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Pro: We should, but won’t

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Andrew P. Morriss
February 2, 2012
EDITOR’S NOTE: The writer is addressing the question, “Should the U.S. remove restrictions on domestic oil drilling?”

Whenever gas prices start dipping—no matter how slightly—consumers start hoping it’s the start of a permanent downward spiral.


That’s likely wishful thinking because of the combination of energy policies and shortages caused by problems in some of the major foreign oil producers.


Crude oil prices determined 68 percent of gasoline prices in 2010, according to the federal Energy Information Administration. Federal and state taxes make up 14 percent, with the rest attributable to refining, distribution and marketing costs. Of these, only crude prices are likely to change significantly in 2012.


Two powerful forces are pushing crude oil prices up.


First, the administration is restricting production of oil through its energy policy, in which it obstructs efforts to increase domestic oil and gas production. This is bad for consumers not only because it restricts total world supply but especially because it restricts supplies from sources unaffected by foreign political instability.


Second, oil from the Middle East remains vulnerable as illustrated by Iran’s continuing threat to mine the Straits of Hormuz and so block 35 percent of all world oil carried by ship.


The administration’s opposition to domestic oil and gas production is bizarre because it has been promoting elsewhere exactly the efforts it blocks domestically.


For example, in March 2011, President Obama praised Brazil’s efforts to increase offshore drilling, saying, “At a time when we’ve been reminded how easily instability in other parts of the world can affect the price of oil, the United States could not be happier with the potential for a new, stable source of energy.”


Obstructing energy production domestically means the price Americans pay at the pump increasingly depends on events affecting foreign oil producers.


Here again, the trends suggest higher prices. Before 2001, world oil prices rarely swung wildly, largely because Saudi Arabia maintained sufficient spare production capacity to make up any temporary production losses elsewhere.


With production of 8.1 billion barrels per day, Saudi Arabia plays a key role in world energy markets. For example, when the second Iraq war removed a billion barrels a day from world markets, the Saudis increased production to cover the loss. They can no longer do so, in part because expanding Saudi spare capacity is increasingly expensive.


One estimate suggested that expanding the kingdom’s Manifa field by just 900,000 barrels per day could cost the Saudis $16 billion. Another reason is that Saudi domestic consumption is rising; Saudi Aramco estimated exports will decline by 2 million barrels per day by 2020 due to increasing domestic use.


There are just two other producers capable of creating significant new production capacity: Russia and the United States.


Russia produces 10.4 billion barrels per day and America 7.9 billion. The next largest producer, Iran, pumps just 3.7 billion.


Russia’s production costs are higher, so that even if Russia wished to create sufficient capacity to stabilize prices—something it has shown little interest in doing—prices would still rise.


Further, the combination of growing political turmoil in Russia and some ongoing disputes between foreign energy companies and their Russian partners mean the money and technology is not available to significantly expand production there.


Moreover, even smaller oil producers are facing problems maintaining capacity. The increasingly authoritarian regime of Hugo Chavez has turned Venezuela’s national oil company from a model of technical efficiency to a politicized bureaucracy unable to maintain existing infrastructure.


Given the uncertainties abroad, continuing Obama’s policy is a roadmap for higher energy prices. In these times of economic distress, most working Americans simply can’t afford that.


Andrew Morriss is a professor of law and business at the University of Alabama. Readers may write to him at: 101 Paul W. Bryant Drive East, Tuscaloosa, Ala. 35487; email: amorriss@law.ua.edu.

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