Oil at $120: Here's Why

It would be more amusing had I not been personally involved. Three years ago I was a lone voice outrageously predicting $100 oil, debated on many occasions on national TV by those predicting $50 or even less. The tapes are still available.

Now, $100 seems conservative, others have jumped on that number by the carload and the OPEC president said last week that oil may climb to $200. This, by the way, is the same organization that four years ago was insisting that the “official” price was between $24 and $28, while we were paying $50. Clearly they hoodwinked us.

Oil is at $120 with no price reduction in sight because of two simple but unsavory facts: We in the United States and Europe have earned the right and the luxury to be ridiculous and oil producing countries, knowing this, have become militants, in what arguably can be called energy imperialism.

First a disclaimer, in itself silly that I have to make. This article is not paid by Big Oil. Second, I have a simple belief: energy and its abundance is perhaps the most important commodity in modern life, bar none, and any energy shortages will plunge the world in an economic tailspin we have never experienced before. If one does not believe this, no need to read further.

Of the world energy demand 87 percent comes from fossil fuels, oil, gas and coal. This fraction has not changed much since the 1970’s and the first “energy crisis” while energy demand has more than doubled. By almost everybody’s estimates by the year 2030, the total world demand will increase by 50 percent and oil, gas and coal will still provide 87 percent of the world’s energy.

The reason we use them is not because of some evil conspiracy headed by a dark knight by the name of Dick Cheney. We use them because they are the easiest, most flexible, most reliable and most efficient forms of energy. Biofuels as done today, cause a negative energy balance not even considering their impact on food prices. I have no aversion to wind or solar. I love the sun, I am Greek. But they are eminently unreliable and, even in their best case, without government subsidies, they make $200 to $2000 oil still attractive. It is that simple.

But here is how we are ridiculous and it would have been funny had we not run the danger of committing societal hara-kiri. We have let dazed environmentalism of the most outrageous variety to put on a tie and become mainstream, dominate the covers of national newsmagazines and, predictably as of late, earn Oscars, Emmys and Nobels.

There are no alternatives to fossil fuels for decades to come and the transition will be long and painful. We will continue to be a fossil-fuel dependent economy for the foreseeable future. To boot, the US imports now almost 70 percent of 21 million barrels per day of oil demand. Hugo Chavez, Vladimir Putin and Mahmoud Ahmedinejad have noticed.

So what do we do now? We are not allowed to drill in proven offshore or arctic resources and where we can drill “it takes more than an act of Congress”. At any given time, our oil and gas reserves are perhaps 40 percent less than they could have been in practically any other country because of environmental compliance. Ask almost any American which country provides more oil to the United States and the answer would be Saudi Arabia, Canada or Mexico. The correct answer is of course the United States, by far. In a margin business where one half of one percent of over or under supply can cause havoc on the oil price, drilling in the ANWR would make a heck of difference both really and symbolically.

It takes 800 permits to build a new refinery. Is it surprising that none has been built in over 30 years?

Big Oil is of course blamed by many, headed by national politicians. The truth is that US oil companies have very little impact on current oil prices and their influence is waning by energy militant countries that own the reserves. Instead of being protected they are maligned by politicians and a gullible public. