“Congressman, if I can, I don’t want to take your time,” American Petroleum Institute President Jack Gerard said in testimony March 7 at a House Energy and Commerce Committee hearing, “but there’s a — an experience we have in July of 2008 that . . . we ought to go back and look closely at.”
That July, Gerard said, the price of oil fell abruptly after President George W. Bush announced he would allow drilling in parts of the Outer Continental Shelf that for decades had been off-limits. As Gerard told it, “the price of crude oil over three days dropped $15 a barrel and continued to move down.” The lesson, he said, was that “markets are driven on a global basis by expectation. If the market heard the president of the United States say ‘I’m serious about producing my vast energy resources,’ you will see an impact in the market.”
The tale was an indictment of President Obama. But there’s one hitch, say oil experts. It doesn’t hold together.
“We had an oil price bubble in 2008,” says Fadel Gheit, oil analyst with Oppenheimer & Co. “Prices collapsed when they became unsustainable by speculation.”
The Friday before Bush lifted the presidential moratorium his father first imposed on drilling off the U.S. Pacific and Atlantic coasts, crude oil hit an all-time — and oil analysts say unsustainable — high of $147.
The dizzyingly high price, and fears of an economic slowdown, triggered a wave of selling by oil investors or speculators, in part because of margin calls. The prices of equities as well as commodities such as corn and aluminum, unrelated to offshore drilling, also fell, reinforcing the argument that oil’s fall was a symptom of broader market conditions.
“There is no doubt that expectations are a part of price movements,” says Ed Morse, head of commodities research at Citigroup. “But credit problems and impending recession and significantly lower demand were infinitely more important than policy at that point in time.”
Also, Bush’s statement had no immediate supply effect. New offshore oil projects take more than a dozen years to lease, explore and develop.
But Gerard has not wavered. “Sending a clear message to people who buy and sell crude oil that the United States is committed to reasserting itself as one of the world’s major oil producers would immediately put downward pressure on gasoline and other fuel prices,” he says.
Some oil experts say that such claims undercut API’s credibility when the industry does at times raise valid questions about energy policy.
Gerard stands by his estimates. Take, for example, jobs numbers. He says if allowed to buy more leases on federal lands and drill shale rock without federal restrictions, the industry could create a million jobs. But that calculation — like others stating the industry is responsible for 9.2 million existing jobs — includes not only legitimate direct and indirect jobs but more remote “induced” jobs that the API has listed as including everything from day-care workers to valets to rocket scientists.
Gerard blasts Obama for failing to lease enough federal land for shale drilling and says most new U.S. output comes from private and federal lands.
But Frank Verrastro, energy program director at the Center for Strategic and International Studies, faults API’s approach. “If the president says production is up, the industry takes umbrage and says it’s on private lands; it’s not your policy that did it. True,” he says. “But a lot of money has been coming back to the U.S. Production is up. Profitability is up. I don’t know what you’re complaining about.”
If the industry had discovered more shale gas, Verrastro adds, gas prices would sink even lower. As it is, firms are scaling back exploration because of the huge natural gas glut.
“They’re empty arguments,” Verrastro says. “You need to have a more constructive dialogue, but no one wants to have that dialogue.”
API has also said new EPA standards will mean high gas costs. An API study said standards for low-sulfur gasoline would add 12 to 25 cents a gallon to the price and force the shutdown of four to seven refineries.
However, a new study by API’s consultants, Baker & O’Brien, says EPA’s new standards would add six to nine cents a gallon and that no refineries would have to close. George R. Schink, managing director at Navigant Economics, testified at a congressional hearing that the standards would add 2.1 cents a gallon.