Light, Sweet, Canadian Crude
It's always fun to get to the office in the morning and find yet another person who doesn't seem to understand how oil markets work. Today, we get James S. Robbins in National Review Online:
The first step to adopting a comprehensive energy strategy is understanding that energy is both a critical requirement for the U.S. economy, and also an element of national power. The United States is a major energy consumer, and has unrealized potential as a directed market force. The United States should exploit its power by exercising consumer preference, and imposing free market discipline on the oil bazaar. The OPEC cartel would be the ultimate target of this strategic focus; though OPEC's influence has declined in recent years, it is still powerful enough to adjust oil prices to the benefit of its members, and the detriment of the energy consuming countries. Diminishing or ending OPEC's influence over the oil market would be one strategic goal. This could be accomplished through a variety of mechanisms, from tax incentives for non-OPEC purchases, to diplomatic action to separate wavering cartel members, to outright restrictions on importation of OPEC oil.
The United States should also integrate energy into its geostrategic understanding of the world, and begin to shift purchases away from unstable regions such as the Middle East, and towards sources in Europe, Africa, and the Western Hemisphere. Dollars flowing to Canada or Norway, for example, are unlikely to be converted into national security threats. This is related to the abovementioned point about breaking the power of the cartel, since shifting purchases away from the Middle East often (though of course not always) means shifting away from OPEC.
Two points. One is that OPEC has essentially become irrelevant to this conversation. Back in the day, the OPEC cartel manipulated world oil prices by deliberately keeping production levels low to keep supply low and prices high. Nowadays, though, demand has risen enough that OPEC is essentially out of excess capacity and there's a real question as to whether OPEC nations can raise capacity fast enough to meet rising demand.
More to the point, oil is a global commodity sold on an open market. Who the United States gets its oil from has nothing to do with anything. Indeed, already we don't actually important a huge proportion of our oil from the Middle East for the simple reason that the Middle East is closer to Europe and East Asia than it is to the USA so it doesn't make a huge amount of sense to ship Middle Eastern crude all the way over here when Canada, Mexico, Venezuela, etc. are all in our hemisphere. That notwithstanding, if we shifted our purchases away from the Middle East even further, we would only crowd out buyers of non-ME oil and lead them to increase their purchases of Middle Eastern oil.
The only relevant features of the situation are global demand and global supply. Even a country that doesn't import any Middle Eastern oil -- indeed, even a country that doesn't import any oil at all -- would still see prices skyrocket in the wake of a major supply disruption in Saudi Arabia. There isn't really anything we can do about this. We can, over time, make oil less central to our economy so that price spikes would be less damaging.
Comments (14)
no, matthew, you don't understand: boldness is what counts, i tell you, boldness.
actual rational understanding or rationcination? they have no relevance during the bush-cheney era, especially given what passes for a thought process among so many of the right-wingers.
July 12, 2005 7:33 AM | Reply | Permalink
Mr. Robbins should look up the word "fungible" in the dictionary and then start over again.
I do have one quibble with your thoughts. You say "demand has risen enough that OPEC is essentially out of excess capacity and there's a real question as to whether OPEC nations can raise capacity fast enough to meet rising demand." This is only true if, for political reasons, they maintain a fixed price at which supply is less than demand. They can always raise their selling price to equilibrate supply and demand.
July 12, 2005 7:36 AM | Reply | Permalink
Is it still the law that Alaskan Oil can only be used in the United States? One of the more intelligent policies would be to sell Alaskan Oil to Japan and other Asian countries thus avoiding the expense of taking it around the Horn. That would free up oil that Japan gets from else where and the United States could use it and the at least the cost of shipping oil would go down.
Like gold oil has taken on mystical qualities that leads people to mistake its fungible commodity for some great national treasure.
July 12, 2005 7:38 AM | Reply | Permalink
For the love of all things cute and overexposed, please share your thoughts on the new panda cub soon!
July 12, 2005 7:38 AM | Reply | Permalink
1.) Reduce consumption.
2.) Develop alternative energy sources. Bio, ethanol, etc...
I feel #2 is the key. If we can increase our independence by developing new sources we can then effectively supplement it with domestic, Canadian, Norwegian/Russian and Central American oil as an alternative to middle-eastern oil. And all the while continue increasing our dependence on domestic alternative sources. Right now our whole economy is at the mercy and whims of the people setting the crude prices...that is a dangerous position to be in whether we are getting the oil from Saudi Arabia or Canada.
July 12, 2005 8:52 AM | Reply | Permalink
Just one quick expample. You mention ethanol, which is renewable, but it is endo-energetic. That means that it take more energy to grow the corn, truck it to the factory, and process it into fuel than the fuel produces. Using this method producess a net loss of engergy, not a gain.
By investing in this technolgy, we will only hasten the day that we run out of oil based fuels. I have not seen any research on bio-diesel, but I suspect that it is similar in nature.
This should not stop us from trying, by any means, but as of today we do not have a viable alternative to reduced consumption if we want to effect the cost of oil.
