Noel Sheppard
NRO
As oil prices head through the roof, and gasoline jumps over $4 a gallon, Americans feeling the pinch at the pump should recognize that the wealthiest nation on the planet has nothing but itself to blame for the third in a series of energy crises that began when Richard Nixon was still in office.
Having largely ignored the previous two shots across the bow — the first coming in 1973 when OPEC decided to ban sales of oil to nations that supported Israel in the Yom Kippur War, and the second in 1979 after the Islamic Revolution in Iran — the U.S. seems determined to repeat the mistakes of the past.
Shamefully, we are once again in the position of wondering just how high energy prices can go, and at what cost to our economy. Despite 35 years of empty rhetoric from politicians bemoaning U.S. dependence on foreign oil, legislatively enacted environmental barriers have actually resulted in a 25-percent decline in domestic production since the first ’70s energy crisis — while our usage has increased 20 percent.
Regardless of one’s ideological proclivities, it seems logical that you can’t reduce foreign-oil dependence by cutting production at the same time that demand is rising. Despite how obvious this seems, one of our nation’s two major political parties stubbornly continues to ignore that logic.
What should make Americans on both sides of the aisle even more ashamed is that before the first energy crisis, the United States produced 11.428 million barrels of oil per day. This represented 66 percent of the 17.308 million barrels we consumed that year.
Compare that to 2007, when America produced 8.481 million barrels per day, or only 41 percent of the 20.7 million barrels consumed. Such is the result of the so-called energy policies of seven White Houses and 17 Congresses controlled by both Democrats and Republicans.
Yet, today’s politicians — mostly on the left side of the aisle, of course — have the gall to place all the blame for rising energy prices on increased demand from expanding economies like China and India.
At least those countries are participating in exploration efforts to expand their own supplies. China’s oil production has almost doubled since 1980, while India’s has grown by an astounding 375 percent. At the same time, U.S. production has declined by 22 percent.
We sure do know how to respond to energy crises in this country, don’t we?
Closer to home, our neighbors also ramped up oil production. To the south, Mexico has seen its crude output jump 64 percent since 1980, while Canada’s increased 85 percent.
Did I mention that our production declined by 22 percent in the same period?
Putting this in its proper perspective, if America had responded to the second energy crisis by increasing oil production only at the average rate of our North American neighbors, we’d currently be supplying ourselves with 18.86 million barrels of crude per day, or 91 percent of our usage.
Think oil would be $135 a barrel if that were the case?
Of course, this argument always shifts to questions of where additional production could come from. Assuming there was no environmental/political element, the logical and exceedingly obvious answer is currently being proffered by former House Speaker Newt Gingrich’s American Solutions for Winning the Future: Drill Here, Drill Now, and Pay Less.
As the former Speaker said to Fox News’s Bill O’Reilly last Thursday:
[O]pen up the coast to drilling. And open up the Rocky Mountains for shale oil. We have in the Rocky Mountains three times the amount of oil that the Saudis have, three times the amount of the entire Saudi reserve in the Rocky Mountains. The Brazilians are now energy independent in terms of oil, because they found two huge reserves in the Atlantic ocean. It’s currently illegal for Americans to go on American territory in the Atlantic, the Eastern Gulf of Mexico, the Pacific, northern Alaska. It’s illegal for us right now to go after the Rocky Mountain shale oil.
Gingrich was right on the money, for according to an April 2006 study done for the Library of Congress:
Oil shale is prevalent in the western states of Colorado, Utah, and Wyoming. The resource potential of these shales is estimated to be the equivalent of 1.8 trillion barrels of oil in place. . . . In comparison, Saudi Arabia reportedly holds proved reserves of 267 billion barrels.
Something the former Speaker didn’t mention was the Arctic National Wildlife Refuge, which according to a report just published by the Energy Information Administration in May, has the potential of producing as much as 1.45 million barrels of oil per day.
Predictably, the liberal counter-argument is that such production is years out, and won’t solve today’s supply problems. Such thinking ignores the speculative component to energy prices, and how much today’s bullish consensus about oil is based on the expectation that American production will continue to decline as it has for going on four decades.
