Why Domestic Drilling Won't Lower Your Gas Prices

If you believe the bumper stickers and Newt Gingrich, you probably think that the solution to the pain you're currently experiencing at the gas pump is to "drill here, drill now, and pay less" -- potential environmental damage to the Gulf of Mexico be damned. With gas back up to 2008 levels and three out of four small business owners saying that higher fuel costs are hurting profitability, is now the time to take the slogan to heart?

Obama doesn't think so. In a speech today the president mentioned his 2008 campaign and recalled, "You remember that: 'Drill, baby, drill' and all of that. And none of it would really do anything to solve the problem." Indeed, little factual support can be found to back up the slogan.

With all due respect for the people who have apparently signed a petition urging more domestic drilling as a way to save money on fill-ups, it's an illusion. The problem is that oil from wells drilled in the Gulf of Mexico, the last remaining significant domestic U.S. reserves, costs many times what oil from the least expensive foreign sources does.

We are talking many times. Producing a barrel of Saudi Arabian oil costs just $1 to $2 per barrel, according to a report Reuters put together after sifting through the International Energy Agency World Energy Outlook 2008 and conducting interviews with oil traders and other experts. Producing a barrel of oil from offshore fields like the ones in the Gulf of Mexico, on the other hand, costs $32 to $65 per barrel. Oil shale, which represents much of the North American reserves, runs $52 to $113 per barrel.

Raw production costs don't tell the entire story, of course. Transport fees, currency exchange, profit markups, and export taxes can all drive up the cost of foreign oil. Other conceivable risks include political instability in regions such as the Middle East, corruption in places like Nigeria, and outright anti-U.S. orneriness in countries such as Venezuela.

And there's little doubt that, overall, oil does not sell for $1 a barrel. Seventy-five dollars a barrel is more like it, lately. The Saudis are doing all right, to say the least.

When you're paying somebody $75 for something that cost them $1, it's natural to feel annoyed. But the idea that the solution is to substitute something that costs $65, in the hope that you can still buy it for $75 -- that doesn't feel right either.

There's no question that energy costs a lot. There's little doubt that the U.S. possesses significant domestic energy reserves and much of is it at least potentially economically viable to produce. But environmental disaster, cleanup costs, dirty beaches, and oily seabirds aside, drilling here and drilling now isn't going to bring down the price of oil. Drill here, drill now, pay more, is more like it.

Mark Henricks has reported on business, technology and other topics for The New York Times, The Wall Street Journal, Entrepreneur, and other leading publications long enough to lay somewhat legitimate claim to being The Article Authority. Follow him on Twitter @bizmyths.