Remember when “Drill here, drill now” was supposed to solve our energy problems?
Well, we are drilling here. We are drilling now.
As the Wall Street Journal reports, crude oil production in the United States is expected to jump 12 percent in 2012 and another 8 percent next year. Domestic crude-oil production through the first seven months of 2012 — July is the most recent month for which numbers are available — is 21 percent higher than it was in the same period in 2008.
That influx of oil onto the American market has driven the price of West Texas crude, the benchmark for U.S. oil, down by 7 percent. But as the WSJ also notes (subs. req.):
… gasoline prices currently average nearly $4 per gallon nationwide. Rising U.S. crude production may seem like an attractive antidote, but it is proving ineffective on its own at a time when the world’s appetite for energy remains voracious and Middle East tension is a reminder that supplies could be disrupted.
“Even the significant increase in U.S. production is a small part of the world oil market,” said Severin Borenstein, co-director of the Energy Institute at the Haas School of Business.
Refiners that process the cheaper crude are selling gasoline and diesel into a global market driven more by higher international prices for crude, which are up around 7% in 2012.
Some are benefiting. Refiners in the Midwest—near where much of the new oil is produced or stored—can often pay less for the raw crude than do rivals in U.S. coastal areas and abroad, but can charge market prices for the sought-after gasoline and diesel they churn out.
HollyFrontier Corp., which owns refineries in Oklahoma, Kansas and elsewhere, saw net income jump 149% to $502 million year over year in the second quarter. Tesoro Corp., which operates a refinery in North Dakota, where crude production has roughly quadrupled in four years, reported a 77% leap to $393 million in the same period.
In other words, significant, sustained increases in domestic oil production have had and will have little or no effect on the price of gasoline at the pump, because gasoline at the pump is sold at the world price for that commodity. In fact, the financial benefit from increased domestic drilling is being enjoyed almost exclusively by refiners in the form of considerably enhanced profit margins.
Because that’s how the oil markets work.
– Jay Bookman