More US Domestic Oil Production Unlikely To Offset High Energy Costs, Says Report

The now-familiar call for Washington to lower energy costs by increasing domestic production of oil may not be the most effective policy, according to this month's Congressional Budget Office report on the nation's energy security.

Policies that promoted greater production of oil in the United States would probably not protect U.S. consumers from sudden worldwide increases in oil prices stemming from supply disruptions elsewhere in the world, even if increased production lowered the world price of oil on an ongoing basis, said the report, which outlines possible policy solutions to help insulate U.S. consumers from energy and fuel price fluctuations resulting from global oil supply disruptions,

Its a stance that goes against the positions of the oil industry and Republican presidential candidate Mitt Romney, who have accused President Barack Obama of limiting oil and natural gas production on federal lands, and promoting regulatory policies that stifle energy development. More production, they argue, means greater national energy security and lower domestic energy prices.

The congressional report, however, says the opposite.

In fact, such lower prices would encourage greater use of oil, thus making consumers more vulnerable to increases in oil prices, the report said. Even if the United States increased production and became a net exporter of oil, U.S. consumers would still be exposed to gasoline prices that rose and fell in response to disruptions around the world.

The United States does not have enough spare production capacity to hold in reserve for when prices start to climb. And because the nation's oil production is in the hands of private firms, companies are unlikely to withhold oil for a rainy day when they could sell it and make a profit, the report said.

And in the short term, U.S. consumers have little to no alternative to fossil fuels when it comes to transportation. Cars and pick-ups need gasoline, semis and many trains need diesel, and planes need jet fuel -- all of which are derived from oil. The more oil prices climb, so will the price of its derivatives.

In the United States, demand is relatively unresponsive to price changes in the near term because households and businesses have almost no ability to substitute one fuel for another in their transportation decisions or to substantially reduce their consumption of gasoline at low cost, the report said. As a result, households and businesses are limited in their ability to reduce the costs associated with higher oil prices.

Oil is a global commodity, too, and the actions of the United States are not done in a vacuum.

Should the U.S. increase its oil production, other oil-producing nations could decide to keep prices from falling by cutting back on their own oil production, thus making the U.S. policy moot, said the report.

Instead, the report suggests Washington could embark on policies and possible legislation that would reduce the nation's demand for oil, through the advancement of renewable technologies and vehicles with even greater fuel efficiency and the increased availability of public transportation.

The report also suggested the U.S. could release oil from the nation's strategic petroleum reserve to offset temporary supply disruptions, something that has happened before.

In recent months tensions with Iran and lingering global economic fears sent oil prices skyward, and have decreased slightly this month.

Crude oil on the New York Mercantile Exchange on Friday traded at $95.78 a barrel, more than $14 below its 52-week high of $110.68. Since May 4, oil prices in New York have stayed below $100, for the first week under three digits since February.

Gasoline prices on the Nymex also dropped to $3 a gallon, down 37 cents, from a 52-week high. Retail gasoline prices have also dropped in recent days with the nation's price average at $3.73 a gallon, according to the AAA auto club.