High Gas Prices and the Wisdom of Drilling

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- Gas prices are zooming past $4 a gallon, and the nation is hardly freer from the grip of imported oil or closer to robust economic recovery. With his approval ratings dropping precipitously, the president is blaming speculators and investigating fraud at the pump, when this mess is the direct result of failed federal energy policies.

By word and deed, the Obama administration has sought to limit off-shore oil exploration and development and hasten the commercial viability of solar, wind and alternative vehicle technologies.

All this is based on two erroneous, but strongly held beliefs among liberal policymakers, academics and pundits: First, increasing oil U.S. production would do little to lower U.S. gas prices; and second, but not for the vested interests of multinational oil companies, mankind would have long ago harnessed renewable energy sources and freed itself from the sin of burning hydrocarbons.

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Crude prices paid by refineries in the Gulf of Mexico do move with global prices but not in lockstep, and these are affected by regional market conditions. Increasing North American production would lower refinery acquisition costs.

U.S. refineries, like others around the world, are built to handle the special characteristics of oil produced by their primary sources of crude supply. And gasoline produced by individual refineries is not wholly fungible -- differing fuel characteristics are required across the U.S. and Europe to meet regional environmental standards.

Although tensions with Iran are growing and pushing up oil prices everywhere, prices have diverged, for example, between U.S. and European markets. For years, prices for West Texas Intermediate and North Sea Brent moved closely, but now WTI sells for $20 less than its North Sea counterpart. This indicates the U.S. market is becoming somewhat separate and less determined by global conditions. More domestic production and increased access to Canadian oil would lower U.S. oil prices. The Keystone pipeline and more drilling in the Gulf and elsewhere in North America would significantly lower gas prices.

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Instead of acknowledging these realities, the administration first shut down deep water drilling in the western Gulf of Mexico by all oil companies for the sins of one -- BP -- and now is slow-walking new permits. As importantly, it continues bans on developing rich deposits in the Eastern Gulf, off the Atlantic and Pacific coasts and in Alaska to pacify the president's liberal base, which appears comfortable with Energy Secretary Steven Chu's statements about raising U.S. gas prices to European levels.

At the same time, Secretary Chu has invested taxpayers' money in Solyndra and a dozen other alternative energy projects that independent investment analysts advised were very poor commercial bets. One by one those are failing, but the administration refuses to acknowledge mistakes or relent, and pours money into battery technologies, even though with a $7,500 federal subsidy, Nissan and GM can't persuade car buyers to purchase Leafs and Volts.

The facts are, 50 years from now mankind won't be taking oil from the ground on nearly the scale that it does now. Science will have found better ways to capture hydrogen atoms to run more cleanly internal combustion engines, turbines and fuel cells. But oil companies are not conspiring to block the march of science and reckless federal spending won't hurry the pace of discovery and commercialization.

In the meantime, whether Americans pay $115 a barrel for oil from Saudi Arabia and Nigeria or obtained from U.S. sources does make a profound difference for the economy.

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The annual trade deficit on petroleum is about $300 billion. Raising U.S. oil production to its sustainable potential of 10 million barrels a day would cut import costs in half, directly creating 1.5 million jobs. Applying administration models for assessing the consequences of stimulus spending, it would indirectly create another 1 million jobs.

Overall, attaining U.S. oil production potential would boost GDP about $250 billion. Not bad, considering that it could be accomplished by reducing dependence on foreign oil, increasing federal royalty and tax revenues, and cutting the federal deficit.
Professor Peter Morici, of the Robert H. Smith School of Business at the University of Maryland, is a recognized expert on economic policy and international economics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission. He is the author of 18 books and monographs and has published widely in leading public policy and business journals, including the Harvard Business Review and Foreign Policy. Morici has lectured and offered executive programs at more than 100 institutions, including Columbia University, the Harvard Business School and Oxford University. His views are frequently featured on CNN, CBS, BBC, FOX, ABC, CNBC, NPR, NPB and national broadcast networks around the world.

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