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Do High Gasoline Prices Make People Stupid?

Wealth Daily's Weekend Edition

Written by Briton Ryle
Posted April 1, 2012

As a Wealth Daily reader, this observation probably doesn’t apply to you.

After all, we’ve been discussing the energy situation in detail for a few years now.

And I know we’ve been “preaching to the choir,” because I see the emails from Wealth Daily readers who’ve nailed down terrific profits from the oil and natural gas stocks we cover...

Still, millions of Americans don’t seem to understand the energy market. It’s as if high prices at the pump are taking IQ points from them — and from our politicians, as well.

A recent Gallup poll found that 85% of U.S. adults believe the president and Congress “should take immediate actions to try to control the rising price of gas.”

I wonder what actions, exactly, these respondents think should be taken?

And do we really think we can lower the price of gasoline in global free market?

The $2.50/Gallon Promise

If he gets the Republican nomination to run for president, Newt Gingrich says he will put his “$2.50 a gallon” slogan on coffee mugs to celebrate his promise to lower gasoline prices for Americans.

GOP hopeful Rick Santorum says, “They [Democrats] want higher energy prices. They want to push their radical agenda on the public…”

House Speaker John Boehner has advised Republicans to tap into American anger over $4/gallon gas to score political points with voters.

Yes, somebody’s got to do something, alright... but what?

Is “Drill, baby, drill” the answer?

Oil Leases and the SPR

President Obama has responded by promising a coordinated release from the Strategic Petroleum Reserves.

But that doesn’t change the fact that the Obama administration hasn’t exactly been rolling out new offshore drilling leases — though leases have been extended since the Deepwater Horizon spill in April 2010.

And we all know what happened to the Keystone Pipeline.

The nonpartisan Congressional Research Service found that oil production on Federal land represents 7.5% of total oil produced from all onshore U.S. lands in 2011, even though the Federal Government owns more than 30% of the lands with oil-producing potential.

The Energy Information Administration (EIA) reports 3.7 quadrillion BTUs of energy from crude oil were produced from federal lands and waters in 2011. This is a 12% increase over the 3.3 quadrillion BTUs produced in 2008.

So while it may not be enough, there has been progress for oil production on Federal land... and there may be more, as Obama’s been entertaining proposals for opening up more drilling in Alaska.

But the real question is: Does the U.S. have enough oil to bring down the price at the pump?

Supply vs. Price

Over the last few years, U.S. oil production has risen around 20%, from approximately 5 million barrels a day to nearly 6 million barrels a day.

(Much of this increase has come from the Bakken Oil Pool — more on that in a minute.)

This nifty little chart shows there’s not much correlation between U.S. oil production and gasoline prices in the United States:


In the U.S., we consume around 19 million barrels of oil a day.

Adding 500,000 barrels a day — or even a million — in domestic production is quite literally a drop in the bucket.

Sure, increased production is great for employment in certain areas of the country...

Williams County, North Dakota, where the city of Williston is, has an unemployment rate below 1%. And the average salary is north of $90k a year. (You can find similar areas in Pennsylvania, Texas, and Colorado.)

But at its present rate of increase, U.S. oil production can't affect gasoline prices.

And even if every acre of idle oil-bearing Federal land could be pumping oil tomorrow, it would add less than two million barrels a day.

Now, I haven't delved into any arcane math to arrive at the numbers and conclusions I've presented here. It's basic back-of-the-envelope stuff.

And you don't have to be genius to see that the 35-day supply of oil in the Strategic Petroleum Reserve and the 15-day supply at Cushing, Oklahoma, aren't large enough to meaningfully offset supply concerns.

Ultimately, there is only one way to affect gasoline prices...

A Cheaper Alternative

There's no doubt there's an Iran premium in oil and gasoline prices right now. Speculation may have driven oil up 15% above where it "should" trade, maybe 20%. 

Whatever premium there is in oil prices, it just validates the fact that oil is a finite commodity.

Supply will always be threatened — until we have a viable alternative to oil.

And that alternative is natural gas.

The U.S. is awash in natural gas. We have so much supply, they are practically giving it away...

Storage facilities are running out of room; there could be no storage room left by November. Companies have already slowed production, and they may start capping wells.

Why aren't any politicians talking about this?

It's because of the national debt situation. For the Republicans' austerity platform, there's no way they can advocate the government's ability to subsidize the infrastructure build needed to boost natural gas as a transportation fuel, a la the Pickens Plan.

Utilities are turning to natural gas instead of coal as fast as they can. So is manufacturing. General Electric (NYSE:G E) and nat gas heavyweight Chesapeake (NYSE: CHK) recently announced an alliance to make compressed natural gas available at more filling stations.

How to Invest

Even if/when we use more natural gas, you're still not going to see "$2.50 a gallon" anywhere — except on one of Newt's coffee mugs.

Let the politicians be the dumb ones...

In the meantime, if you want buy some Chesapeake stock, that's a fine idea.

I also think small domestic oil exploration companies are an excellent idea. Oil prices could come down some, but the days of cheap oil are long gone.

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Good Investing,

Briton L. Ryle
Analyst, Wealth Daily

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