By Request: Oil!

It was brought to my attention that I have yet to address the energy debate at length, so that’s what we’re gonna do now.

Let’s start with the basics, and full disclosure. I oppose most any attempt to drill for oil. Partly for environmental concern, partly out of a concern for what it could do to the economies of coastal tourism hot-spots, but mostly just because it won’t actually do much for energy prices, and it’s conceptually flawed anyway. The idea that the cure for oil dependence is to drill for as much as we can possibly find is the equivalent of treating crack addiction by making sure we have a ready supply of smack. It doesn’t make any sense whatsoever, especially in the long run, even if it could help in the short-term (which it won’t).

The problem can basically be boiled down into one sentence; the United States uses about 21 million barrels of oil everyday. That’s just insane. What makes it even more insane is that the 2nd largest consumer in the world, China, uses about 6.5 million barrels a day. So when you establish that baseline, those somewhat innocuous sounding figures about global demand come into slightly starker focus. For example, that global demand has steadily increased by about 1% every year doesn’t sound so bad, until you realize that 1% of global consumption is about 850,000 more barrels every day. Putting that into perspective, the US Energy Information Administration estimates ANWR’s potential peak production to be about 775,000 barrels, meaning that even at it’s peak ANWR couldn’t even compensate for the expected annual growth in global demand. And considering that ANWR wouldn’t peak for about 20 years, that means you’re talking about an even wider gap when you factor in declining production elsewhere.

Much talk has also been made about speculators. Now speculating certainly has some effect on the price in the long run, but the idea that it’s chiefly responsible for short term spikes is rather silly. In fact, when you consider what speculating is (buying and selling futures contracts for the most part) it diminishes the evil caricature even more. All speculators are doing is betting that the price is going to continue to rise, and with good reason. Production is close to, or at, peak in most places (including Ghuwar where they’re filling the wells with gobs of saltwater and steam and much of what is being kicked back is just water) and demand is increasing steadily. If anyone actually thought the price was in danger of falling any time soon, you’d see a natural reduction in speculating. But there’s no real reason to expect a sharp decline in the price long term. I’m also more than a little bit skeptical to see the same people who denied there were bubbles in the dotcom or housing markets suddenly insisting that the problem is all because of a speculation bubble in the oil market.

You can, conceivably, come at the issue from a national interest perspective (we need less foreign oil) as well, but that’s got as many, and more obvious, problems associated with it. First of all, the United States does not have a nationalized oil industry, so there’s really no such thing as “American oil.” Oil pulled out of the ground in Alaska goes straight to the global spot market. There’s no way of keeping it here. So the immediate benefit is not to the consumer, it’s to the supplier who gets access to more supply with oil trading at $130 a barrel. You didn’t really think that the oilmen (literally) in the White House had a problem with high priced oil did you?

Secondly, and this is the real kicker, the United States is already the 3rd largest oil producing nation in the world. Only Saudi Arabia and China produce more. At about 8.5 million barrels produced everyday to about 20.8 million barrels consumed everyday, we’re left with a deficit of 12.3 million barrels everyday that have to be imported. Or, to put it more bluntly, the 3rd largest producer in the world has to import twice as much oil as the 2nd largest consumer uses in total every single day. That’s just not sustainable by any measure. There’s no way the United States, as an economy, can continue to so obscenely devour such a finite energy source. And that’s why efforts to treat the problem with more drugs, er, light sweet crude, is only putting the real problem, oil as the base of the economy, off indefinitely, and setting us up for a bigger problem in 10-15 years.

The political candidates don’t exactly have serious positions on this issue. McCain is a joke, even by his standards. On the one hand he’s a “maverick Republican” who actually acknowledges global warming and wants to cut oil consumption, but on the other hand he wants to drill like it’s 1949 so that everyone can have lots of cheap oil to consume. Obama’s is a generic position about developing alternatives and windfall profit taxes that doesn’t really address the details, but then again Presidential white papers rarely do. Obama at least gets credit for getting the crux of it right, but politics being what it is, he’s incapable of speaking truth to the issue; which is to say that we need to tax the hell out of gasoline.

On both ends, production and consumption, gasoline has to be wholly unprofitable. The problem with the market is that oil has a low level of elasticity to demand. That is to say, you can only cut back on your energy usage so much. If you have to drive to work, you have to drive to work. Ditto for a lot of other daily activities people have to do. Yes you can carpool and consolidate trips, but inevitably there’s a baseline you can’t get below. And that’s to say nothing of shipping businesses, farmers, and other energy intensive commercial activities. Energy suppliers know this, so as long as they can get oil, they have no incentive to want to push the price down. They’re going to sell a certain amount of product regardless, so the higher the price the better. On the other hand, when the price is low, consumers have no incentive to demand an alternative form of energy. So the external, macroeconomic, agent we call the government needs to step in and affect the market from the outside, making alternatives more affordable to consumers and more profitable to sellers than oil based products. They should also incentivize public transit (or at least stop subsidizing driving), but that’s another topic for another day.