Ending U.S. Dependence on Foreign Oil

[adios]

Note that there is not the usual clarion call for essentially a decrease in the usage of energy sources as a way to reduce dependence on foreign sources of energy. Reducing demand will benifit the lowest cost producers the most as marginally profitable producers will become non producers. Guess who the lowest cost producers are. Anyway I found this old article interesting.

Ending U.S. Dependence on Foreign Oil (http://www.ncpa.org/iss/env/2001/pd122101f.html)

Ending U.S. Dependence on Foreign Oil

Daily Policy Digest

Environmental Issues
/ Energy & the Environment

Friday, December 21, 2001


The anti-energy policies of the federal government have strengthened the Organization of Oil Producing Countries (OPEC), experts say. By locking up coal, oil, and natural gas fields, the Clinton administration succeeded in forcing U.S. energy producers to look outside this nation's borders for fuel. Unless the Bush administration succeeds in changing this policy, we can expect more price spikes as OPEC producers attempt to control world oil markets.

The remedy, according to William L. Anderson, is increased exploration and repeal of restrictive energy policies. Specifically, he recommends:


Do away with policies that force individuals and businesses to "conserve" energy beyond what they would naturally do given market prices.
Do not enact new taxes aimed at forcing up gasoline prices and depressing current demand, as such measures would artificially and uneconomically depress current demand but wouldn't encourage oil companies to produce more oil and gas.
Do not increase Corporate Average Fuel Economy (CAFÉ) standards -- a "feel-good" measure that distorts production markets by overvaluing fuel and undervaluing other resources, while doing little to reduce gasoline consumption.
If the government is serious about ending the economic power held by OPEC, it will take the following steps:


Deregulate oil and gas markets in order that consumers and producers may enjoy the benefits of free markets.
Enact common sense environmental regulation, including opening oil fields offshore and in Alaska.
Cut gasoline taxes to allow "true" free market prices to more accurately reflect conditions of supply and demand.
Each of these measures, Anderson says, will permit oil markets in this country not only to work properly, but also will make the U.S. economy less vulnerable to periodic oil shocks due to overseas events.

[MMMMMM]

Interesting article. I do think it is important that we take steps to minimize dependence on foreign oil though I am not sure how serious the environmental repercussions of opening for drilling certain parts of our wilderness areas might be. Also I read somewhere once that the oil reserves off the Florida coast are humungous.

Here is another article of interest discussing the damaging effects of OPEC (to both the US economy and the economies of developing nations), how OPEC is anathema to free trade, and what might possibly be done about it. Also mentioned is the need to reduce our dependence.

"December 04, 2003, 9:00 a.m.
OPEC Follies
Breaking point.

By Raymond J. Learsy

In September, at the instigation of Saudi Arabia and Kuwait, OPEC cut oil production by 900,000 barrels per day. Claude Mandrill, head of the International Energy Agency, voiced his disappointment, given the continued weakness in the world economy. OPEC's strategy to maintain prices at persistently high levels works directly against sustained recovery and global economic growth. OPEC president Abdullah bin Hamad al-Attiyah said he received a call from Russia's oil minister, Igor Yusufov, before the start of the September 24 meeting: "He said he will support us and he will cooperate" if prices look to fall sharply. Mexico also assured OPEC members that it would work with the cartel. OPEC would like to see these friendly sentiments result in output cuts to prop up prices: "Support is nice, but we should cash it in the bank," al-Attiyah said.

On October 13, to underline his concerns, al-Attiyah reminded non-OPEC members of the collapse in crude oil prices to about $10 a barrel in 1998-99. Currently the price exceeds $30 a barrel. If $10 is a better reflection of what the price of oil should be in a free-market environment, it is fair to say that OPEC's manipulations have added some $20 to the price of oil — at a cost to U.S. consumers of well over $100 billion per year, and hundreds of billions to the world economy.

Al-Attiyah's admonition to translate action to cash in the bank begs the questions: whose cash, whose bank, and what actions?

In an illuminating statement early in September, Omar Farour Ibrahim, head of information and public relations for OPEC, advised his readers that it is OPEC's "fulfillment of our obligations to humanity to ensure continuous flow of oil from the short to the very long terms. Oil is a finite resource. . . . So our pricing policy seeks to obtain a price that is fair and reasonable to the consumer, while at the same time attractive to investors (most of whom are from the West). . . . I wish to observe that the biggest beneficiaries of high oil prices are the developed countries themselves. Virtually all major oil companies hail from these countries. Virtually all revenue earned by the producing nations goes to importing manufactured goods from developed nations or are kept in foreign reserves in these countries."

