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Mike Luckovich - Skeptical Junkie

 

 

Last month U.S. Senator Jeff Bingaman (D-N.M.) gave a refreshing analysis on the real influences over the price of oil (and thus gasoline).  His speech, which unlike many politicians' is based on facts, can be found here. Below are some of my favorite parts from the speech:

On the factors affecting the price of oil:

The bulk of the discussion at the briefing that we held on Tuesday about high oil prices was about what is going on in the Middle East and North Africa.  It should be obvious that this is the major force driving oil prices, but there seems to be some question about it at the moment, so let me be clear about what we were told.  When the world’s key oil producing and exporting region, which is the Middle East and North Africa, is unstable, world oil markets are also unstable.  When political unrest threatens major chokepoints in the world oil transit routes, world oil prices react, as they have.  When a Member of the Organization of Petroleum Exporting Countries (OPEC) stops exporting oil, which has virtually occurred in the case of Libya, world oil markets react.  When there are fears that a nearby neighbor and close ally of Saudi Arabia, home to the world’s largest spare oil production capacity, might begin a series of political upheavals in the Persian Gulf region, world oil markets react as well.

On Congress's role in Oil:

But what can Congress do to help ease the burden of high prices for U.S. consumers, when oil prices are determined mostly outside our borders?  I think a realistic, responsible answer has to be focused on becoming less vulnerable to oil price changes over the medium- and long-term.  And we become less vulnerable by using less oil.

“I do believe that increased U.S. oil production can and will play a significant role in world oil markets.  The United States does have fairly modest resources, compared to much of the world.  Our base of proven reserves is small.  Many people have observed over the years that the United States has less than 2 percent of the world’s proven reserves.

On discussing the relationship between U.S. oil production and price:

“But, let us not forget that, even with U.S. production strongly increasing, oil prices have also increased.  While domestic oil production plays an important role in ensuring the energy security of the country, its contribution to the world oil balance is just not sufficient to bring global oil prices down.  It is therefore not a complete answer to the high oil and gasoline prices that tax our consumers and that threaten our country’s economic health.

“This leads me to conclude that the key to reducing our vulnerability to world oil prices and volatility is for us to find ways to use less oil.  We need to diversify our sources of transportation fuel.  We need to set ourselves on the right path, as we did when we passed the Energy Independence and Security Act of 2007.  That law required us to make our vehicles more efficient, and to shift toward relying more on renewable fuel.

So after reading all of this information from Sen. Bingaman, I was happy to receive an email I received from Herman Cain (through a newsletter, he didn't send it to me personally) on March 27, 2011.  His stance is typical of conservatives, who wrongly believe that we can become energy dependent by just drilling in the U.S.   Read Herman's thoughts, and see if you can find the one glaring omission from something that would truly have an impact on our energy dependence.

In the early 1970s, America’s dependence on foreign oil was a little over 20 percent. Today, our dependence on foreign oil is over 65 percent. We have become more and more energy dependent because we have never had a serious energy independence strategy, and we still do not have one.

Energy independence is within our grasp because we have plenty of energy natural resources. We have billions of barrels of oil, plenty of natural gas reserves, more coal than any other country in the world, lots of places we could build dams for hydroelectricity and some of the safest nuclear power technology in the world.

Wind and solar energy development is not going to get us to energy independence. Studies such as the Department of Energy’s “Billion Ton Study” have shown that those two sources could at best provide 5 percent of our energy needs combined.

But by maximizing all of our other domestic energy resources, we could become energy-independent. This would not only help to keep down the cost of gasoline and the cost of nearly everything we buy, but it would also be a boost to our economy and create hundreds of thousands of new jobs. But most importantly, energy independence would keep us from being vulnerable to the current instability in the Middle East or the whims of OPEC.

But to become energy-independent, we would have to reject the false premise that America’s high energy consumption is at odds with conservation, or that we will cause irreversible harm to our planet. To say that we will cause irreversible harm to the planet by using our natural resources responsibly is like saying that man never should have discovered fire in the first place.

Natural resources are there for a reason. Use them! That’s why they are natural! The Arctic National Wildlife Refuge (ANWR), oil reserves off our own continental coasts, oil shale areas out west and even nuclear power development can create a path to energy independence.

The area proposed for production in ANWR for example comprises only 0.08 percent of the 19 million acres of the refuge, and it is estimated to contain at least 16 billion barrels of recoverable oil. Allowing drilling there would not be an environmental hazard using today’s technology. And, if any caribou got lost near that less than two-acre carve-out of ANWR I seriously doubt that they would even notice or care.

And yes, accidents do happen in these various sectors of our energy economy. We usually learn from them to help minimize future accidents. That’s common sense. But we do not need to go overboard with excessive regulations after an unfortunate accident to make the approval processes even slower.

Exploration and production of natural gas from shale oil deposits represent another huge, untapped opportunity. The technology to safely extract natural gas from our enormous oil shale reserves has never been better. But here again, the environmentalists always scream that it’s the end of the world, and then some gutless elected officials kowtow to their wishes for more regulations.

So why are we not on a path to energy independence? It’s simply because of too many regulations that slow down the process and discourage businesses to invest. Illogical moratoriums, excessive federal regulations and environmental extremists who influence weak legislators are holding America hostage to foreign oil.

