I noticed the price of gas the other day for the first time in a while. As I pulled in along the pump on my way home Thursday night, I noticed that the price for Supreme Blend read $3.99. At just under 16 gallons, the tab was 64 bucks to fill up. That’s one day’s round trip commute. That hurts. Yes, I drive an SUV. At least it’s not a Boeing 757. A guy has to draw the line somewhere.
It turns out that President Obama spoke about the spike in gas prices Thursday as well. Although energy, including its prices, have been on the Administration’s radar screen for the past three years, I’m guessing today’s timing was in response to the current spike in price as well as the increasing rhetoric that places him as the scapegoat in an election year. The Oxford dictionary defines “scapegoat” as “a person who is blamed for the wrongdoings, mistakes, or faults of others, especially for reasons of expediency”. It’s safe to say we have all of the above, with the emphasis on “others”.
Every time energy prices inch up to a certain level, ($4.00 happens to be the mark for the past couple of years), the false charade of finger pointing starts. Predictably, we have begun to hear the banter out there that we need to increase our oil production, starting with more drilling. Those who place the blame squarely on President Obama have based their argument on a fatal flaw.
Let’s look at the myth that President Obama’s “radical environmentalist policies” are driving up gas prices. Whether we support drilling or not, it’s actually been increasing for the last three years. As Think Progress pointed out last August, President Obama has presided over record growth in oil rigs but continues to get blamed for increasing oil prices. Economics 101 reminds us that increased supply (is supposed to) lower price. In fact, the number of oil rigs in operation since President Obama has taken office have increased by 350 percent in number and total net domestic output is up 8 percent. Yet, prices have increased.
The true reasons for a spike in gas prices can be complex and the current surge has several likely sources. One is the turmoil in the Middle East, especially the possibility of an impending conflict with Iran.
The reason for the increase a year ago was traced to the Libyan uprising during the Arab Spring of 2011. Although Gadhafi is now gone and Libyan oil production has since resumed, oil prices have dipped only briefly below $90 a barrel and have been rising since October 2011. Have we now reached a new permanent threshold?
Oil prices are set on the world market base on one pricing metric. As a result, a price shock in one region can send reverberations throughout the rest of the world. So, instability in the Persian Gulf that may threaten supplies or speculators driving up the price for fear of a disruption in supply will effect gasoline and oil prices here in the U.S., even though they might not directly affect our supply of oil.
According to Brad Plumer, an additional current reason for an increase in price stems from the closing of several North American refineries to facilitate a changeover from winter to summer blends. This will obviously cut into available supply, temporarily driving up the price.
Finally, worldwide demand for oil is increasing as the world’s economies recover. That’s particularly true with an increase in demand from China and India. Speculation has also been the part of the cause for increases in the past. So as local demand rises in various regions, as there’s instability in the Persian Gulf, for example, and as speculators drive the price up, the overall oil price—which is set on a worldwide basis—goes up here as well. In this respect and in part thanks to the technology of Henry Ford, globalization has been played out within the realm of oil economics for the past century.
Fast forward to our world of 2012 and we realize that the sources of global market fluctuations have multiplied 100 fold since the first Model A rolled into a fueling station. That said, it becomes clear that an increase in domestic oil production will probably have no effect on domestic oil prices in the future and it will certainly have no effect now. But for all its complexity, it’s that simple.
What does this all tell us? Well for one thing, it seems that a cut in supply translates far more quickly than an alternative increase. It also brings to mind the thought that inadvertent shocks seem to affect the market far more quickly than any planned market changes in policy.
After declining to levels not seen since the 1940s, U.S. crude production began rising again in 2009. Drilling rigs have rushed into the nation’s oil fields, suggesting a surge in domestic crude is on the horizon. To get a real perspective on this we need to look at the net effect of drilling. According to the U. S. Energy Information Administration, the United States owns about 1.5 percent of the world’s supply but consumes about 22 percent on an annual basis. Drilling just ain’t gonna cut it.
I want to dive into the weeds just a bit here with two specific projects because they get thrown in our faces as two deceptively easy solutions to this tragedy of the commons.
