Political discussions over the future U.S. energy strategy often cite “drill baby drill” approach as the only way to keep gasoline prices down at the pump. As easy as it may sound, “drill baby drill” policy will not change the fact that the United States has 2 percent of the world’s oil reserves but consumes 20 percent of the global supply. Let us analyze price structure of the most common transportation fuels to determine which policy – “drill baby drill” or renewables – better serves prices at the pump in the long run. The following diagram presents price structure of gasoline, diesel and ethanol (retail prices, $/gallon, January 2012).
Crude oil represents 76% plus 6% of refinery costs in the price structure of gasoline and respectively 67% plus 11% in the price structure of diesel. That already places about 80% of the petroleum-based fuel price beyond U.S. control. The refinery costs will not change significantly. Increased domestic oil production will not affect significantly world oil crude price. Taxes offer price flexibility only in the upward direction.
On the other hand, the ethanol price has three major components – feedstocks, enzyme and conversion, all of them greatly affected by technology advances paving the way for lower prices at the pump in the long run.
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