Oil, Politics, and the Truth About Gas Prices

The price of oil and gas is going up, and the story continues to take up a significant portion of the political spotlight. Since the average gallon of gasoline is hovering around $4 per gallon, it must either be some left-wing conspiracy to promote alternative energy or proof that we haven't done enough to develop our own resources, as the right wing claims.

Before we get all hot and bothered about the politics, let's look at the facts surrounding oil and gas prices. Crude oil is, after all, at the heart of this debate, since it accounts for 72% of what you're paying for at the pump, and since it's a globally traded good, I'll consider the biggest global factors driving oil.

It's not me, it's you
When anything goes up in price, we like to blame others. It's the natural thing to do. It's the left, it's the right, it's China. In this case, it's actually true that it's not your fault.

The U.S. has seen overall petroleum usage decline since it peaked in 2005, and we're producing more oil than we have since 2003. Imports have fallen from 60.3% of petroleum product supplied in 2005 to 45.1% in 2011. So if we're producing more and using less, it can't possibly be we who are driving up the price of oil, can it?


Source: U.S. Energy Information Administration.

In fact, it's the rest of the world's thirst for oil that's driven demand higher in recent years. And over time, it's supply and demand that drives the price of oil, so we should probably blame them.

China produced just 1.56 million automobiles in 1998, and by 2012, deliveries of passenger automobiles has reached 2.37 million per month. Experts are now revising 2015 forecasts of China's crude-oil consumption to 13.6 million barrels per day, a level that is triple where the country was in 1998.

China isn't the only growing source of demand, either. India's oil consumption grew 40% from 2001 to 2009, and other emerging markets around the world are more than making up for any reduction in demand from the United States. As I said, it's really not us -- it's everyone else.

Put simply, the truth is this: Global demand for oil is going up, and that's the biggest factor driving prices higher.

Fighting solves nothing
In the short term, the potential for conflict with Iran has driven oil prices higher. It hasn't necessarily affected supply very much, though, since Saudi Arabia has said it would fill any gap left by the Iran oil sanctions. But in traders' minds, there's a risk factor. As long as there's tension in the Middle East (and when is there not tension in the Middle East?), oil will reflect it.

More domestic drilling won't reduce prices
The U.S. has increased production at an impressive rate over the past seven years, and there's a price conundrum in effect here. If oil prices go down, drilling in shale and deepwater becomes less profitable, and domestic production goes down. Companies such as Kodiak Oil & Gas (NYS: KOG) and Continental Resources (NYS: CLR) drilling in shale are finally starting to make some real money, because prices are high, and if oil did get low enough for us to enjoy $2.50-per-gallon gas, their profits would dry up and production might stop.

Talking about offshore drilling is always popular, too, but there's a cost-and-supply issue there. SeaDrill (NYS: SDRL) , Transocean (NYS: RIG) , and Noble are finding work for their ultra-deepwater rigs as fast as they can build them, but shallow-water rigs are out of work. The easy oil is mostly gone, so explorers are moving further offshore into deep water, which is more expensive. Add to that a supply shortage of ultra-deepwater rigs, and turning up the heat on offshore drilling sounds great -- but the reality is that the impact would be very minimal short-term.

The truth of the matter is that the U.S. doesn't have enough oil to make a significant difference in the global oil market, especially short-term, and if prices went down dramatically, our sources of oil would prove less profitable, and we'd see reduced production anyway.

Keystone XL doesn't fix anything
Since oil's market is global, what does it matter if Canada ships oil to the U.S. or China? Canada's oil-sands exports will hit the global market somewhere, so building Keystone XL will have very little impact on global oil prices. Maybe we could feel better about buying oil from our neighbor to the north than from Venezuela or Saudi Arabia, but it's not going to bring down the price at the pump.

TransCanada (NYS: TRP) and conservative commentators would like you to think otherwise, but the reality is that the impact would be minimal. And the project would do very little to affect supply for the next couple of years.

Supply and demand still rule
There are still limits on how high the price of oil, and thereby gasoline, will go. Once gas reaches $4 per gallon, people start to cut back, and demand diminishes. When oil climbs over $100 per barrel, oil producers from miles offshore to shale plays find more oil that they can drill profitably, and supply increases. Supply and demand will balance each other out; it's just going to happen between $3 and $5 per gallon instead of between $1 and $2 per gallon as we might prefer.

A sure solution to the problem
There isn't one magical silver bullet to fix what we don't like about the oil market, but a massive global recession has proved to be an effective way to reduce oil and gasoline prices. That's not a solution I think anyone really wants to see, though. Aside from that, unless China decides to switch to horses and buggies, I just don't see an easy solution.

Who's really to blame
If you want to blame someone for the price of oil, blame China or India -- or Russia. Or, you could look in the mirror and ask why you still pay $4 per gallon for gasoline if you can't really afford it. The laws of supply and demand indicate that demand should drop if prices go up as much as they have in recent weeks. If you aren't cutting back, then you're just as much at fault as anyone else.

At the time thisarticle was published Fool contributorTravis Hoiumhas no position in any company mentioned and uses only about 10 gallons of gasoline per month. You can follow Travis on Twitter at@FlushDrawFool, check out hispersonal stock holdings, or follow his CAPS picks atTMFFlushDraw.The Motley Fool owns shares of Transocean.Motley Fool newsletter serviceshave recommended buying shares of SeaDrill and TransCanada. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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