Gas: Prices, Politics, Ponies and Pipelines

This week, the Senate defeated a bill to enable the Keystone XL oil pipeline that has been proposed to transport tar sand oil from Canada to the U.S. The "victory" is likely symbolic, as the incoming Senate will flip to a Republican majority at which point they should easily pass it, though they won't be able to override President Obama should he veto the bill, as expected.

Supporters of the pipeline promise jobs, though the actual economic impact is sketchy to say the least. They also promise cheaper gas at the pumps, though that's an even trickier bag of goods to sort through. Gas prices have fallen 70 cents since their summertime peak, and it has nothing to do with pipelines.

The oil industry is a very complex business that does not operate by normal market dynamics for a variety of reasons. For starters, supply and demand can't be managed nearly as efficiently as most other products.

When the industry wants to produce more oil, they have to start years before they can expect production to swell. You might do that while prices are high only to find that they've fallen by the time output rises significantly, which is obviously compounded by the excess supply suddenly flooding the market.

Sometimes new technologies are discovered that make getting to oil reserves that weren't thought to be cost efficient easier. Sometimes higher prices make it worth going after that oil, but only until the spike in supply sends them down again.

In 2012, the number of operating oil derricks in the United States hit an all-time high, mostly because the per barrel price was high enough to make it worthwhile to bring the closer margin wells online.

Then there's the matter of speculation, which the CTFC says accounts for up to a third of the cost of a barrel of oil. Billions are waged on future prices, which impacts current prices in a way that is totally separate from normal market demand for use. Most of the oil "traded" is never even taken possession of, let alone used. It's just sold and resold.

If the economy on the whole slows down, demand for gasoline tends to drop off precipitously. Less economic activity means fewer trucks hauling less goods, less deliveries of raw materials, etc.

So, what's happening now to make gas prices drop? Much of it has to do with the major investments into exploration and technology that occurred when prices were skyrocketing in 2005-07.

The effect is good for the overall economy as businesses see resources freed up to invest in expansion. It's bad for oil companies and oil producing nations; winners and losers just like everything else.

The ancillary benefit to the oil producers, however, is that while $4.50 a gallon gas tends to drive people toward alternative energy sources, $2.70 a gallon gas gets them thinking about SUVs. All else being equal, stable prices are best for all parties, but it's just too complex of a market not to be cyclical absent profound regulation.

So, what about the pipeline? My guess is that at some point it probably gets built. Plans for the project had moved forward all but unnoticed until it became something of a proxy war between environmentalists and industrialists and then a rallying point for both Democrats (against it) and Republicans (for it).

Will it make gas noticeably cheaper? Almost definitely not. Will it provide many jobs? Nope, about 50 full-time positions in addition to the temporary construction sort. Is it the worst thing that can happen to the environment? Not unless it ruptures, though the very production of tar sand oil is itself among the dirtier enterprises in energy.

The real war in curbing emissions, however, is always ultimately going to be usage. Focusing on the average MPG of our automobile fleet will have a much bigger net impact than stopping any single oil operation. The biggest environmental achievement of the Obama administration might have been its success in improving CAFE standards for the first time in decades, but there is still much work to be done and gains to be had.

Improving the average MPG of all cars in the United States by just one mile per gallon would save more oil than the industry's own projections of what they would yield drilling in the Alaska National Wildlife Reserve for 10 years. Our incentives on hybrids are a good start because they drive new technologies that will ultimately move us away from oil, but there are serious gains to be made on traditional combustible engines in the meantime.

The new standards have forced the industry to improve. A 2007 Ford Mustang V6 got an EPA average 19 MPG. Five years later, the same model averaged 23 — while adding almost 100 horsepower! That didn't happen in response to the market or because Ford wanted to focus on the part of the car's performance. It happened in response to sensible regulation.

What would have happened if the carrots and sticks had incentivized the manufacturer to keep the ponies at the original horsepower rating and put all of the technology into upping the MPG? Maybe it would get an average of 30 mpg. That would be significant from an environmental standpoint and far from tragic from an automotive one. Maybe there would be non-hybrids achieving 50 mpg averages, a goal that would be easily realized were it a priority. 

The MPG aspect is a battle that can be won much easier than pipelines, while having a much bigger effect by ultimately making them less necessary to the market. It's also a chance for consumers to vote more directly with their wallets. Perhaps a common sense compromise can be reached: you get the pipeline, we get 5 mpg in additional fleet average.

Dennis Maley's column appears every Thursday and Sunday in The Bradenton Times. He can be reached at dennis.maley@thebradentontimes.com. Click here to visit his column archive. Click here to go to his bio page. You can also follow Dennis on Facebook.