Saturday, May 7, 2011
Many people are legitimately upset about the high cost of gasoline that is currently plaguing the United States, and because of their anger, are blaming the current administration for the high cost. They claim that the Obama administration could limit our vulnerability to these price increases by opening up federal land in Alaska, the Outer Continental Shelf (OCS), and the Rockies for the production of oil. Though there are multiple issues regarding oil production in these areas - a subject that I will deal with in a later post - those who hold to the view that increased domestic production will solve our energy woes, really do not have a thorough understanding of the oil market.
In a perfect world, oil would be governed by the economic doctrine known as supply and demand. Its Economics 101 - if supply goes up and demand stays constant, the price of a commodity will go down. If supply goes down and demand stays constant, the opposite will happen - the price of the good will increase. The problem is, oil is not governed by this doctrine, instead it is subject to the price manipulation by the Organization of Petroleum Exporting Countries - an organization which controls close to half of known world oil reserves. You see, whenever new oil comes into the market, the OPEC nations have the ability to decrease their own production to keep oil prices at a level that they think is appropriate ($90-$100 per barrel is their goal).
What all does this mean? When U.S. politicians - whether they be on the right or left - advocate for "Energy Independence" they are advocating for an impossibility. In fact, Energy Independence is only possible if the U.S. switched to a completely different energy infrastructure, an energy structure not beholden to the price of an internationally traded commodity. As long as the U.S. economy is dependent upon oil and its derivatives (gasoline, diesel etc.) we will always have to participate in the "global market" of oil. Because oil is an internationally traded commodity, any increase in domestic production has the possibility of being met with a decrease in production by OPEC states, thus keeping the price the same and having no economic benefit at the pump.
Why would OPEC do this some might ask. Would they not be shooting themselves in the foot? Not necessarily. As the price of oil would decrease with increased domestic production, OPEC nations would LOSE substantial amounts of money per barrel because of the decrease costs. In their mind, it would be better to cut back production and keep oil prices artificially high, because in this way they are still receiving about the same amount of money, yet selling less oil - a win-win situation for them.
So though Domestic Drilling may have some benefits - such as job creation etc. - if someone states that we need to do it to give us "Energy Independence", they really have no idea what that truly means.
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