‘Markets Moved By Expectations’

Mark Green
Posted March 23, 2012

Opponents of increased domestic production of oil and natural gas like to point out that oil is a world-wide market – which it is – then immediately try to support their case by looking only at U.S. production.  These folks jumped on an AP report this week that sought to prove that U.S. production has no bearing on prices.  Here’s the key paragraph:

"Politicians can’t do much to affect gasoline prices the market for oil is global. Allowing increased drilling in the U.S. would contribute only small amounts of oil to world supply, not nearly enough to affect prices. The Associated Press conducted a statistical analysis of 36 years of monthly inflation-adjusted gasoline prices and U.S. domestic oil production and found no statistical correlation between oil that comes out of U.S. wells and the price at the pump."

Again:

“… no statistical correlation between how much oil comes out of U.S. wells and the price at the pump.”

Let’s take this from the top.  The U.S. is the world’s third-largest producer of crude oil, providing 11.16 percent of the supply in 2010. Now ask yourself, if zero barrels came out of U.S. wells, would that affect the price of crude oil? Even the most determined anti-oil advocate would have a hard time saying that the loss of 11.16 percent of the world’s oil production wouldn’t mean anything to the global market. Is this an absurd example?  Yes.  But sometimes an absurd premise requires a little absurdity in response, and the idea that the U.S. has no impact on oil prices is an absurd premise. 

So now that we’ve determined there is a correlation “between oil that comes out of U.S. wells and the price at the pump,” the question becomes amounts.  Earlier in the same AP piece the reporter acknowledges that:

"Oil prices have been high in recent months because global oil demand is expected to reach a record this year as the developing nations of Asia, Latin America and the Middle East increase their need for oil. There have also been minor supply disruptions in South Sudan, Syria and Nigeria. And oil prices have been pushed higher by traders worried that nuclear tensions with Iran could lead to more dramatic supply disruptions."

The Washington Post adds all this up:

"The international oil market has tightened … because a series of crises has shaved oil production or boosted demand worldwide. Together they add up to a difference of about 1 million barrels a day in the global oil balance."

The Wall Street Journal’s take [subscription required]: 

"Global spare oil production capacity is running 'ridiculously thin' at less than 2% of demand, potentially offsetting the impact on overheating oil prices of any further increases in supplies, said Paul Horsnell, head of commodities research at Barclays. Perceptions in the market that the volume of spare capacity, or the amount of production that can be brought onstream within 30 days, has almost completely dwindled could even push oil prices higher if additional supplies are released on to the market, he added. The 2% figure represents around 1.6 million barrels a day to 1.7 million barrels a day. 'Below 5% it starts getting a little tight because there's no slack for anything to go wrong. I think the general theme right across the oil industry is that it is running very hot indeed at the moment,' Horsnell said."

OK, so the current spare global capacity, which Horsnell indicates is key to crude’s global price, is something like 1 million to 1.7 million barrels per day. The question: Can the U.S. do anything with North Americans sources to increase that?

Yes, we can:

• Gulf of Mexico – We can restore exploration and development in the Gulf to pre-2010 levels. Right now the Energy Information Administration projects federal Gulf production will be down 21 percent this year from 2010. Production dropped from 1.55 million barrels per day in 2010 to 1.32 mb/d in 2011 and is estimated to be 1.23 mb/d this year. If Gulf production reached the 1.76 mb/d that EIA in 2010 projected for this year, that would be an additional 400,000 barrels per day over 2011.
• Keystone XL pipeline – Construction of the full Keystone XL would bring upwards of 800,000 additional barrels of oil per day from neighbor and ally Canada.
• Federal Lands – We can reverse the current downward trajectory in production on federal lands while opening up new areas in Alaska and offshore. The Arctic National Wildlife Refuge alone is estimated to hold 1 million barrels per day – domestic supply that would be affecting global markets right now if it hadn’t been blocked for more than a decade by opponents who dismissed ANWR because it would take seven to 10 years to come online. In all, the U.S. is believed to have 200 billion barrels of oil that’s technically recoverable but not counted with our “proven reserves.”

The point is supply matters. “Markets are moved by expectations,” correctly says API Executive Vice President Marty Durbin. The White House says otherwise, but the United States has ample resources of its own and stable resources from Canada to affect that global oil balance mentioned above. But it will take political leadership that’s both honest and bold, that you can affect global markets in more ways than just cutting demand, as the president seems to believe.  It will take more than simply saying, as the president did Thursday in Cushing, Okla., that “we’re drilling all over the place,” when the facts say otherwise. API President and CEO Jack Gerard, from earlier this week:

“Sending a clear message to people who buy and sell crude oil that the United States is committed to reasserting itself as one of the world’s major oil producers would immediately put downward pressure on gasoline and other fuel prices.”