Record High Gasoline Prices Highlight Missed Opportunities

Published August 21, 2012

Gasoline prices reached a national average of $3.72 last week, which is the highest on record for this time of year, AAA reported yesterday. While media pundits debate how high gasoline prices could have been avoided, a more important question is how the United States can benefit rather than suffer under high gasoline (read high oil) prices.

Oil is easily shipped around the world and is therefore a global market. When gasoline (derived from oil) prices rise in the United States, they are rising elsewhere in the world also, including in oil producing nations such as Saudi Arabia. Yet Saudi Arabia and other major oil producers set policies to keep oil prices high rather than low. The reason for this is oil exporters like Saudi Arabia benefit more from the substantial wealth created by oil exports than they suffer paying higher prices for gasoline. Nations and entities that sell more of a product than they use benefit when the price of that product rises. Purchasers or importers of that product, by contrast, suffer when the price of that product rises.

The United States has abundant oil supplies. However, federal and state governments have locked up most of our nation’s oil supplies and rendered them off-limits for production. We could not only be oil self-sufficient if we so choose, but we can easily be an oil exporting nation if we so choose. We are an energy-poor nation by political choice, not by resource availability.

A good illustration of how we can benefit from high oil prices is in North Dakota. In western North Dakota the Bakken shale oil formation sits under private rather than government-owned lands. As a result, this is one of the rare places where energy companies are able to tap our abundant oil resources. North Dakota oil production is now equal to that of OPEC member Ecuador, North Dakota unemployment is under 3 percent, and the North Dakota state budget is flush with payments from oil companies.

North Dakota’s oil abundance is not unique. There are many other abundant oil plays throughout the nation that can be tapped for production. So long as government forbids oil production in these locations, however, the nation as a whole will fail to take advantage of high oil prices the way North Dakota does.

While media pundits argue this week about how we could have avoided $3.72 gasoline, a more important question is how we can benefit rather than suffer from persistently high oil prices.