Columns / Discourse / May 22, 2008

Why is oil so expensive?

Oil company executives were once again called to Capitol Hill today to answer questions from a bunch of self-important blowhards, this time the Senate Judiciary Committee. Once again, the Senators couldn’t seem to understand why it was that oil prices were through the roof, and fired thinly-veiled accusations of collusion, price fixing, and price gouging at the executives.

The members of the committee making such accusations said they could find no good reason why in a free market prices should rise so far so fast. The President and CEO of Shell had an answer for them: it’s your fault. He said, in effect, that the market isn’t free to begin with, since Congress won’t let them drill in most of the United States. And he’s right. Most of the blame for today’s astronomical price per barrel can and should be laid at the feet of the very men who summoned the executives before their committee.

Quite simply, the laws of supply and demand are in force in the oil markets. Whatever tools may be used (or misused) to manifest the demand, most notably the speculators on the commodities markets, the core issue is that world demand is growing—and world supply can’t keep pace. Even now the price we pay at the pump is still artificially low: Canada is our biggest supplier, and under the provisions of NAFTA, they can’t raise their per-barrel price for crude for sale to us above what the Canadian consumer pays, which means that our price for their oil is currently hovering substantially lower than the nearly $130 that keeps getting publicized.

The last decade has seen economic booms in China and India, which between them represent 37% of the world’s population, leading to an accelerating demand for the amenities of a more modern lifestyle, including personal automobiles. Nor has demand in the United States, Canada, or Europe stopped growing. The world oil supply, however, has not been growing at nearly such a rate, meaning that the market will bear higher prices.

This is not, however, to say that proven oil reserves haven’t been growing—quite the opposite. We have yet to find a year where the world’s proven oil reserves haven’t grown, despite our growing use of them. We aren’t running out—far from it. We have enough oil to last us into the 22nd century without difficulty, and potentially far more than that.

All of which leads us to one question: why hasn’t supply been keeping pace with demand? In some corners of the world, there probably is an effort to keep oil prices high by restricting output, most notably from OPEC, which among its member states controls two thirds of the world’s proven reserves. Bush recently went hat in hand to King Abdullah of Saudi Arabia to ask for increased production from that country and was politely rebuffed. That said, Congress’s recent approval of legislation allowing the Justice Dept. to sue OPEC members under anti-trust laws was fairly hasty, particularly when the same people wonder why the world thinks of us as a bunch of arrogant jerks, and will not solve the problem of oil prices, in my opinion.

But beyond even the influence of OPEC, we have legislated and restricted ourselves into this mess. The environmental lobby has advocated a fiscally and environmentally irresponsible policy of preservation without management in nearly every situation. ANWR, for instance, if opened for drilling today, could replace our imports from Saudi Arabia in ten years with a footprint of only 2,000 acres—about 0.01% of the 19,000,000-acre preserve. Similarly extraordinary amounts of oil could be extracted off the California and Florida shores with similarly miniscule footprints and practically no environmental impact. Oil companies today are nearly as environmentally conscientious as the lobbyists vilifying them.

We have the pictures from the Exxon Valdez disaster of 19 years ago firmly etched in our minds. That was one incident, unfortunate as it was, and the kind of ecological devastation engendered by that spill is far from characteristic of oil exploration and production. Today, it’s a safe, clean, environmentally friendly industry keenly interested in avoiding the expenses and bad press of another such incident, and until Congress recognizes this, we will not move beyond our current prices. As much as alternative energy is a great idea, it’s just not ready for wide-scale implementation at current market prices. Perhaps in twenty or so years it will be, but for now, the only workable method to lower oil prices is to lift the restrictions keeping supply from growing with demand. There is no viable alternative.

Chris Berger

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