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Market News

 February 27, 2012
Drilling alone won't bring cheap U.S. oil

 Republican presidential hopefuls are presenting the U.S. public with a familiar fantasy: By expanding offshore drilling they can bring gasoline prices back to earth. With the U.S. pumping only 9 per cent of global crude, its leverage on supply is modest. But the world's biggest consumer can affect demand, the other determinant of price. That, however, requires frank talk about conservation.

Americans get restive as pump prices rise toward $4 (U.S.) a gallon. Chastising President Barack Obama, and pledging to cut prices back to $2.50 a gallon, as Newt Gingrich has done, is standard political salesmanship. It's also economic hubris. The United States pumps just 7.5 million barrels of the world's 82 million barrels a day of crude, according to BP. One nation can't control world prices with such a modest market share.

Even if the United States were to throw environmental caution to the winds and open up areas currently out of bounds to producers, the extra output could be offset by oil cartel OPEC. Swing producers, most notably Saudi Arabia, might swiftly reverse the effect of years of extra American drilling if they were unhappy with the resulting oil price.

It is also hard for Republicans to argue that the United States is failing to exploit its own oil. Oil output has been rising for the first time since the 1970s -- thanks to enthusiastic deep-sea drilling and surging output from shale regions in North Dakota, Texas and elsewhere. The result is that reliance on foreign oil has fallen below 50 per cent, back to levels last seen three decades ago. None of this, however, has stopped the price of Brent from rising 60 per cent over the past two years.

The United States' real clout on global energy markets comes as a consumer, where it accounts for a fifth of all oil burnt. There is plenty of low-hanging fruit, here. The average fuel efficiency of the U.S. vehicle fleet is about half that of European nations. And federal taxes on gasoline, which are the most effective means of curbing usage and fostering efficiency, are correspondingly lower.

A plea for conservation is unlikely to appeal to voters of any political persuasion. But the economic laws of supply and demand are pretty simple. And they make a strong case for focusing on the latter over the former. In an election year, however, don't expect reason to triumph over populism.