Black Gold

The Obama Administration has perpetuated a number of myths about oil in its drive to shut down the fossil fuels industry and force America’s dependence on unreliable renewable sources of energy such as solar and wind power. 

Both solar and wind power are excellent niche energy sources used in a variety of situations that are not conducive to traditional petroleum energy. For instance, solar panels are employed to power small sensor stations located in remote areas difficult to supply with fuel such as along remote pipelines or for scientific instruments gathering data in remote locations. Wind power was employed by farmers on the prairie to power water pumps in iconic windmills, and by the Dutch to pump water out of areas reclaimed from the sea. Water power has been employed in numerous applications throughout recorded history including grist mills for making flour and industrial applications to power factories during the Industrial Revolution.

The folly of the environmental movement has been in thinking that these excellent niche energy sources could be expanded to fill the role fossil fuels currently occupy as our primary energy source. This dream has existed since Jimmy Carter made a big push for renewable energy in the late 1970s, but these sources continue to be expensive and unable to provide the stable energy our country requires to operate. The electric grids in our country are precisely calibrated to require a steady supply of power to operate at peak efficiency, and the nature of electrical power requires that they be maintained with a steady supply of base power. Wind and solar sources are unsuitable for this purpose because the wind is unpredictable and the sun is unavailable on cloudy days. Coal and natural gas are the least expensive sources of energy that are able to provide the steady supply of power necessary for electricity generation.

Petroleum refers to that subset of fossil fuels which includes not only gasoline which powers our cars and lawn mowers, but also kerosene, also known as JP-5 jet fuel, diesel powering semi trucks and trains which move our freight, and lubricating products such as oil and grease necessary to keep metal parts moving smoothly. Other fossil fuels include coal and natural gas which powers many of our electricity generation plants and warms our homes.

The petroleum industry is no different than any other manufacturing industry in that it takes raw materials and processes these raw materials into finished products that are suitable for consumption. Crude oil is the raw material processed in a factory known as a refinery into consumer products such as gasoline, diesel, kerosene, oil, grease, and tar. A barrel of crude oil is processed into a number of useful products with nothing going to waste.

There are different grades of crude oil and each refinery must be set up to handle a specific grade of crude oil much like each car plant must be tooled to produce a specific automobile model. Most people are familiar with the light sweet West Texas Intermediate crude which is the benchmark price quoted on the nightly news as the cost of a barrel of crude oil. It is designated light because of its relatively low density, and sweet because of its low sulfur content. This grade requires the least amount of processing and is therefore the most valuable grade of crude oil which is why it is used as the benchmark for crude oil pricing. What most people don’t know is that the majority of crude oil extracted around the world, including the Middle East, falls into the category of heavy sour crude which is thick and heavy with a high sulfur content requiring much more processing than its light sweet counterpart. Consequently, its price is much less than the benchmark light sweet price quoted on the nightly news.

Venezuela, whose hydrocarbons minister Juan Pablo Perez Alfonso led the creation of OPEC in 1960, produces an extra heavy sour crude oil that is difficult to refine. For this reason, Venezuela purchased CITGO and converted its refinery in Louisiana over to the exclusive production of Venezuelan crude oil. When Hugo Chavez threatened to cut off shipments of Venezuelan crude oil to America back in 2009, he had to be reminded that their oil is shipped to America for refining because no other refinery can process it. Thus his threat was quickly dropped.

Much is made of America’s dependence on foreign oil by both political parties whose presidential nominees routinely make the promise of weaning America off of foreign oil every four years like clockwork. However it must be remembered that oil is a global commodity sold on a global market at global prices and it matters little where it is extracted other than its grade which determines where it can be refined. America is the second largest producer of crude oil in the world with some 10.8 million barrels produced per day, and is poised to overtake Saudi Arabia as the world’s top oil producer in the near future. The only way America could possibly become energy independent even if this was a desirable outcome would be to dramatically increase drilling and to open up federal lands for oil exploration. This would include the ANWR whose protection from oil exploration environmentalists have turned into a near religious cause.

President Obama takes credit for the increase in oil production, but this production has occurred on private lands despite the best efforts of Obama’s EPA under Administrator Lisa Jackson to impose rules curtailing oil production. Oil production on federal lands has dropped dramatically under the Obama Administration, and the EPA is seeking the power to impose rules on the fracking process that has led to the discovery of massive new shale gas deposits despite the fact that state agencies are more than capable of regulating this activity. The EPA’s push for regulatory control of shale gas production methods is driven by their desire to regulate this industry out of existence to make wind and solar power the only attractive energy options available in America.

The EPA is currently waging a war on the coal industry which has resulted in the closure of coal mines as the coal industry prepares for the shutdown of numerous coal-fired electric power plants in the next few years removing some 34 GW of generating capacity and resulting in higher electric bills for Americans. So President Obama is being disingenuous at best and downright lying at worst when he suddenly claims to support the fossil fuels industry. Neither his record nor his past public statements support this sudden embrace of fossil fuels as the path to American economic recovery. President Obama has laid the groundwork in his first term to drastically remake the American energy sector in a second term resulting in much higher prices to Americans already struggling to survive the economic disaster his first term has produced.

Finally, the factor weighing the most on gas prices at the pump is not the traditional economic supply and demand curve, but inflation. American consumption of gasoline has been declining the last four years due to decreased demand driven by the poor economy which has put millions of Americans out of work. The supply of gasoline is abundant as producers are faced with the problem of where to store the excess capacity they currently have. Crude oil is traditionally priced in U.S. dollars around the world, and the value of the dollar has fallen dramatically over the last four years as the Federal Reserve under Ben Bernanke has taken to printing money as fast as possible to buoy President Obama’s reelection chances. This excess supply of money is producing inflationary pressure as too much money is chasing too few products. The only thing keeping this inflation somewhat in check has been the decreased demand resulting from the high unemployment in this economy. Americans out of work and fearful of the future are refraining from purchasing unnecessary items.

However, gasoline is an inelastic commodity meaning that it is difficult for consumers to rapidly respond to changes in its price. When the price of gas increases, consumers can’t just go out and buy more fuel efficient vehicles, so their ability to respond to price changes is limited. Inelastic consumer demand and dollar-denominated crude oil are the reasons driving higher prices at the pump. Once again, President Obama is being disingenuous when he points out that gasoline demand has fallen under his watch and implying that this falling demand has something to do with his promotion of alternative energy sources. Notice that Obama avoids discussion of gasoline prices which have soared under his watch from an average of $1.84 in 2009 to an average of $4.61 this year.

Boosting oil production will improve the American economy in multiple ways. First, through the creation of much needed additional jobs. Second, expansion of domestic supplies will allow industry to avoid high transportation costs associated with the import of foreign oil which will decrease production costs that can be passed on to consumers through lower prices. Third, lower prices at the pump will boost Americans’ disposable income and allow for the purchase of additional consumer products. Fourth, expansion of domestic energy supplies make us a lot less reliant on the Middle East and reduces our need to become entangled in their regional political troubles. However, the biggest obstacle to an improved American economy is the inflationary pressure generated by the increased money supply coming from the Federal Reserve. Unless this problem is corrected, the American economy faces a repeat of the 1970s Stagflation, but on a much more massive scale.

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