on private and state lands. Production on federally controlled lands actually declined from 2010 to 2011 by 14 percent.

Myth: America has only 2 percent of the world’s oil, so more drilling won’t make a difference.

Fact: The 2 percent figure is deliberately misleading. It represents how much oil the U.S. has if we do not look for any more. Vast onshore and offshore areas have been placed off-limits by the federal government, and as a result, it is not well known how much oil is there. 

Every place where we have been allowed to drill – like the Central and Western Gulf of Mexico and Prudhoe Bay in Alaska – the initial estimates of oil reserves proved far below actual production. And technological advances are constantly increasing the amounts that can be tapped – but only if the federal government does not prevent us from exploring.

North Dakota’s Bakken oil field is a perfect example. Thirteen years ago, its proven reserves were 1/25th of what they are today, and that number is growing. If U.S. reserves were allowed by the government to expand by the same amount, our reserves would be over twice those of Saudi Arabia.

A proven oil reserve is a figure that is obtained by an oil producer once they have fully explored and developed an oil field.  Using the president’s definition, the U.S. has 28.4 billion barrels of oil. That equates to 2 percent of the world’s oil. But if you look at all the untapped resources, the U.S. holds trillions of barrels of oil. The Obama administration says we have only 2 percent of the world’s oil because that’s all they will let us have.

Myth: The percentage of imported oil has declined thanks to President Obama.

Fact: Oil imports have declined because the weak economy has suppressed demand –14 million Americans don’t have jobs to drive to and others cannot afford gasoline at half the prices of Europe that Energy Secretary Chu said he thought Americans should pay. Increased domestic production from private and state-owned lands has also helped, but government production declined last year. To meet our long-term needs and reduce reliance on oil from unstable and unfriendly countries, we need to increase domestic production on federal lands and waters and approve the Keystone XL pipeline project to allow more Canadian oil to reach the U.S.

Myth: Alternatives like electric cars are a big part of the solution and reduce the urgency to increase oil supplies or take other steps to rein in the price of gasoline.

Fact: These alternatives are simply not available, or affordable, for families today. Research and development of alternative fuels and vehicles is important, but we must be realistic about it. It’s going to take many more years before cost effective and technologically viable alternatives will be ready to gain a significant market share to meet American family needs. All analysis, including the Obama administration’s own, tells us the age of gasoline is going to be with us for quite a while longer, and we need to do all we can to ensure that it is as affordable as possible until such future time as alternatives can carry the load.

Myth: Price gouging by big oil companies is behind the rise in gas prices.

Fact: Past spikes in gas prices have led to numerous investigations by the Federal Trade Commission and other agencies. These investigations have repeatedly exonerated the oil companies of illegal conduct while pointing to the real causes such as costly regulations. While there is nothing wrong with looking into the possibility of price gouging by oil companies, there is something very wrong with obsessing over it to the exclusion of other, more likely causes of high prices. 

Myth: Tapping the Strategic Petroleum Reserve (SPR), as the President did last June and may do again, is a good response to rising gas prices.
Fact: The SPR is a stockpile of oil set aside for use in an emergency, such as a disruption of oil imports from the Middle East. It can only last for a matter of months, and then would need to be replenished. Moreover, its use for political purposes threatens our security in the event of a real national security threat. In contrast, increased domestic drilling on federal lands or Keystone XL would provide a genuine addition to the nation’s oil supply, and one that would last for decades instead of mere months. Increased domestic drilling and Keystone XL are real solutions for addressing high prices while tapping the SPR is a short-term political gimmick.    

Myth: Regulatory costs are a minimal part of the price of gasoline.

Fact: The Environmental Protection Agency imposes two kinds of regulations impacting motor fuels – measures that seek to reduce emissions from refineries and those specifying the recipe for gasoline. Rather than trying to reduce the cost of existing regulations, EPA is considering adding more of them, such as New Source Performance Standards targeting greenhouse gas emissions from refineries and new Tier 3 regulations mandating ultra-low sulfur gasoline. The cost of current and anticipated future regulations has also contributed to several recent domestic refinery closures.

Myth: EPA’s fuel economy regulations for new cars and trucks are a solution to high gas prices.

Fact: These rules provide no relief until you buy a new vehicle, and are not a substitute for taking steps to reduce gas prices. Further, the higher sticker price resulting from these rules – up to $1,000 by 2016 and $3,000 by 2025 according to EPA, and higher according to outside estimates – raise questions about how many consumers will benefit from them.

Myth: Increased supplies will not bring down prices for years to come.

Fact: The price of oil is not just determined by current supply and demand indicators.  It is also set by future expectations of supply. For example, the day President Bush lifted the executive moratorium on the Pacific and Atlantic Coasts, the price of oil dropped $9.26. And prices continued to decline when the Congressional moratorium was lifted. Changes in government policy have significant effects on price, but unfortunately, all signs coming from the Obama administration have assisted in driving up gasoline costs.

Myth: President Obama has approved dozens of new pipelines, including from Canada.

Fact: The Obama administration approved only one oil pipeline from Canada. The disapproval of Keystone XL was the first time a Presidential Permit had ever been denied. It will take more than one pipeline to make sure that the U.S. receives more safe secure supplies from Canada. Unfortunately, his denial may limit the amount Americans will be able to get; the Canadians are now talking to China about exporting their oil there. 

Myth: Use it or Lose it. Oil companies are sitting on thousands of unused leases.  New areas of exploration shouldn’t be opened until companies drill what they already have.

Fact: Oil and gas leases on federal lands and waters require long lead times to explore and develop — which makes the “Use it or Lose It” argument misleading. Non-producing leases reflect the time – sometimes 5 to10 years or longer – that it takes to identify and drill prospects, evaluate results, to acquire permits, and build and install surface facilities and pipelines.  

Just because a company holds a lease does not mean it will ultimately produce energy. In the offshore deep water, the industry commercial success rate is 20%, and in new areas onshore the success rate is 10%. Unsuccessful leases are in the “non-producing” totals. Most unproductive leases already revert to the government, with no return — ever — on investment.  

Oftentimes the hold up in moving federal leases from the non-producing category to the producing category is federal government bureaucracy itself. Shell's 6-year plight to explore its Alaska OCS leases is a good example. These leases are classified as “non-producing” by the federal government. According to the Obama DOI, less regulatory burden on state and private lands where the federal government has little to no role is contributing to the dramatic shift in investment away from federal lands. In other words, the federal government is making it too uneconomic to “use it.”

Myth: Wall Street speculators are causing oil and gasoline prices to rise.

Fact: Multiple studies by the federal government and independent economists have demonstrated oil and gasoline prices are determined by fundamental supply and demand. While some assert the growing number of financial speculators in the futures market is evidence of their power to control prices, this repeats the false economic notion that correlation equals causation. Financial participants in the futures market provide crucial sources of liquidity to the marketplace and actually help moderate wild price swings. If physical consumers of oil were the only ones allowed to trade futures contracts, the market would be unable to function.


U.S. Representative Fred Upton

U.S. Representative Joe L. Barton

Congressman Fred Upton has represented the commonsense values of southwest Michigan since 1987. In 2010, Fred was selected by his House colleagues to serve as Chairman of the Committee on Energy and Commerce. Read More»;