The debate over gas prices never ends.
The price of gas is one of the most visible economic indicators we have. After all, signs advertising fuel prices are all over the place. When it goes up, people notice, more so than, say, the price of milk.
Gas prices are also the tail end of a long and extremely complicated supply line. Global conditions often have a big impact on local fuel prices, but people who don’t grasp this are more likely to blame oil producers, refiners and fuel retailers for some imagined conspiracy to gouge consumers. And if you point out that no evidence of collusion to inflate prices has ever been documented, despite repeated investigations over decades, that’s just part of the conspiracy.
Most recently, gas price complainers have wondered why booming domestic oil production in North Dakota and elsewhere hasn’t lowered fuel prices. What good is all this “drill, baby, drill” if it doesn’t reduce some of the pain at the pump?
The truth is that the rise in domestic oil production has had an impact on fuel prices. They’d be a lot higher if America wasn’t pumping all this oil (emphasis mine):
July 4 (Bloomberg) — The U.S. will remain the world’s biggest oil producer this year after overtaking Saudi Arabia and Russia as extraction of energy from shale rock spurs the nation’s economic recovery, Bank of America Corp. said.
U.S. production of crude oil, along with liquids separated from natural gas, surpassed all other countries this year with daily output exceeding 11 million barrels in the first quarter, the bank said in a report today. The country became the world’s largest natural gas producer in 2010. The International Energy Agency said in June that the U.S. was the biggest producer of oil and natural gas liquids.
“The U.S. increase in supply is a very meaningful chunk of oil,” Francisco Blanch, the bank’s head of commodities research, said by phone from New York. “The shale boom is playing a key role in the U.S. recovery. If the U.S. didn’t have this energy supply, prices at the pump would be completely unaffordable.”
So why is it that gas prices aren’t falling despite big increases in domestic oil production? That’s because increases in domestic production have offset decreases in oil imports.
Which brings us to another fascinating aspect of this issue.
By way of illustrating just how profound an impact domestic oil production is having on the American economy, consider this graphic from ZeroHedge which shows the American trade deficit for all goods except petroleum products. We now have a trade deficit (outside of oil) of some $49 billion, the highest in history:
Despite this wide gap in non-petroleum trade, “overall US trade is not all that bad,” according to ZeroHedge. That’s because the US is important far less oil thanks to a sharp rise in domestic oil production. Here’s the trade balance between imported and exported petroleum goods:
I’m not sure that trade deficits are as worrisome as some make them out to be. On one hand, if goods and services are flowing into America from other places, doesn’t that indicate that people here can afford those goods and services? That there is a market here for them?
On the other hand, it’s hard to see a lot of positives in the decline of non-petroleum exports.
Still, trade balance on its own isn’t that dependable an economic measure. We could be exporting less because we’re consuming more domestically. We could be importing more because our economy is recovering.
But the impact domestic oil production has had on the trade balance has been profound.