I just got a call from Congressman DoRight. He is one of the remaining members of Congress who wants to leave partisanship on the policy doorstep.
The congressman calls me when an important energy issue is before the Congress. Today, he called to discuss several articles in the national media about the so-called oil boom, the increase in oil exports and the continued relatively high gas prices for consumers. Frankly, despite having a high IQ, he was confused. He questioned whether oil dependency will remain an issue if we increasingly become an oil exporter. He asked whether gas prices will be lowered, if we become awash in oil. Good questions.
We talked about the recent Wall Street Journal front page story. It, quoting from the recent International Energy Agency (IEA) report, indicated that the U.S., within less than a decade, will surpass Saudi’s and Russia’s oil production and become the number one producer of oil in the world. Wow (DoRight still says wow!). According to DoRight and the Wall Street Journal, if this occurs, America could reduce its dependency on imported oil and, at least from an oil perspective, no longer fear tension in the Middle East. In this new world of oil abundance, U.S. production would surge to 11.1 billion barrels a day by 2020, assumedly including liquids. Within a decade, the IEA forecasts that U.S. oil imports will fall by more than half, to just 4 million barrels a day. Reduced imports would result from increased U.S. production and falling demand. Natural gas in the Journal’s hyperbolic description would displace oil as the largest single fuel mix by 2030. (It should be noted that the Journal’s editorial praising the implications of “Saudi America” suggested more than a doubling of U.S. production within the next ten years, much more than projected by the IEA and described in its own front-page story. Real editorial independence! Or someone didn’t check.)
Remember, just four years ago, we feared energy scarcity. Soon, we will be awash in oil. Some shrill cries already exist to relax or abandon the statutory limits on refined crude oil exports, particularly light sweet crude from shale, enacted nearly 40 years ago because of the Arab oil embargo.
Not so fast! I reminded DoRight that recently the L.A. Times ran a story headlined “U.S. fuel exports grow to historic levels,” and explained that “increased fuel exporting by U.S. refiners is one of the reasons that gasoline and diesel prices have been so high.” Refiners, responding to criticism, indicated that exports are essential to make a buck…translated secure profits. Exporting refineries include those in California where recent refinery problems, assumedly, impeded production and reduced fuel supplies to five year lows. During the “crisis,” gas prices at the pump reached as high as $6/gallon in some places for a short time.
Refinery owners are not anti-American. But they are the antithesis of Bruce Springsteen’s creed, “We take care of our own,” unless it means their own profits. Oil and its derivative gasoline are traded in a global market. Higher prices (and profits), not patriotism, are sought by refineries. The conventional idea that U.S. surpluses will significantly affect gasoline prices does not really apply when there is global demand for U.S. oil and gasoline, as well as higher prices outside the U.S.
IEA’s projections frequently have been wrong. I believe they are wrong now. Increasing costs of drilling for tight oil and uncertainties concerning price of oil per barrel will lead to caution on the part of oil companies with respect to new wells. Recently, oil prices per barrel have hovered around $85 a barrel. But they have fluctuated between $70 and $110 a barrel. At $60 a barrel, oil production becomes a real risky business. Because the cost-profit equation doesn’t pan out, at $50, oil companies likely will shut down drilling.
Environmental and GHG regulations will be an impediment to extended drilling, particularly in fragile environmental areas. Demand for oil will be governed, to a large degree, by global economic health. If vigorous growth returns, there will be a much wider gap between demand for and supply of oil than described by IEA. In this context, IEA’s demand curve seems screwy. It illustrates demand increasing significantly through a good part of the next decade, then declining relatively rapidly. Their rationale reflects at best a tenuous generalization and at worst a wish. The deficit between U.S. oil production and U.S. demand will remain significant well into the next decade.
We now secure about 10 percent of the oil we import from the Middle East. Increased production in the U.S. will reduce the amount of imports probably to less than 5 percent. Yet the costs for gasoline in the U.S. will continue remain impacted by Middle East tensions. Nations requiring oil imports like China and Japan rely more than the U.S. on Middle East oil. If tensions erupt into conflict, they will compete vigorously for remaining oil and as a result, bid up the global price and consumer costs for gasoline in the U.S.
To some extent, trading in oil is like playing poker. If oil companies guess right they make lots of money; if they guess wrong, they still make lots of money by transferring costs to the consumer. Their ability to control prices and the market for transportation fuel gives them all the cards they need to become sustained winners. Consumers and the economy are losers.
DoRight began to understand. Competition and price, not total production numbers, control prices in the U.S. The transportation fuel market is a restricted market with consumers limited primarily to a choice among blends of gasoline.
The congressman seemed agitated. He asked, “Why in hell, does the federal government limit other safer, more environmentally friendly, and cheaper fuels from competing with gasoline?” Present outmoded anarchistic statutes and regulations impede the use of alternate replacement fuels such as natural gas, ethanol and methanol. Their ability to compete with gasoline would lower the price of oil per barrel and the cost of gasoline at the pump, the frequency of oil and gas spikes and significantly, if you’re an environmentalist, the incentives for oil companies to drill for tight oil in environmentally sensitive high cost drilling areas like the Arctic Circle.
“Nothing is so firmly believed as what we don’t know.” – Michel de Montaigne