According to Ibrahim, then, it is not just developed countries that share in OPEC's magnanimity, but "humanity" in general.

OPEC has trained consumers — and indeed most people around the world — to believe that oil is a much more finite resource than it in fact is. For example, in 1972 a prominent group of experts known as the "Club of Rome" estimated that only 550 billion barrels of oil remained to be tapped and the world would run out of oil by 1990. Between then and now some trillion barrels of oil have been consumed. Furthermore, according to the International Energy Agency, as of the year 2000, there exist some 2.3 trillion barrels of ultimately recoverable reserves. And that number would be more than 4 trillion barrels if we took into account oil recoverable from tar sands and oil shale. Meanwhile, producers around the world continue to announce new finds. The untapped — and as yet undetermined — supply in Iraq, Russian Siberia, Kazakhstan, Azerbaijan, Turkmenistan, Africa, the deeper ocean floor, and even parts of Saudi Arabia make glut more realistic than scarcity.

OPEC perpetuates the phony theory of scarcity and successfully manipulates the price of oil with the help not only of its own members but also of Russia, Mexico, and other non-OPEC producers. And then there is the quiet acquiescence of those "developed nations": Sad to say, since the mid 1980s our government has been complicit in OPEC's success.

Back in 1986, then-vice president George H. W. Bush traveled to the Persian Gulf to urge the region's oil producers to rein in oil production. Oil prices had hit a low of under $10 a barrel and the economies of Texas, Louisiana, and Oklahoma were hurting badly. In successfully prodding the Mideast oil producers to cut production, the American government became a virtual partner in OPEC's manipulation of the international oil market. The immediate result was a doubling of oil prices to over $22 a barrel by July 1987. This at a cost to American consumers of $60 billion a year — while hundreds of billions of dollars flowed into OPEC members' coffers in the years following.

Our government's support of OPEC and its policies became patently clear after the first Gulf War. It would have been reasonable to expect Kuwait and Saudi Arabia — the former having been rescued, the latter protected — to sever ties to OPEC and assume the responsibility of supplying oil to world consumers on a free-market basis.

Yet for our government to have pressed for such a change in Saudi and Kuwaiti policy would have necessitated rooting out ingrained interests. To this very day our government continues to play along with OPEC's monopolistic shenanigans, using the rationale of "stability of oil supply." This is a fiction perpetuated by the domestic oil industry, as well as by the geopolitical and financial prerogatives exercised by certain OPEC producers (e.g., Saudi Arabia and Kuwait) at the highest tiers of government through their massive financial recycling of oil revenues and deeply entrenched relationships with a core of highly connected oil companies, contractors, equipment suppliers, and banking and financial institutions. It is a sad example of crony capitalism high-jacking the national interest.

Since Gulf War I, we have witnessed the dangerous consequences of a policy that appeases and tolerates OPEC. Through the manipulations of OPEC, hundreds of billions of dollars have been drained from the world's economies and transferred to too many malign and unstable regimes. These riches have helped foster political and religious fanaticism, endangering countries around the world. It has further impoverished developing nations, creating resentment and social instability in countries that need fairly priced energy to develop and grow their economies.

Given the events of 9/11, and given the experience of the dozen years since the first Gulf War, the question must be raised whether OPEC and the political malignity and market distortions it propagates can be tolerated in an era of growing proliferation of weapons of mass destruction.

It is time for the U.S. government to adopt a policy inimical to the existence of OPEC. If the Bush administration is serious about fighting terrorism, furthering transparent governance, and achieving world stability, it will make a stand on this front. We should do everything within the boundaries of foreign policy, law, and trade to bring the predatory nature of the OPEC cartel and its pricing machinations to an end.

We could begin by working through the World Trade Organization, which prohibits its members from setting quantitative restrictions on imports and exports. OPEC's very existence is a prima facie affront to free trade. OPEC imposes a heavy tax on poorer nations, inhibiting their economic development. Here is an issue that could bring "developed" and poorer nations together under the aegis of the W.T.O.

As a response to OPEC's production cuts, the U.S. should immediately suspend purchases for the strategic oil reserve (which is currently filled to 90 percent of capacity) until prices abate. Though not comparable to the OPEC cuts, it would at the very least send a signal that we are no longer standing idly by.

