How the U.S. Can Boost Oil Production and Lower Gasoline Prices?

An increase in oil output would be supported by some climate change advocates if it is temporary until the United States transitions to renewable energy sources. In contrast, some support increased energy production to help ensure the United States recaptures its energy independence status.

In 2021, the U.S. produced more oil than any other country. It exported 8.47 million BPD (barrels per day) and imported 8.63 million BPD of petroleum resulting in 160 thousand BPD of net imports. Petroleum consists of crude oil, hydrocarbon gas liquids, gasoline, diesel fuel, and biofuels.

This low net import figure is impressive because the U.S. consumed 19.78 million BPD in 2021! The good news is that 51% of oil imports come from a friendly country like Canada, while only 11% comes from less politically friendly OPEC countries. Many would be surprised to learn that increased output of just 160 thousand BPD in 2021 would have allowed the U.S. to regain its energy-independent status. Others would be happy to phase out our 960 thousand BPD imports from OPEC countries and replace it with an additional 800 thousand BPD imports from Canada using the Keystone Pipeline! In 2021, the U.S. imported 4.34 million BPD from Canada.

Why are Oil Companies Not Taking Government Requests to Boost Output Seriously?

Although the United States is the top world oil producer, our growing demand requires higher output to eliminate net oil imports. Many oil executives remain uncertain if Government requests for higher production are temporary and leave oil companies holding the bag as existing shortages ease. Second, pressure from investors to avoid drilling for new oil is also weighing on oil executives. Third, the oil commodity market is in backwardation, meaning future prices are lower than spot prices raising concerns that if oil companies begin to drill for new oil, prices could collapse when they can deliver the oil 6 to 9 months later.

How To Get Oil Companies to Boost Production?

The government must send a strong message that the request for new drilling is prudent and economically sound. The first step the government could take is to use the Defense Production Act to encourage firms to drill for more oil and give those companies an option to sell the new oil output back to the Federal Government at twice their acquisition cost. Given that the average cost of drilling and bringing oil to market is $25.00 per barrel, giving oil companies an option to sell all new oil they produce at $50.00 is an attractive incentive to oil companies to at worst double their investment in a short period. This option is not likely to be used by companies since oil prices are not likely to drop to $50.00 per barrel over the next year.

This should allow the Federal Government to feel more comfortable releasing more oil from its SPR (Strategic Petroleum Reserves) to ease price pressures. It can then repurchase it at lower prices as U.S. output increases in response to government incentives. If futures markets are correct, the government should have an opportunity to repurchase the oil at a lower price to refill its SPR (strategic petroleum reserves).

The SPR is designed to hold a maximum of 714 million barrels of oil and is holding 580 million barrels of oil as of Feb. 25, 2022. In 2021, the US agreed to release 50 million barrels of oil from the SPR followed by a March 1, 2022, commitment to release an additional 30 million barrels.

Summary and Concluding Thoughts:

The higher oil output needed to generate lower energy prices is possible if economic incentives for oil companies are adopted. In essence, the government could encourage higher oil output within the next 6 to 9 months while aggressively releasing oil from its SPR with the hope of replenishing it at lower prices once oil output increases. Such actions will put downward pressure on energy prices in both the short-and-long-run.