A revitalized and responsibly unleashed energy sector could be a significant economic stimulus to our economy right here at home.

Working families can’t afford to spend more of their discretionary income on gasoline and energy costs, especially in a stalled economy.

So according to Herman Cain, all we have to do is let the "free market" work for energy and let gas and oil explorers have their way and we'll be energy dependent.  I like Mr. Cain, but I expected more from this guy.  He's not thinking independently, he's merely repeating the conservative train of thought that's been repeated for the past 40 years.  Do you know the glaring omission from his plan: reducing consumption!  Not once does he call on plans for America to reduce our consumption of oil.  I love the free market, but only when all externalities are accounted for.  You can't just burn all the coal and oil you want and let someone else pay for the effects of the pollution.  Most who claim the free-market will solve all problems conveniently ignore negative externalities that aren't accounted for, thus artificially keeping the price of dirty fuel artificially low!

Believe it or not, I actually called into Herman Cain's talk show 2 years ago when he was discussed the need to "drill here, drill now".  In our discussion, I informed him of a study that the Energy Information Administration performed actually studying the effects of drilling in ANWR.  The study concluded that in the best case scenario, the price of a barrel of oil would drop by $1.44 in 2027!  From the actual study (bold added by me):

Additional oil production resulting from the opening of ANWR would be only a small portion of total world oil  production, and would likely be offset in part by somewhat lower production outside the United States. The opening of ANWR is projected to have its largest oil price reduction impacts as follows: a reduction in low-sulfur, light crude oil prices of $0.41 per barrel (2006 dollars) in 2026 for the low oil resource case, $0.75 per barrel in 2025 for the mean oil resource case, and $1.44 per barrel in 2027 for the high oil resource case, relative to the reference case.

That means that in 2027, 16 years from now, the price of a gallon of gasoline might drop by a nickel if Herman Cain has his way!!!  This is his grand plan?  Drill in ANWR so we can pay a nickel less in 16 years when we go to the pump? Also, Saui Arabia can easily counter increased production in the U.S. by lowering production in their country, thus keeping prices flat!  That's the role of OPEC, keep prices stable and increase profit from the member countries.  I would love to see the Herman Cain campaign do an analysis like the Energy Information Administration that analyzes the effects of opening up certain areas to drilling and seeing how it will affect the price of oil.

I actually don't oppose increased production in the U.S.  What I oppose is political figures who only tout increasing U.S. production when they know that this will have little to no impact on the long term price of oil!  Why?  Because the oil price is determined on a global commodity exchange whose traders could care less what the U.S. will do in 20 years (once allowed to drill, it takes years for an oil well to get through permitting and start producing oil).  Once oil starts flowing from a well, it is still sold on a global market; U.S. taxpayers don't get a "home field" advantage.

My ideas fall in line more with the energy efficiency experts at the Rocky Mountain Institute and their plans for Easing the pain at the Pump:

While increased domestic oil production may mitigate national security
issues, it does little to ease the pain at the pump— US oil reserves are considerably more expensive to extract than reserves from the Middle East or Venezuela.  In addition, these supply-side solutions are only a finger in the leaky dam of our addiction to oil. Instead of trying to produce more, we should focus on using less through the efficient use of energy—starting with transportation since it drives the majority of US oil demand.

And I also like what Thomas Friedman has to say on the subject of the U.S. energy problems:

Republicans, by contrast, are insisting that we can somehow drill our way out of our energy problems, and House Republicans just reported out of committee a bill that would block the E.P.A. from taking any action to reduce greenhouse gases, while also slashing government funds to keep air and water clean. So far, the G.O.P. is calling for cuts in the things we need to invest more in -- like education and infrastructure -- while leaving largely untouched things we need to reduce, like entitlements and defense spending. A country that invests more in its elderly than its youth, more in nursing homes than schools, will neither invent the future nor own it.

The world is caught in a dangerous feedback loop -- higher oil prices and climate disruptions lead to higher food prices, higher food prices lead to more instability, more instability leads to higher oil prices. That loop is shaking the foundations of politics everywhere. That's why the world needs a strong America more than ever, and that's why it is vital that we fix our structural problems -- now.

If we leave it for the market and Mother Nature to make the adjustments for us, we will be sorry -- and so will the world. We are the keystone holding up the global system. If we go weak, our kids won't just grow up in a different America; they will grow up in a different world.

I'm not against drilling in the U.S.  If oil has to come out of the ground, I'm sure that it will be more environmentally friendly to do in the U.S. than in some jungle in Africa.  Also, I believe some increased drilling is good because it lowers the amount of oil we have to import from regimes that hate us.  But I am against those who use this cheap political trick to try and fool voters into believing that drilling here will have an impact on the price they pay for gasoline now.  "Drill here, drill now, pay less" is a sham.  "Drill here, drill now, reduce consumption, pay less" may have some merit to it.

Links:

A few days after this was posted, CNN had an article titled "Drill baby drill won't lower gas prices".   It makes the same case as I do above.

http://money.cnn.com/2011/04/25/news/economy/oil_drilling_gas_prices/ind...

http://www.mnn.com/green-tech/transportation/blogs/five-reasons-gas-pric...

Don't forget about the role of speculators in gasoline prices.