Should “break the cartel” be a rallying cry of our energy policy? We do not tolerate cartels at home; we should not tolerate them in a strategic commodity.
The U.S. imports over 13 million barrels of oil per day (b/d). 1 Nearly 6 million b/d, 45%, comes from the Organization of the Petroleum Exporting Countries (OPEC)—Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. That is too much leverage over price and supply policy, not only for the U.S. but the world. Looking at this list, one can also make a strong national security argument to divest OPEC of control.
OPEC’s stated mission “ … is to coordinate and unify the petroleum policies of Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers …” 2
“Stabilization” and “economic” are not words that have characterized oil markets in the last two years. OPEC has failed. In fairness, the blame is shared by purchasing countries. High prices are partly attributable to overheated demand seeking limited supply. China’s growing economy created much of that increased demand, and to exacerbate matters, their subsidies and price controls encourage over-purchasing and discourage efficiency. This week China agreed to lift prices on fuel, and oil prices dropped $5/barrel on world markets. The U.S. for its part is neither an efficient consumer of energy. Both countries can do more.
Does speculation cause high prices? The answer may not be satisfying. The Economist argues that commodity traders do not actually hold oil. They buy and resell futures contracts—“paper barrels”; i.e., “hoarding” of oil is not their business. 3 Ultimately contracts end up with the companies who must sell real oil to their customers, so we are back to the demand problem. Analysis of oil company profit margins, in spite of the record profits in absolute dollars, shows a decline in the last ten years: just the opposite of what one would expect if they were “gouging”.
What about the supply side of the equation? That is infinitely more promising. The U.S. produces 5 million barrels per day, or only 28% of our needs. 4 This week both the President and Senator McCain called for more off shore drilling, 85% to 90% of which is closed to exploration. The Wall Street Journal reports that Bush is “taking a knife to a gun fight” by not preemptively signing an executive order, which is one half of the prohibition, until Congress moves. 5 Senator Obama’s web site makes no reference to increasing energy supply, except by reference to speculative ventures such as “cellulosic ethanol”. Some economists believe ethanol subsidies contribute to higher food prices.
McCain does not support drilling in the Arctic National Wildlife Refuge (ANWR), where there could be enough oil to displace the volume we import from Saudi Arabia, even though 75% of Alaskans approve of drilling on a footprint, as George Will points out, the size of Boston’s Logan Airport (2000 acres) 6. ANWR is almost 20 million acres!
McCain calls for 45 nuclear power plants to be built before 2030, and points out that it will solve both the energy and pollution problems. Judging from the French experience, he is correct. France generates over 86% of its power from 58 nuclear plants. Combined with hydropower, wind, and solar they claim that 95% of their energy production emits no carbon dioxide.7
Most interesting is the abundance of oil shale. The Energy Information Administration estimates, “The global resource of oil shale base is huge—estimated at a minimum of 2.9 trillion barrels of recoverable oil, including 750 billion barrels in the United States … The U.S. resource, if fully developed, could supply more than 100 years of U.S. oil consumption at current demand levels.” 8
A charming, if not altogether constructive, characteristic of America is that we are most effective when faced with an adversary. $4/gallon gas could be an ephemeral adversary because Americans are good at adapting. Besides, Congress’ machinations will dull our senses to that pain in short order. On the other hand, OPEC-busting presents an opportunity to take control of a vital primary input of economic production while disabusing potential rogue states from exerting unearned leverage over American interest.
No solution will bring a quick increase in supply, but in the commodity markets expectation and risk calculus can have spot and forward pricing effects. And that begs for action today.
1- Energy Information Administration (EIA), US Department of Energy, http://www.eia.doe.gov/
2- OPEC, http://www.opec.org
3- The Economist, 6 May 208
4- EIA
5- “Bush’s Drill Bit”, The Wall Street Journal, 19 June 2008, page A14
6- Potential Oil Production from the Coastal Plain of the Arctic National Wildlife Refuge: Updated Assessment; EIA
7- Électricité de France, http://www.edf.com/the-edf-group-20403.html
8- Nonconventional Liquid Fuels; EIA
Michael Avari
www.americancivility.us
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1 user commented in " Break The Oil Cartel? "
Follow-up comment rss or Leave a Trackback“Break The oil Cartel?” — It is just like
Who will bell the Cat. Even a child can understand that the beneficiaries of oil price
rise are” Seven Sisters ” , traders and speculators —all are Americans or Europeans.
As regards oil producing countries no one should blame them. Who cared for them when there was no crude oil? Now when God has given
them opportunity to make money for development
of their countries and safety of their future generations it is no body’s business to blame them. The rules of modern economics were framed by westerners and oil producing countries are playing the game accordingly.
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