Our large Alaskan supply often enters the debate. In a report on the Alaskan National Wildlife Refuge (ANWR) by R. Morris Coats and Gary M. Pecquet of Nicholls State University, oil that is discovered today, or that is newly developable, such as in the Alaskan National Wildlife Refuge (ANWR), has no effect on prices until that oil hits the global market. That could potentially involve a delay of several years. What’s more, the American contribution to the global market would be miniscule.
This past week President Obama rightly disowned some of that misplaced blame, deflecting it onto the rising demand originating in Brazil and China, certainly a plausible assessment given their growth in economic development although it has been slowing.
Another hot point in the current energy debates is the Keystone XL Pipeline (KXL). We now know that the KXL is a fatally flawed proposal. According to a report from Cornell University, There’s a long list of costs and very little in terms of benefits.
Initial investment will be $3 to $4 billion lower than claimed. This project will create no more than 2,500-4,650 temporary, not permanent, direct construction jobs for two years, several thousand fewer than the number permanent jobs claimed. KXL will divert Tar Sands oil now supplying Midwest refineries, so it can be sold at higher prices to the Gulf Coast and export markets. As a result, Midwest consumers could well pay an unnecessary premium of 10 to 20 cents more per gallon for gasoline and diesel fuel. The study reports that the additional costs of around $2 to $4 billion will suppress other spending and will likely cost jobs.
Lessons learned from the BP Gulf incident, tells us that pipeline spills incur costs and therefore kill jobs. This diverts funds away from more productive economic activity. Finally, by helping to lock in US dependence on fossil fuels, Keystone XL will impede progress toward green and sustainable projects.
Neverthesless, both the Alaskan and Keystone projects still get touted as disengenuously easy solutions to the current gas prices if President Obama would just give the green light.
In terms of our trade deficit, net imports of oil and related products account for nearly half. As of 2007, the US consumed 20.68m billion barrels of petroleum products a day and imported a net 12.04m billion barrels a day.
Clearly, there are some very real economic reasons to pursue alternative energy. I’ll save the environmental ones for another day.
To balance things out a bit, President Obama is right to propose a diversified portfolio of energy development. But the suggestion to increase the already steep rise in drilling should be abandoned. There are plenty of far superior alternatives.
Several years ago President Bush also presided over a doubling of gas prices. In response, he proposed a 22 percent increase in funding for clean-energy technology research at the Energy Department. He proposed the use of nuclear, solar and wind power as well as more efficient batteries to power hybrid-electric autos and hydrogen-fueled cars.
When gas prices spiked to well over $4.00 per gallon under Dubya, he recommended the development of several different types of renewal energy. He signed several laws giving the Department of Energy the authority to provide more than $67 billion in loans and guarantees to help support innovative energy projects to reduce greenhouse gases and air pollution and to retool auto plants to produce more efficient vehicles.
We need to strengthen that commitment again. Solar energy has become more efficient and cheaper thanks in part to improved technology and economies of scale. We also need to take a new look at biomass and cellulosic ethanol. According to the Natural Resources Defense Council cellulosic ethanol, which is made from crop waste and non-food crops, such as switchgrass, is the biofuel of the future. It can produce four to ten times as much energy as corn ethanol without requiring the amount of land that food-growing farmland or forest require.
The development of a diversified portfolio of non-carbon renewable energy should be our top priority when it comes to addressing current prices as well as a leveling off of CO2 production and creating independence from oil producers that are sometimes hostile toward the United States. For starters, we can fund it with a redirection of nearly $4 billion in the subsidies that oil companies collect every year and instead put the money into an investment trust for renewal energy as seed money for research and development. This money could in turn leverage private capital.
The real culprit here is not President Obama, nor any other single person for that matter. The real culprit remains our addiction to oil and stubborn lack of resolve to develop a real and comprehensive energy strategy. President Obama himself admits to having a “hodgepodge” energy policy. We need a strong, coherent energy policy that’s committed to alternative, renewal, non-carbon resource development that’s properly funded.