July 12, 2005 9:47 AM | Reply | Permalink
I agree...but it is still far easier to develop alternatives then it is to manipulate the crude markets through purchasing adjustments. As long as we consume the way we do we have no choice but to buy middle-eastern oil.
July 12, 2005 9:59 AM | Reply | Permalink
You mention ethanol, which is renewable, but it is endo-energetic.
I've heard this, but I still have trouble believing it only because I can't understand how anyone could be that stupid.
On the other hand, anyone who knows how corn grows (and I hope this is not limited to red staters) would have to wonder about the efficiency. You get something like a 7 foot high stalk for two ears at most. You need a lot of water and fertilizer. I suspect you'd get more energy output burning the stalks in a trash-to-steam plant than you'd get from distilling the ethanol.
If we were serious about bio-fuels, I think we'd be looking for a weed that grows in poor soils and we'd modify it genetically to produce oils as close to bio-diesel as possible. I still think that using plants (the biological kind) to convert solar energy to chemical fuel isn't such a wacky idea. But it seems like the focus on ethanol has more to do with corn subsidies than energy policy.
July 12, 2005 10:06 AM | Reply | Permalink
Matt, it amazes me how many "analysts" one sees blathering on about the oil situation without understanding the simple point you've expressed about fungibility. I worked for years at a refinery on the Gulf Coast, and while crudes from different parts of the world differ significantly in quality, the market basically adjusts for that in price, so unless you've got a refinery that really needs to run, say, sweet crude ("sweet" means low-sulfur), crudes are all pretty much fungible. We used to run what seemed like a different crude, from a different country, every week -- it all depended on what was out there on the seas.
The only thing that helps, as Libertine notes, is to reduce our overall dependence on energy imports -- i.e., imported fossil fuels. (Yes, I understand that as long as our domestic supply is available for export, its price will rise along with the rest of the world's supply, but obviously in a true national security situation that outward flow could be shut off.)
July 12, 2005 10:07 AM | Reply | Permalink
PaulC, I'm pretty sure Phoenix is correct, or was at one time at least. Improvements in efficiency may have brought the energy balance on ethanol up to positive by now, but still probably not very much. I'd be curious if anyone knows of recent reliable date on this.
Ethanol has never been about reducing energy imports. I mean, it's often sold that way to a gullible public, but it's all about consuming excess farm product. That, and to some extent ethanol, as an oxygenate, can reduce vehicle exhaust emissions. But it's mostly been a sop to farmers.
July 12, 2005 10:11 AM | Reply | Permalink
Ethanol is about farm region politics, it isn;t any sort of answer.
Bio-Diseal has promise and is a place to really investigate. Sure the majority of cars in America aren't Diseal, but they dont; need to be to make a serious dent. We need to foucs on miles driven not number of cars. For example converting commercial trucking, trains etc to Bio-Diseal could have a significant impact ont he amount of Oil we consume.
Federal reseacrh funds should be targeted at finding what crops are best to use.
July 12, 2005 11:27 AM | Reply | Permalink
Matt, speaking of rating posts: that one deserves a "5"! I keep wondering when people will wake up to the fact that oil is a commodity, traded all over the world, and it makes little difference where you buy the oil that is refined in your country. The only ones really affected are the oil companies who own certain rights to oil in specific countries or oil fields. This is why I always thought our little war in Kuwait was unjustified. Saddam was going to sell Kuwaits oil on the world market, just as the Kuwait ruling family does, so his "owning" of that oil had no effect on any Americans other than the oil companies who operate the oil fields for Kuwait. So, basically, we went to war in Kuwait to benefit those oil companies.
July 12, 2005 2:23 PM | Reply | Permalink
There is technology available, but not optimized, for making ethanol from any biomass - all of the corn plant, for example, as well as wheat straw, grass, wood chips, etc. Ethanol produced in that way reduces the energy needed to grow and harvest corn to make ethanol. I'm not sure if the process still uses more energy than it produces, but I do know it is more efficient than corn based ethanol today.
July 12, 2005 2:29 PM | Reply | Permalink
Not every grade of oil can be send to every refinery. For example, most of Venezuelan crude can most profitablyy refined in relatively few places. Thus it was a bit disconcerting that Chinese showed interest in building that kind of refineries, specifically to be able to import from Venezuela.
That said, the phrase <strong>unrealized potential as a direct market force</strong> is blather of the highest grade, so pure it is.
<IT>The Economist</IT> claims that there is quite a bit of growth potential in oil production, mostly in OPEC however, where, sadly, the production is in the hand of inefficient national monopolies that do not invest enough in the development of new etc etc.
The key question are: (1) is it in OPEC interest to invest as much as <it>The Economist</it> approval wold require, and (2) can OPEC country exhibit enough solidarity to refrain from investing enough. It was rather recent that oil prices were 4-5 times lower than today. The dangers of over-investment are clear. On the other hand, under-investment gives immidiately a benefit of lower expenditures.
Diplomatic actions to separate wavering cartel members? That does not sound like <strong>market force</strong> but more like force in the markets. I suspect that this dog aint gonna hunt, however.
July 12, 2005 5:08 PM | Reply | Permalink