March 2, 2012 1 Comment
So, had a nice conversation on the phone with a friend who is an energy policy expert. Naturally, he scoffed at the idea of developing further domestic resources having a substantial impact on the price of gasoline. Even if we instantly developed all we have, it’s still a pretty limited percentage of the global oil supply– which is the key to oil prices and thus gasoline prices. Anyway, got off the phone and found this great gas prices Q&A by Kevin Drum. A sample:
Q: So what’s the relationship?
A: The University of California-San Diego’s James Hamilton, your go-to guy for the effect of oil prices on the economy, says his rule of thumb is that a $1 increase in the price of crude produces a 2½-cent increase in the price of gasoline. Lately, gasoline prices have been linked most closely to the price of Brent crude, and since the beginning of the year Brent has gone up from $107 to $123, a $16 increase. By
Hamilton’s rule, this should have produced an increase of 40 cents in the price of gasoline.
Q: Hey, that’s almost exactly right! So there’s nothing more to it than oil prices?
A: Pretty much. There are a few miscellaneous other factors, like refinery shutdowns and the change from winter to summer formulations, but they don’t amount to much.
Q: Fine. But why have oil prices gone up?
A: In the long run, the answer is just supply and demand. Oil production has plateaued over the past few years because everyone in the world is pumping full out, and there’s very little spare production capacity left.
And today, reader Mike B sent me the link to this nice WP Fact Checker piece about Keystone pipeline and gasoline prices. The key bits:
We spoke to other oil experts and received a mixed verdict on whether Keystone XL would make much of a difference on gasoline prices. “All else equal, more supply does put downward pressure on price,” said Jim Burkhard, managing director of global oil for IHS Cambridge Energy Research Associates, who has testified before Congress in support of the Keystone XL pipeline. But he hesitated to predict the impact.
Blake Eskew, senior vice president at the oil consulting firm Purvin & Gertz, Inc., said that Keystone “has the potential to affect prices somewhat, but it’s a fairly small impact.” He said it might be worth “a few cents” at the pump.
We also find it interesting that TransCanada, in its fact sheet on the Keystone XL pipeline, makes no claims that it will reduce gasoline prices—only that it will not increase prices. “The price of international oil prices has no impact on the operation of our pipeline and we do not profit from changing market changes,” TransCanada said. “Prices are set on a global level.” [emphasis mine]
The Keystone Pipeline seems pretty necessary. And it’s going to happen. We just need to do it an environmentally smarter way than the initial plan, that’s all. But let’s be clear, that or all the “drill baby drill” you want, just is not going to have much affect on what we pay at the pump.