The argument for increasing oil production in the United States to decrease gas prices at the pump has sparked passionate debate, but it undervalues the influence of the Organization of Petroleum Exporting Countries.
In recent years, OPEC has shown an ability to manipulate the price of oil around the world, making it unlikely that an increase in U.S. oil production would reduce gas prices. However, this unfortunate fact has a silver lining: OPEC's need to sustain its market base and hold off the alternative-energy industry is likely to keep oil prices from skyrocketing.
Two factors tend to be ignored in discussions of gas pricing. First, oil markets are not like other commodity markets, such as those for corn or soybeans. The market for oil is unique in that the OPEC cartel controls the world supply, and thus the price, by increasing or decreasing production. (During internal negotiations in 2008, OPEC members clashed on whether to adjust production to increase prices or just to sustain them. In keeping with its historical policy, Saudi Arabia vowed to ignore quotas in order to stabilize the price.)
Second, it is difficult to imagine U.S. political support for imposing an export-control system to prevent the oil produced domestically from being sold abroad (e.g., nationalization of oil extraction, a tax on oil exports, or a legal embargo).
Now, consider this pair of scenarios:
The United States buys less oil from abroad. As a result, OPEC would cut production and increase prices. (That's what cartels do.)
The United States increases oil production to the extent that it stops buying oil abroad. OPEC would cut production and keep the world price high.
In both cases, U.S. consumers would end up paying the OPEC price, because U.S. producers (in the absence of trade restrictions) would export at the higher OPEC price instead of at the lower U.S. price.
It should be remembered that in 2011, America became a net exporter of petroleum products — and that this contributed to higher prices at the pump. This is more evidence of a global market in which OPEC-controlled oil prices have a direct impact on U.S. gas prices: U.S. companies find it more profitable to sell additional production abroad, at prices driven up by OPEC, than to bring the U.S. price down by selling domestically. Again, the only quick solution — nationalizing oil production or imposing trade restrictions — would be unacceptable in a free-market system.
While this may seem dire for U.S. consumers, it does not mean that OPEC holds all the cards. As a Saudi oil minister said in 1973, "The Stone Age didn't end because we ran out of stones." In other words, the Saudis understand supply and demand and the historical evolution of technology. If something was learned from the aftermath of the 1973 oil crisis, it is that high oil prices lead to technological solutions, reducing dependence on oil at a global level (e.g., through conservation, development of alternative energy sources, and opening of new oil reserves). In some buildings, you can still see "turn off the lights when leaving" signs from those days.
As a result, some OPEC members have been concerned that high prices will prompt conservation and development of alternative resources. Following this logic, the market likely has a ceiling for U.S. gas prices.
According to current estimates, if the average price of gas breaks the $5 barrier, cars powered by hybrid engines and alternative fuels would become less expensive to buy and operate than those powered by internal combustion engines. Thus, one can argue that it is in OPEC's interest to keep the price of gas below $5 a gallon. The technology is available, and increased demand would make it more accessible. One would expect OPEC to act accordingly.
Rafael Corredoira is an assistant professor of management and organization at the University of Maryland's Robert H. Smith School of Business. He wrote this for the Baltimore Sun.