Is Oil a Bubble? Part 3

Includes: IEO, IEZ, OIL, USO, XOP
by: Jordan Kahn

In this last part of my series on the oil bubble, I am going to take a look at the supply side of the equation and touch upon why Congress might be as much to blame, or more so, than the oil companies at which they are currently pointing fingers. (In case you missed parts one and two, here are the links to them: Part 1  and Part 2.) For decades, the U.S. has had no real energy policy with which to hang your hat on. I remember in the early 1970s seeing funny commercials on television rallying people to get more active in conserving energy. However, conservation isn’t an active strategy for increasing supply.

Congress continues to search for scapegoats to blame for this mess, whether it is the big oil executives, financial speculators, or futures exchange regulators. However, they continue to show their failure to grasp the bigger picture, which is to increase domestic supply. Just over a week ago, the Senate refused to lift its ban on developing the oil shale in the Rockies, where estimates have put the amount of oil locked in this shale, stretching from the U.S. to Canada, at more than 1 trillion barrels. Can you imagine?

Congress has come up with a bevy of misguided “solutions,” including limits on CO2 output, restricting drilling on public land; windfall profits taxes on big oil, and trying to sue OPEC. None of these will help increase the supply that is needed to meet growing future demand. The primary solution should be tapping our own domestic supply sources, which remain out of reach.

The “windfall profit tax” is just another example of Congress’ inability to focus on supply and demand. Do you really think that the government would do something productive with those extra tax revenues if they got them? Moreover, why would you create a disincentive for the oil companies, when what we need is for them to invest more in exploration and drilling? A recent report from the International Energy Agency [IEA] warned of a potential global supply crunch, but said that it could result from the failure of governments – not private oil companies – to open up their lands for more exploration and development.

Reports out of countries like China and Brazil show they are getting the message. China reported 10 new oil discoveries last year, and Brazil has reported some huge finds this year, all of which bode well for those countries. Europe is also  increasing exploration in the North Sea, but our Congress is leaving billions of barrels untapped as it worries about the profits of the oil companies. According to Investors Business Daily, since 2002 the U.S. oil and gas industry has earned roughly $0.08 on each $1 of sales, which is about the same level as the U.S. manufacturing sector as a whole. It seems to me that the notion of windfall profits itself goes against the ideals of capitalism and free market economies.

I am not one to completely ignore the environment either. However, I have read that Louisiana, where many of our drilling and refineries are located, is one of the top areas for fisheries, and that the fish have thrived amid the drilling infrastructure. So let’s stop putting the environmental lobby’s campaigns ahead of the national interest of the rest of the U.S. consumers. If we had started drilling in the Arctic National Wildlife Refuge [ANWR] back in 1995, when President Clinton vetoed the proposal, we would be producing an extra million barrels of oil per day now.

The facts of the matter are that for the last 28 years, Congress has opposed our drilling in Alaska’s ANWR, which we know contains billions of barrels of oil. They have also prevented us from building any new oil refineries, prevented from drilling in the outer Continental shelf of the ocean, and halted the building of nuclear and clean coal power plants. Together, had these initiatives been promoted, they would have gone a long way toward alleviating the problems we are facing today.

The Institute for Energy Research estimated that the combined supply of oil contained in the sources mentioned above amount to as much as seven times the reserves of Saudi Arabia. This could be enough to meet current demand in the U.S. for hundreds of years. Moreover, The Heritage Foundation estimates that if full-scale production begins within five years, the U.S. could end its dependence on OPEC entirely by 2020. So Congress, what are you waiting for?

So ultimately, who is to blame for the oil bubble? To be fair, there are other factors that I have neglected to mention: China is likely hoarding resources, Iran is storing tons of oil in tankers, OPEC is running below peak production, and refineries are running below peak utilization rates as well. Remedying these situations would help, but their impact is less than the potential of the initiatives Congress has the power to green light. I can only hope that they somehow see the light and decide that it is more productive to start looking at solutions to the problem, rather than focusing on scapegoats.

As a last point, I probably could do a fourth part on the theory of “peak oil,” but I fear I am getting a bit verbose on the whole subject. Suffice it to say, I am not sure I believe in peak oil. Who is to say how much oil is still out there in previously hard to reach areas, or sources that were considered uneconomical to explore? However, these arguments lose sight of what really is important, and that is how long will oil supplies last? I think as alternative energy sources continue to become mainstream and as current transportation and industrial methods continue to use less energy for input sources, that we will deem the notion of running out of oil misplaced.