Congressional Democrats, eagerly seconded by their party’s presumptive Presidential nominee, have blocked inter alia oil exploration in the Alaskan wilderness, the exploitation of Rocky Mountain oil shale and the construction of new U.S. gasoline refineries. A boilerplate defense of this obstructionism – I heard it from a liberal friend just yesterday – is that none of these measures would do anything to reduce gasoline prices now, so it’s just demagoguery to call them urgent.
That line is superficially plausible. Is it necessarily correct?
Oil producers have a choice between taking oil out now and keeping it in the ground in anticipation that its price will rise. If prices are going up rapidly, some producers may decide that oil is a good investment, one that they can make by simply forgoing expanded production. This may be part of the reason, aside from sheer incompetence, why exporters like Russia, Iran and Venezuela have paid so little attention to their production infrastructure.
Historically, the risk in playing the waiting game has lain in the steady discovery and tapping of new oil sources, but that risk, a rational actor could suppose, is receding. More and more, it looks like North America’s vast reserves will lie fallow for the foreseeable future. Demand is bound to increase over the next couple of decades. Nothing that is technologically feasible during the next 10 to 15 years, other than a worldwide depression, will cause oil consumption to plateau or decline. Therefore, the prospect of investment gains discourages the liquidation of oil “portfolios” and artificially constrains current supply.
If producers foresaw an American oil boom, the calculus would change dramatically. They would have an incentive to take their profits now. With luck, we might see panic extraction by high-cost producers who fear a long-run price decline. And the worst case scenario, where current prices aren’t affected at all, still means that oil will be more abundant in a few years, just as, if we had acted differently a decade ago, it might be today.
Further reading: Noel Sheppard, “We Have Only Ourselves to Blame for $4 Gas”:
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.
He goes on to make the same argument that I do, with more detail:
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.
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