Why Keystone XL, War With Iran, and "Drill Baby Drill" Will Actually Raise Gas Prices

While Newt Gingrich travels the country extolling the power of a magical plan to lower gasoline prices (perhaps revolving around unicorns towing our cars), a simple fact:

The Republican policy agenda will lead to increased gasoline prices at the pump in the short, near, mid, and long term while undermining the American economy and American security.

While there are a plethora of other elements, let’s narrow down to just four key Republican agenda items:

  • Bellicosity over Iran (and elsewhere) raises short and near-term prices and threatens mid-term increases;
  • Promoting Keystone XL pipeline will increase prices in the near and mid-term;
  • Drill, Baby, Drill” will have minimal impact in the mid-term while raising prices in the long-term; and,
  • Opposing increased CAFE standards has helped foster today’s high prices and will increase prices in the mid and long term.

1. Iran

The situation with Iran is difficult and this post will not offer a magical solution to dealing with Iranian nuclear ambitions. The pressure on Iran (embargo) and the potential for military action (by Israel or the United States or some coalition) against Iranian nuclear facilities is leading to increased speculation with a ‘war fear tax’ already on global oil prices.  While President Obama (and most of the world’s leaders) are emphasizing the importance of seeking a diplomatic and peaceful resolution, if possible, even while making clear a military action might become necessary, the Republican presidential candidates are far more bellicose (as per a prominent Mitt Romney OPED several weeks ago). 

This bellicosity is already influencing that ‘war fear tax’ with global trader concerns that a Republican President would abandon diplomacy and escalate to a ’shock and awe’ campaign.  While incredibly hard to pin down directly, some experts postulate that a strike on Iran would massively increase U.S. prices at the pump in the blink of an eye. 

Simply put, want $6 gasoline at the pump? Strike Iran.

Now, such strikes might be necessary but no one should pretend that it will cost virtually nothing to go to war with Iraq (oops,  Iran).  Thus, Republican rhetoric on Iran is already contributing to market jitters over a potential war and thus increasing prices. And, living up to that rhetoric with an actual strike would have an immediate spike impact on prices which, dependent on Iranian reaction to the strike (imagine an attack on Saudi oil facilities), could drive oil prices above $250 barrel.

2. Keystone XL

The Keystone XL pipeline is promoted by the American Petroleum Institute, US Chamber of Commerce, and the Republican Presidential Primary candidates as some form of magical solution to gasoline prices at the pump opposed by President Obama. The reality is far different.

Key fact: right now, the price of crude for U.S. Midwestern refineries is significantly lower than the global price of oil due to, in no small part, the costs of moving Canadian Tar Sands crude into refineries that serve the world market rather than the U.S. domestic market.  And, this has real impact on fuel prices:  “spot gasoline was 55 cents cheaper in Chicago than in New York.”

According to a recent Bloomberg article on Keystone XL and fuel prices, “project backers including Republican Presidential candidate Rick Santorum, say [it] will create cheaper U.S. gasoline, instead risks raising prices as much as 20 cents a gallon in the Midwest, Great Plains and Rocky Mountains.” The Keystone XL pipeline is intended to resolve the pricing differential between WTI/Brent crude oil prices and provide a path for those Canadian tar sands exploiters to earn in the range of $10-$15 more for every barrel they sell by putting the oil on the world, rather than upper Midwest, market.

Thus, building Keystone would actually lead to higher prices at the pump through much of the Midwest -- with the potential to lower (very slightly) prices in a few areas of the United States even while driving higher average prices across the nation) in the near-to-mid-term.

3. Drill, Baby, Drill

The “Drill, Baby, Drill” rhetoric purposely ignores that the Obama Administration is overseeing the greatest boom in drilling activity the nation has seen since serious record-keeping began decades ago -- and focuses on burning up even more rapidly the nation’s fossil fuel reserves.  Expanding beyond that activity could, in the mid-term term, perhaps increase U.S. production slightly (some analysis suggests in the range of 250,000 barrels/day by the 2020s — less than oil production has already increased during the Obama Administration) and thus foster lower gasoline prices by perhaps 1-2 cents per gallon.  

However, the United States only has a few percent of world oil reserves.  ”Drill, Baby, Drill” is based on accelerating exploitation of America’s depletable resources which will increase dependence on other nation’s for U.S. liquid fuel demands over the longer term (as prices go up even more).

4. Opposing CAFE Standards

Without even considering the impact of truck and other large vehicle standards, the Obama administration's collaboration with the auto industry to lower CAFE standards on light vehicles is projected to reduce U.S. oil demand by 2.2 million barrels per day by 2025. That's about 40 percent of current U.S. production -- and in the range of ten times what might occur from a no-holds barred “Drill, Baby, Drill” regime ignoring environmental consequences.

Very simply, if we believe that rather simplistic capitalistic “supply/demand curve," this reduction of U.S. demand (negagallons) is a direct equivalent to increased supply and should reduce overall fuel prices -- and thus save money not just for those driving the higher mpg vehicles ,but for everyone who goes to the pump. One analyst has suggested that the Obama Administration’s plans to reduce U.S. oil imports by a third could cut oil prices globally by $10-20 a barrel.

This value stream has been almost uniformly ignored when Republicans discuss the payoff from CAFE standard strengthening. In fact, this ‘indirect’ savings might be three (or even more) times greater than the direct savings that drivers will have due to having to buy fewer gallons of gasoline. (And that calculation, of course, doesn’t even begin to account for the externalities of America’s oil addiction from security costs to health issues to environmental impacts to …)  Simply put, the opposition to strengthening CAFE standards over the years has lead to greater 2012 US oil demand, higher gasoline prices, and increased US vulnerability to global oil price and supply fluctuations.  Opposing tightened CAFE standards is an argument for extending this problem indefinitely into the future.

As noted, the above are only four examples. While we're at it, we might ask about the Republican attacks on efforts to explore the potential of low-cost, low-pollution biomass fuels (such as algae) that may lower liquid fuel prices in the mid-to-long-term. Or, for that matter: their resistance to improved rail transit, bicycling, electric vehicles, household energy efficiency programs (which would reduce demands for home heating oil), and a whole host of other paths to reduce U.S. liquid fuel requirements  that could also help drive down U.S. prices at the pump over the mid-long term.

There are so many other viable paths to improving the economy, squeezing energy costs, and reducing the external costs (health, environment, and so on) of our energy system. But if you look at the reasoning behind Republican political rhetoric and policy priorities, there's only one possible, inescapable conclusion: The Republican agenda is to increase oil company profitability while increasing gasoline prices at the pump.

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