We should explore all avenues that might lead to antitrust proceedings against those entities and oil companies which conspire to fix and manipulate production and prices. U.S. policy should encourage other major oil importing nations to act likewise.

These efforts should be combined with an active program to develop alternative fuels sources such as hydrogen, ethanol, methane, wind and solar, hydroelectric, and, where possible, coal and nuclear. They should be further reinforced by a renewed focus on conservation and, if need be, gas rationing — not only as a conservation measure but as a negotiating tool to reduce consumption in the face of OPEC production cuts and to assure an orderly allocation to the public in case of a major disruption of supply.

Without OPEC, the price of oil could drop by $10 a barrel, if not more. The savings to American consumers alone would surpass $100 billion per year. The significance to the world's poorest economies would be greater yet.

These steps — and the many other viable ones — should be taken now. OPEC is an ugly cartel, a sty in the eye of free trade and sound global economic policy. Until we begin to break its stranglehold on global and local economies, OPEC's monopolistic behavior will only get worse.

— Raymond Learsy, a private investor, has been an international trader in oil and chemicals."

http://www.nationalreview.com/comment/learsy200312040900.asp

[HDPM]

Usually any free market stuff will work better and tax cuts are always good. I would also like to see competition i.e. gas stations advertising domestic gasoline. I would pay a little more for American than saudi gas. Less chance the profit will go to the terrorists. I would open the ANWR for oil drilling. Better to close Yellowstone to snowmobiles than let a huge resource rot.

Also, don't think the Saudis aren't worried. They recently asked for handouts if western countries decreased their oil consumption in the face of the Kyoto stuff. There are all kinds of things we should do to eliminate the market for oil from over there.

[Boris]

I don't understand what is so wrong with being "dependant" on foreign oil. The almighty dollar speaks loudest so those people in the Middle East will always supply us with oil. Even if by some miracle scenario some of the OPEC nations decided to cut us off, we could always just go in and kick their ass. I think a more likely threat is the Europeans deciding to lower their crazy gasoline/car taxes. This would definitely hurt the US as you would see a significant increase in oil demand and thus prices.

[Boris]

Just to keep everything Fair and Balanced, it should be noted that, despite literally thousands of attempts, there is not conclusive empirical evidence that OPEC has any substantial ability to manipulate oil prices.

[MMMMMM]

"Just to keep everything Fair and Balanced, it should be noted that, despite literally thousands of attempts, there is not conclusive empirical evidence that OPEC has any substantial ability to manipulate oil prices."


And what thousands of attempts might those be, and on what do you rely for your assertion?

[adios]

Here's an excerpt that illustrates my point about low cost producers from an old article in The Guardian:

Key members of Opec are prepared to let the price fall as low as $10 a barrel to make oil sales unprofitable for all but the lowest cost producers. If sustained it would put a lot of low-cost producers out of business. And there is the rub. Low oil prices may boost global output in the very short term. But in the long term they will send completely the wrong signals. Low prices will encourage profligate consumption in gas-guzzling countries like the US and discourage desperately needed experiments with alternative energies and renewables. It will also deter investment in high-cost fields that would lessen the west's huge long-term dependence on oil from the Middle East and from Saudi Arabia, the world's biggest producer.

Crude politics (http://www.guardian.co.uk/petrol/story/0,7369,597283,00.html)


Crude politics

Falling oil prices are good - for a while

Leader
Monday November 19, 2001
The Guardian

Petrol prices are set to fall by 1p a litre if the present drop in world oil prices (down to $18 a barrel from over $25) is maintained. This is good news for consumers and will be even better news if Kuwait's warning comes true - that oil could fall to $10 a barrel if there is a price war between Opec and recalcitrant non-members like Russia. Falling oil prices will leave people with more spending power and lead to a drop in the retail prices index. This will create conditions for fresh falls in interest rates - thereby leaving yet more money in the pockets of consumers, or at least those with overdrafts and mortgages. Just the sort of counter-cyclical boost that the UK economy needs.
Falling oil prices are also manna from heaven for the world economy (at least in the short term) and may help it avoid a long recession. You do not have to go all the way with those economists who argue that rising oil prices have been the chief determinant of higher unemployment to accept that they have a vital role to play. The quintupling of crude prices in the 1970s led to a prolonged and destabilising bout of inflation from which the world has only recently emerged. Professor Oswald of Warwick university claims that the current rise in unemployment can be traced to the spike in oil prices in 1999-2000, when it rose from $10 to $36 a barrel. If that is true then the current fall may lead to an early reversal.

