June 2008 Archives

One of the more contentious, and least soluble, questions in the great energy debate is whether constantly escalating prices and the result of a genuine supply-and-demand crunch; futures market speculators running up the price, or a natural and long overdue correction.

This question has become so important that it is now the subject of a full-blown investigation by the U.S. Congress.

Most observers believe that Congress will find little by way of a smoking gun that will point clearly in one direction or another. There has, in fact, been a sharp increase in demand in recent years. For those who pay attention, we are aware that the growth of a automobile culture in third world countries, particularly China and India, have put a strain on world reserves ready for market. At the same time there has been little reaction on the supply side to take account of this increase in areas of the world that we never used to think of when the question of energy availability came up.

Such a convergence of unusual and unforeseen economic headwinds would naturally lead investors to get into oil futures. But is there a concerted effort on the part of some cabal to drive up prices artificially in order to reap profits that would not accrue in the natural order of things? It would seem not.

A number of economic considerations appear to be driving investors. One is the recent realization that the world price of oil has been greatly undervalued for years. The $4.00 per gallon price we are paying for gasoline today is equivalent to $1.30 in 1980 if measured in constant dollars. This is a situation that is bound to attract investors to put their money in oil.

The weakness of the U.S. dollar on world money markets has at least as much to do with rapids price escalation as investor speculation. Throughout the world, oil can be bought and sold only with American dollars. When the dollar falls against other currencies, there is nowhere for the price of oil to go but up. No alternate avenue is available - anywhere.

Add to this lack of choices is a world economy that is trying to find its level in a number of areas. Oil isn't the only area where confusion reigns. Food, housing, travel, and a host of other areas are all in disarray leaving investors wondering where the safe place is to put their money. In such an atmosphere on a global scale, oil has taken its place along side of gold as a safe hedge against economic chaos. This is not speculation or conspiracy; this is ship of fear seeking a safe harbor.

Complicating the market picture are some questions that don't usually arise in terms of assessing the market. Does OPEC really have the kind of control over supply we all tend to think they do? The answer is not clear. President Bush has asked Saudi Arabia to increase production and they have agreed, but can they really increase output enough to substantially affect the world price. Experts by no means agree about the Saudi's ability to dramatically increase production. Many believe that are at, or very near, capacity now.

The awful truth is that world supplies are well above the 5-year average right now. At the same time there is a dearth of refining capacity due to a 25-year policy of regulation in obstruction that has stopped our ability to refine crude oil into the market products we all need to maintain our lifestyle and whose price we are so sensitive to.

In the long run, of course, high prices are the cure for high prices. Eventually the oil bubble will burst, prices will come down and lifestyles will adjust. But when?

With each passing day the news informs us of yet another hike in the price of crude oil (followed closely by gasoline) to a new record high. As it does, America continues and intensifies its on-going debate over the causes, consequences and origins over this phenomenon which threatens to radically alter an established American lifestyle. Within that debate there rages a series of sub-debates; each with its own set of facts and discussion rules.

As part of our contribution to this important and not-soon-to-end national public policy exercise, the Black Oil Blog will be taking a regular look at developments as they happen, the facts and perceptions involved and what they may mean for resolving the larger question.

As part of our service we want to offer you the opportunity to become actively involved by offering your own contributions to our Blog. Whether you are an experienced blogger or just someone who has wanted to try his hand, we invite you to post your own views on our Web Site. As we are looking for your untainted perceptions, we will not be editing your submissions to conform to our viewpoint or anyone else's. We do however ask you to keep in mind that space limitations may force us to utilize some editing judgments.

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The Problem:

We have all felt the effects of the rising cost of oil: $4.00 for a gallon of gas; soaring heating bills, especially for Midwesterners during the past winter; and rising food costs, due both to increased costs of transportation and the use of food to produce fuel. And with analysts discussing an economic recession, Americans are worried about increased costs for food and fuel.

Concerns over energy extend beyond America as well. Countries worldwide face food shortages and even riots, due in part to American energy policies. The war in Iraq continues to be focal point of debate over energy, highlighting our reliance on foreign oil. And President Bush's recent trips to negotiate with King Abdullah in Saudi Arabia over gas prices demonstrate America's undesirable position.

The Solution:

Clearly, the pursuit of alternate energy sources addresses long-term concerns over oil dependency. But while these successors to oil are becoming more viable, most are still too expensive or undeveloped to be practical. Or, like hybrid vehicles, they continue to rely on oil to function. While alternative energy may be our future, Americans need a solution now to rising costs associated with oil, and dependency on foreign oil.

One immediate solution may be literally under our feet. Right now, America has untapped oil fields in the Arctic National Wildlife Refuge (ANWR) of Alaska, in the Bakken Formation of North Dakota, in the Green River Basin of the Western U.S., and off the cost of California. The Gulf of Mexico also holds oil reserves, currently being mined by Cuba. Drilling in these areas has been opposed for years by organizations rightly concerned about the environmental impact of oil rigs and pipelines. But modern oil extraction techniques minimze the impact on the environment surrounding drilling sites. Congress should no longer hesitate to open these areas for oil production.

The Reason:

To be clear, increased American production may not immediately reduce high oil prices. Due to the location of the oil and the drilling technology required to extract it, oil companies may need as much as five years to begin production. And once that happens, oil prices may not drop significantly.

But America will clearly benefit from more drilling within our own borders. First, analysts are optimistic that the untapped U.S. oil reserves could replace much of our foreign oil for years to come. Americans pride themselves on self-reliance; this should extend to natural resources that we possess. Second, more drilling means not only more American jobs, but also more money kept in the American economy instead of leaving the country. With uncertain economic prospects, domestic oil production could stimulate economic growth.

Congress must act now so we can achieve energy independence.