What to do about the Oil Problem

The Tirade: We need to achieve low oil prices, and ensure that no one country is able to control our fuel supply. We have just passed a new Energy Bill. It does not do so. What we do need to do: Drop the ANWR fight and instead break the back of OPEC, slash consumption, and work closely with China.

The Links:

Since the early 1970s the US has sucked up more oil than we produce, and a large share of everything the world produces. I figure that’s okay, as we also produce more goods than anyone else in the world.But now China is sucking up oil without adding a lot to the world production, and driving up prices. And worse, all the big oil reserves left in the world are in places (read Iraq, Iran, Russia), that are not exactly, ahhh, “politically friendly”. This is not tenable. It’s a politico-security problem wrapped up with an economic problem.

Here’s the crux of the situation. OPEC currently controls enough oil output to be the swing producer and manage prices like a monopoly. OPEC is controlled by countries whose population doesn’t like us. American and Asian consumers are the main drivers of oil demand, factors we can influence. (Usually sharp changes in oil prices are caused by faster or slower economic growth in Asia or the US than was expected, not OPEC). OPEC’s main goal is to keep prices stable, and relatively high. As long as OPEC is the swing vote in world oil supply, and a handful of the Arab nations control OPEC, and we need lots of oil from OPEC, we have a problem. Because prices will not come down, and we’ll always have an oil embargo hanging over our heads. Again, we need to achieve low oil prices, and ensure that no one country is able to control our fuel supply.
Unfortunately our energy policy for the last 30 years has been built on two premises:
  • Friendship with key OPEC members like Saudi Arabia and Kuwait, whom we have courted to keep OPEC somewhat in line and keep the oil flowing (kind of like putting the fox in charge of the hen house);
  • And a policy of supporting the domestic oil industry to increase drilling with only limited commitment to reduced consumption.

This has been true of every administration, whether Republican or Democrat. And the Energy Bill is no exception.

My Prescription: Supply solutions need to go hand in hand with reduced consumption. If we want to solve the Oil Problem, we have to attack both the roots of the supply and demand.

The Details:
Attack the Supply Problem
  • Drop that whole drilling in the Alaskan National Wildlife Refuge thing. It is not the cure-all that the Bush Administration considers it to be, and it sets off the environmental lobbies like no tomorrow so we can’t move on to real oil policies. The potential production from that field is a lot, but not big enough to make a long-term difference in our oil needs. Besides, if I had the choice I’d rather save our oil for later and burn Saudi Arabia’s.
  • Break the back of OPEC. OPEC is a monopoly cartel. If you break it, oil production goes up, oil prices fall (though they do become more volatile), and no longer can one or two Arab nations hold us over the barrel on oil. They become just one of many countries, not the swing producer.
  • This would drive oil prices down and reduce our reliance on the Middle East.
  • How do we do that? Make friends with major swing producers like Venezuela, Russia, West Africa, Mexico, Norway, Indonesia. Encourage OPEC cheating. Split them off from the herd one by one, so that it no longer speaks with one voice. Use our economic and political power to fight the Oil Cartel just like we fight the drug cartel.
  • Encourage additional domestic drilling and new technology, but be cognizant that domestic drilling is only a small part of the solution.
  • At the same time, crack down hard on countries that nationalize oil reserves and renege on contracts with the major oil companies. The major oil companies are our oil companies. We want them getting a hold of Nigerian and foreign oil. Encourage the opening of foreign drilling in new markets

Attack the Demand Issue in Parallel

  • Reduce our oil consumption. Most of our oil goes to cars and plastics. We badly need to drive the adoption of fuel-efficient hybrid and fuel cell cars by implementing significantly higher fuel efficiency standards and consumption taxes. In practice this means eliminating the fuel economy exemptions for pickup trucks and SUVs. And this from a Texan with two F-150s and a 1970 Mustang in my family!
    As a consumer, this means buy smaller cars, or stop complaining about oil prices.
  • Encourage reduced consumption in China and India. We can sell them the technology to do this. I would love to see an “Oil Consuming Nations” cartel with China, Japan, and India to balance OPEC.
  • Increase the strategic petroleum reserve. Our reserve is only a few days of supply. Give our government some additional leverage with a mandate to fight OPEC on oil prices.
  • And of course, recycle, recycle, recycle. Any time you throw away plastics, you increase demand for oil.

In Requiem: We have an Oil Problem, both economic and political. OPEC is our enemy, not the oil companies. OPEC must be destroyed. Consumption must be reduced, but at the same time as increased production so that the price shocks don’t hurt our economy.

And within a few years we will find that while still an oil economy, we will be richer, we will not have an Oil Problem with Arab countries hanging over our heads, and we will be one step closer to transitioning a sustainable energy future.

For Research:

http://www.rmi.org

http://www.nrel.gov

http://www.eia.doe.gov

http://www.opec.org/

1 reply
  1. Peter
    Peter says:

    The article assumes that OPEC has plenty and plenty more oil to give up. This, according to Matt Simmon in his book "Twilight in the Desert" is incorrect. If that is so then it does not matter how well OPEC is "conquered and divided" by ear whisperers, OPEC can not respond with increased production.The good news is that OPEC no longer controls oil prices. The bad news is that no one now controls oil prices.The final suggestions that third world oil belongs only to western private oil companies and not to sovereign governments smacks of 19th century colonialism. Best to lose that attitude if we are not to be surprised by the occasional bloody message that communicates "we don't like you".

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