The immediate cause of falling oil prices is Russia's refusal to accept Opec's moves to limit output. Russia is now a major player in the crude war rather than the cold war. As the world's second biggest oil exporter (and currently the fastest growing economy in the Group of 8), it wants to maximise the foreign exchange it gets from oil revenues in order to boost growth.

Key members of Opec are prepared to let the price fall as low as $10 a barrel to make oil sales unprofitable for all but the lowest cost producers. If sustained it would put a lot of low-cost producers out of business. And there is the rub. Low oil prices may boost global output in the very short term. But in the long term they will send completely the wrong signals. Low prices will encourage profligate consumption in gas-guzzling countries like the US and discourage desperately needed experiments with alternative energies and renewables. It will also deter investment in high-cost fields that would lessen the west's huge long-term dependence on oil from the Middle East and from Saudi Arabia, the world's biggest producer.

A large part of America's defence budget ultimately goes towards defending the security of oil supplies from potentially unstable countries like Saudi. If a fraction of that sum was invested in renewables and in the manufacture of much more fuel efficient engines then the US would be a happier and more secure place. Meanwhile, we should take advantage of these low prices which have come at an appropriate moment to boost flagging global growth - while accepting that it is neither likely nor desirable that they will be with us for ever.

[Boris]

I have an MS in Environmental and Resource Economics from a top tier research university. With regards to OPEC, I took a class in Industrial Organization that addressed among other things the market dynamics of monopolies and, by extension, cartels. We discussed OPEC at length. My professor, for whom I still have a tremendous amount of respect and who is definitely on the right side of the political spectrum, made the claim about the empirical research. I believe him.

Aside from complicated and time consuming empirical research though, we could just use a little bit of game theory and common sense to come to the conclusion that it is indeed highly improbable that OPEC has any sort of sustained pricing power. The temptation for any one country to cheat and increase output is so great that it probably renders the cartel ineffective. Empirical research in this area suggests that not until there are 3 or less suppliers dominating a market does monopolistic pricing begin to emerge. Also, a small number of suppliers is not a sufficient condition for elevated pricing.

[Cyrus]

The solution to high oil prices is ...even higher oil prices!

(Also sprach E. Luttwak.)

[Cyrus]

"It is indeed highly improbable that OPEC has any sort of sustained pricing power. The temptation for any one country to cheat and increase output is so great that it probably renders the cartel ineffective."

At the height of every production-tightening effort instituted by OPEC, the supply dept's of every oil buyer and his mum were deluged with "clandestine" (yet quite legitimate) offers to buy crude at below the OPEC-"set" price range. The prices of those (firm) offers reflected what the free market level actually was.

Arab royal princes, big and small, with private ownership over oil fields had a particularly good time. I still have the telexes.

--Cyrus

[Zeno]

We should use as much foreign oil as possible now, especially when the price is reasonably cheap. This saves North American oil reserves until later. The "north slope" (including Canada) has a lot of oil and natural gas. In 40 years when the tundra can bloom almost year around and production cost are lower because of the combination of better weather conditions and better technology the US and Canada will have a field day drilling oil and gas wells. We can then team with Russia and have a "white mans burden" cartel of oil.

Drive with that petal to the metal. Suck that oil down - we need to use it all up before Jesus gets back.

-Zeno

[adios]

[ QUOTE ]
I don't understand what is so wrong with being "dependant" on foreign oil. The almighty dollar speaks loudest so those people in the Middle East will always supply us with oil.

[/ QUOTE ]

I agree with you.

[adios]

Higher taxes on imported oil or more subsidies for US oil would probably be equivalent. I don't like those ideas.

[adios]

My understanding is that a lot of oil produced in Russia and other former Soviet countries have very low production costs as well (not as low as the Saudis though). I don't see how lowering consumption in the US will reduce our dependence on imported oil. There may be other good reasons to lower consumption though. Perhaps certain tanker companies might be a good investment /images/graemlins/smile.gif.

[HDPM]

I do not think they would be equivalent. Perhaps it isn't a good idea. But I just think in a free market you should be able to accurately describe your product and charge what you want for it. So if 2 gas stations are next door, and one uses only domestic oil, I would go to the one that advertises domestic products and charges .02 more per gallon. If they charged .78 more per gallon I'd go buy foreign oil. The price differential will be viewed differently by different people. Taxes and subsidies ruin the market. My idea is part of the market.

[Cyrus]

/images/graemlins/cool.gif