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Op-Ed: Why ‘Drill Baby Drill’ is Far From the Answer

March 29, 2012

The following is an editorial submitted to Business Fleet by David Ruggles, an industry analyst who attended this year's Conference of Automotive Remarketing.

It seems every few years the world market price of oil is the topic to write about. We had a little run up in fuel prices last year over the Libyan overthrow of their dictator, but talk of attacking Iran before they get a nuke has triggered another scare; this time more serious. And because this is a Presidential election year, the increasing fuel prices have become a political football — despite the fact that Presidents can do very little about the world market price of oil.

During the recent Conference of Automotive Remarketing (CAR) held in Las Vegas at Caesar’s Palace, there was a lot of talk about fuel prices being the “wild card” in industry projections.

It is quite remarkable that so few in this country really understand how the world market for oil works. If they did, they would understand why “Drill Baby Drill” is far from the complete answer.

First, oil is a fungible commodity:

From Wikipedia – “Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution, such as crude oil, shares in a company, bonds, precious metals or currencies. For example, if someone lends another person a $10 bill, it does not matter if they are given back the same $10 bill or a different one, since currency is fungible; if someone lends another person their car, however, they would not expect to be given back a different car, even of the same make and model, as cars are not fungible.”

What does “fungibility” in the world market price of oil mean to Americans and our economy? A barrel of oil from the Bakken fields in North Dakota is worth the same as a barrel of oil in Saudi Arabia, excluding transportation and refining expense differences. The barrel of oil from Saudi Arabia might cost $10 to extract while the barrel from Bakken might cost $65 or more due to the extra cost of “fracking” to get the oil out of the ground.

Following is a chart showing the relative cost of various types of oil production:

Saudi Arabian oil has been the cheapest to produce over the years. While there may be a sense of security knowing we are sitting on the huge Bakken Reserve, Bakken does not lend itself to cheap gas at the pump. In fact, oil sands and oil shale require a high world market price to be viable. Add in the higher cost to refine these thick and gooey oil stocks from sands and shale, and the price of refined fuel becomes quite high.

The bottom line is that it is highly unlikely that oil producers in North Dakota would sell their oil to American consumers for any less than the world market price. And it is unlikely that American consumers would pay more for Bakken oil just because it came from the U.S.
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