During Domestic Drilling Boom, Why Are Gas Prices Still High?
Photo Illustration by Miguel Villagran/Getty Images
Despite a domestic drilling boom, gas prices are still relatively high.
The drilling processes of hydraulic fracturing — or “fracking” — and horizontal drilling have made it possible to access previously unreachable deposits of fossil fuels, creating a surge in domestic oil and natural gas production. So why are prices at the gas pump still relatively high? (Last week, the average national gas price was $3.68 per gallon.)
We sat down with Dr. Ted Patzek, Chairman of the Department of Petroleum and Geosystems Engineering at the University of Texas at Austin, to find some answers.
He said there are multiple reasons why gas prices are still up, even though the country is producing more than it has in some time:
- The crude oil reserves that are currently being produced by hydraulic fracturing are fairly expensive to access. Today, American oil reserves tend to lie in shale formations or in deposits under the ocean floor. The higher production costs become part of higher gasoline prices.
- Crude oil, not natural gas, is the main substance in gasoline, which powers our cars, airplanes, and many other forms of transportation—so increased natural gas production does not drive gasoline prices down.
- Financial institutions, such as major banks, speculate on raw materials like oil and natural gas. Companies such as J.P. Morgan and Goldman Sachs provide financing for the development of oil and natural gas projects—but they also exert influence over the prices of these resources, and thus can keep them relatively high.
From the Deserts of Saudi Arabia to the Bottom of the Sea
Dr. Tad Patzek of UT says that reaching new sources of oil and gas is expensive.
Since many easy-to-access oil reserves have already been tapped, more expensive technology is required to reach new reserves.
“In the good olden days, it was enough for the Saudis to drill a well, and that well would produce 10,000 barrels of oil per day,” Patzek said, adding that this would be the output of a good well, not every well drilled. “All you needed to do was sit by the well and sip Coke or whatever they sip… To recover it was either cents or single dollars per barrel. The rest of it was profit. Today, it’s no longer true. It’s not true for Saudi Arabia. But it’s definitely not true in the Bakken, in the Eagle Ford, or in the deep Gulf of Mexico. This is expensive oil.”
According to Patzek, wells drilled in the Gulf of Mexico can produce a significant supply of oil, but drilling in the ocean is risky, and requires expensive platforms, pipelines, and separation facilities. On land, shale formations such as Montana and North Dakota’s Bakken Shale may contain major oil deposits, but individual wells tend to produce little oil, so drilling there can require high investments (and many wells).
Today, most of the oil that powers American cars comes from the United States, followed by Canada, Patzek said. Countries such as Saudi Arabia, Mexico, Venezuela, Nigeria, Angola, Russia, and Iraq supply the remaining oil, but none provide the U.S. with as much oil as Canada does.
“Canada is our main partner in the oil trade, by far,” Patzek said. “Right now, to say that we rely heavily on Middle Eastern oil is an overstatement.”
(In fact, fearing that U.S. shale production will further reduce the demand for Middle Eastern oil, a Saudi Arabian prince and oil billionaire has begun urging his country to diversify its economy, according to a Reuters report.)
Natural Gas Heats Homes, Fertilizes Fields, and Manufactures Steel—But Doesn’t Power (Most) Vehicles
According to Patzek, natural gas is used to produce nitrogen fertilizers, petrochemicals, plastics, and the high-quality steel that is used in tools and machinery. Natural gas can also be used for heating, and electricity generation in power plants. However, most automobiles run on gasoline, with a few exceptions. (About 12 to 15 percent of public transit buses in the U.S. are fueled by natural gas, and some major American car companies sell natural gas-powered vehicles.)
“That’s why there is a disconnect between a glut of natural gas and the low prices of gas, and the high prices of fuels at the pump,” Patzek said.
So what is the effect of the natural gas glut on the U.S. economy?
“Natural gas is absolutely instrumental in helping the U.S. economy,” Patzek said. “Because of its abundance, we are bringing manufacturing back to the United States. The price differential between U.S. [natural] gas prices and … Russian [natural] gas prices over the last decade has injected about $600 billion into the U.S. economy. That’s not something to sneeze at.”
Should Americans transition to powering their cars with natural gas? Patzek said that natural gas tends to burn more cleanly than gasoline (although it does produce emissions). However, natural gas-powered cars require specialized filling stations. Some already exist—such as at Austin-Bergstrom International Airport—but more would be required to create an infrastructure as extensive as the nation’s network of gasoline stations. Also, natural gas stations can be noisy neighbors.
“This is not cheap, because if you want to recharge your car to, let’s say, 3,000 or 5,000 PSI in a short time, you will need very powerful compressors that will make noise [and] vibrations,” Patzek said. “Not everybody would want to have them on your friendly street corner. It’s not as simple as you might think.”
The “Pervasive Intervention” of Big Banks
According to Patzek, major banks such as Goldman Sachs and J.P. Morgan speculate on commodities such as food, aluminum, metals, crude oil, and natural gas, which can raise the prices of these goods. According to a New York Times op-ed published last year, the price of oil was about $100 a barrel in 2012, although the costs of extraction average only about $11 a barrel worldwide. The chief executive of ExxonMobil testified in 2011 that pure speculators accounted for as much as 40 percent of oil’s price per barrel.
“I think that people need to understand that there is a pervasive intervention of Goldman Sachs, JP Morgan, and [other] banks into natural resources and raw materials,” Patzek said. “In fact, I think they exert more and more influence over the price levels of these commodities relative to the producers. I don’t think that’s a healthy trend, but on the other hand, they also provide financing to develop more projects.”
(Recently, the New York Times also reported on how Goldman Sachs increased U.S. aluminum prices by exploiting pricing regulations.)
Driven By Power
“Our society is driven by power,” Patzek said, referring not to political or economic influence, but to the scientific definition of power.
“Power is energy per unit of time,” he explained. “If I produce a lot of energy over 1,000 years, it is of no consequence … because I won’t have enough gasoline to drive. But if I produce the same amount of energy in 10 years, well then it matters, because then I can drive my car [or] I can fly a jet… Everything we do in the United States of America, around this planet, in modern societies, is about power. The oil industry is giving power to the society.”
Is society using that power well? Patzek believes that it could be managed more wisely.
“Much of this power is being wasted, especially in the U.S.,” Patzek said. “In terms of us driving an F-150 truck to get a six-pack of beer, or coming to work every day in a super monster truck or an SUV that burns three times as much fuel as my Toyota Prius, or four times more… With complete disregard for the planet and our own future, we are wasting it.”