With that in mind, anything Congress did today that indicated a change in philosophy concerning U.S. oil production would send shockwaves throughout commodities exchanges across the globe.
Just how much of an impact could such a change in policy have? Well, one of the factors involved in prices being determined on futures exchanges is the current disincentive for oil producers to sell their product today rather than months from now, a condition called “contango.”
As of Friday, the New York Mercantile Exchange price for July delivery was $134.86. By comparison, the November contract closed at $136.04, giving producers $1.16 more to hold their product an additional four months.
Commodities experts for years have claimed this contango acts to restrain the immediately available supply as oil companies opt to sell their product more expensively in the future rather than at today’s prices.
A change in U.S. policy that would clearly result in more supply in the future could act to depress all of the contracts further out thereby encouraging producers to cash in at today’s prices rather than gamble there’ll be higher down the road. If this actually reversed the contango to a “backwardation” — when futures prices for further-out contracts are less than the nearest contract — all oil producers around the world might feel more compelled to raise their output in order to take advantage of today’s high prices.
Yet, maybe more important, as investment bubbles are a function of emotion and momentum, anything that acted to limit the upside of oil prices could cause the bubble to burst in a wave of panic selling as every hedge fund manager and trader on the planet ran for the exits at the same time.
When this happened in March 2000 after NASDAQ’s historic 18-month, 250-percent increase, that index declined by an astounding 40 percent in the next few weeks.
Just imagine what a sudden $50 drop in oil, with a commensurate $1.60 decline in gas prices, could do to an economy that appears teetering on recession.
And, this could be a conservative estimate of how much prices would decline. Given the leverage involved in commodities as opposed to stocks — oil traders need to put up as little as seven percent of the cost of a futures contract instead of the 50 percent required for equities — the precipitous drop that comes once this bubble bursts could be far greater in magnitude than what happened in the few weeks following NASDAQ’s peak.
The question of course is whether this is indeed what most members of Congress want. Consider how many elected officials and presidential candidates have advocated higher oil prices as both a means of curbing demand and encouraging the use of alternative fuels. As National Review’s Jim Geraghty pointed out Wednesday, this seems to be Barack Obama’s view:
Apparently, Obama doesn’t object to $4 a gallon gas per se, just to how rapidly the price increased. Most Americans hate it and want gas prices to go down as rapidly as possible. Obama wants to “help people to make the adjustment” to “new circumstances.”
Geraghty was commenting about the following statement made by Obama on CNBC Tuesday:
CNBC’s John Harwood: So could the (high) oil prices help us?
Barack Obama: I think that I would have preferred a gradual adjustment. The fact that this is such a shock to American pocketbooks is not a good thing. But if we take some steps right now to help people make the adjustment, first of all by putting more money in their pockets, but also by encouraging the market to adapt to these new circumstances more rapidly, particularly U.S. automakers.
Conspicuously absent from the discussion was anything about increasing domestic oil production. Instead, Obama’s answer was consistent with left-leaning thinking for decades: we need to take steps to help people adjust to higher energy prices rather than the economically beneficial alternative of just producing more.
Considering the capitalist foundation of our country, isn’t this a tremendously hypocritical point of view? Why has one political party for nearly four decades viewed energy crises through the narrow prism of learning to adjust to higher prices and declining resources, as opposed to aggressively finding and producing more of what the country and the economy needs?
Such questions seem particularly relevant given how this same party views hunger in our nation and throughout the world. The answer isn’t for those that have less to make an adjustment and adapt to their impoverished condition. “Adjust to having less” is certainly not the Left’s prescription for Americans lacking health insurance.
Democrats want government to increase the supply of food and medical care to those deemed financially incapable of providing for themselves.
Why doesn’t the same hold true for energy? Does the Left just presume that food and medicine are both human necessities government is required to assist the citizenry in obtaining, while energy is a luxury item people can learn to do without?
Curiously, when it pertains to less developed nations than ours, this answer appears to be “No,” for it seems obvious to Democrats — including presidential nominee Obama! — that countries like China and India require an ever-expanding supply of oil in order to meet the needs of their people.
What makes the Left in this country think this is no longer true for America?
— Noel Sheppard is the associate editor of the Media Research Center’s NewsBusters.
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