It’s basic economics: an increase in the supply of a product coupled with a decrease in demand results in a drop in price.
But that isn’t happening with oil.
Since 2008, oil production in the United States has surged a stunning 28 percent as the controversial practice of fracking unlocks new supplies in North Dakota and Texas. At the same time, use of oil and petroleum products has fallen 4 percent, as Americans switch to more efficient cars.
In theory at least, both of those factors should have pushed the price of crude down. Instead, it’s gone up.
Since bottoming out during the financial crisis, oil futures traded on the New York Mercantile Exchange have nearly tripled in value, climbing from $33.87 per barrel in December 2008 to roughly $95 this month. Although $33.87 was an aberration, a temporary low brought on by economic collapse, oil still costs substantially more now than it did in 2007, before the recession began.
The high price illustrates a brutal truth of today’s interconnected world — oil is a global commodity, bought and sold in a global marketplace. Even if demand falls in the United States, it’s growing in countries such as China and India. And it’s growing fast enough there that booming oil production in the United States can’t keep pace.
“You’re seeing record world demand growth, but supply is not keeping up so much,” said John Felmy, chief economist for the American Petroleum Institute. “It’s a world price. We’re a part of it, but only a part of it.”
Critics say the price paradox undercuts the oil industry’s efforts to drill in more of America’s public lands and coastal waters. Doing so, they say, won’t necessarily help Americans at the gas pump. Indeed, gasoline prices in California set new records last year, with the statewide average hitting $4.67 per gallon.
“It really debunks the myth of ‘Drill, baby, drill,’ that if we just produce more oil, prices will stay low or go lower,” said Michael Marx, director of the Sierra Club’s Beyond Oil campaign.
Higher domestic production has had a small effect on U.S. oil prices — just not enough to keep them from rising.
Much of the new oil comes from North Dakota and flows into pipelines in the Midwest. But the lines that connect the Midwest to export terminals on the Gulf Coast can’t carry all the additional crude. The result has been a glut of petroleum in one particular place, the pipeline hub of Cushing, Okla. And Cushing is the delivery point for the oil contracts traded on the New York Mercantile Exchange.
So the price of those contracts, for West Texas Intermediate (WTI) crude, is running about $17 below the standard international price, in large part due to the glut in Cushing. But WTI still costs more than $95 per barrel — a level that would have seemed shocking just a few years ago.
Indeed, American oil prices have been rising at the same time that fracking and horizontal drilling have revolutionized the nation’s oil industry.
U.S. oil production peaked at 9.6 million barrels per day in 1970, enjoyed a brief resurgence in the 1980s and then entered a long slide. The bottom came in 2008, when production fell to 5 million barrels per day, according to the U.S. Energy Information Administration.
The rebound has been swift. Last year, U.S. production jumped to 6.4 million barrels per day, according to data released last week by the American Petroleum Institute. Not since 1997 has the country pumped that much oil. And the numbers keep climbing.
Meanwhile, the country’s use of oil and gasoline is falling, albeit slowly. According to the Institute, demand for all petroleum products in the United States slid 2 percent in 2012, reaching its lowest point in 16 years. Despite the improving economy, Americans used fewer petroleum products last year than they did in the depths of the recession.
But the world’s thirst for oil, gasoline and diesel continues to grow. And that thirst isn’t easy to slake.
Oil demand in China, for example, rose 3.4 percent last year, reaching 9.68 million barrels per day, according to the Platts energy information service. And 2012 was a relatively rough time for China’s economy, with conditions improving only toward the end of the year. The country’s oil demand hit 10.58 million barrels per day in December, according to Platts.
Against that background, the increase in U.S. oil production doesn’t seem so dramatic, certainly not enough to cut the price.
“It’s not even one percent of world production,” Felmy said. “That’s relatively small and can be easily offset.”
The Energy Information Administration does not yet have an estimate for global oil production last year. But in 2011, worldwide production rose less than 1 percent compared to 2010.
Of course, America’s current oil boom is just getting under way.
The International Energy Agency, an intergovernmental body not known for wild-eyed predictions, recently forecast that the United States could overtake Saudi Arabia as the world’s largest oil producer by 2020. Will all that extra petroleum finally lower prices? That depends on how fast global oil use continues to grow. And how much petroleum other countries produce.
“It’s a difficult question to answer, because there’s not a one-for-one (relationship) between an increase in production and a decrease in prices,” said Doug MacIntyre, director of the Energy Information Administration’s office of petroleum statistics. “There are so many other factors.”