The boom in U.S. oil drilling hasn’t lowered gas prices

February 11, 2013

Last year, the world  pumped more oil out of the ground than ever before in history. In the first nine months of 2012, the world produced an average of 88.8 million barrels per day, about 2 million more barrels per day than in 2010. Nearly half of that increase came from new drilling in the United States.

Struggling to keep up. (The Washington Post)

Yet oil and gasoline prices remain at elevated levels. Brent crude is still trading for around $120 per barrel, higher than it was two years ago. Here in the United States, pump prices averaged $3.59 per gallon in early February, a record for the usually calm winter months. Again, that's all despite the recent boom in tight-oil drilling in places such as North Dakota and Texas.

So why is that? The big thing to remember is that oil prices are a function of both supply and demand. If world demand for oil rises faster than producers can pump the stuff out, prices will go up. And that's what is happening now. As James Hamilton of UC San Diego explains, China alone has consumed about half of the extra oil that's been drilled since 2010:

China likely consumed nearly half of the global 2 mb/d increase. The EIA reports that China increased its petroleum consumption by almost 500,000 b/d in 2011, and preliminary estimates are that China added another 420,000 barrels to its daily consumption in 2012.

Technically, the world isn't even producing enough oil to keep pace with the rise in global incomes. Oil supply has risen by 2.3 percent since 2010. But the world economy has grown by 7.1 percent since then. The only reason that oil prices haven't soared to record highs, Hamilton points out, is that countries have been undertaking new conservation measures. Americans, for instance, are buying more fuel-efficient cars in droves.

Granted, oil prices would almost certainly be even higher than they are now without the drilling boom over the past two years in places like North Dakota. But at this point, the extra drilling is struggling to keep up with the pace of global economic growth.

Most forecasters expect that to be the case for years to come. The International Energy Agency recently projected that U.S. oil production would continue rising through 2020 and beyond, as companies extract more "unconventional" oil from shale rock and other sources. But global demand was also expected to rise 35 percent between now and 2035, with China on pace to become the largest oil consumer in the world in the next two decades.

Further reading:

--James Hamilton has much more detail on why gasoline isn't cheap. In particular, he notes that much of the rise in global petroleum supplies has come in the form of "natural gas liquids," which have been a boon to the petrochemical industry but not much use to drivers.

--Americans are buying more fuel-efficient cars, polluting less.

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Sarah Kliff · February 11, 2013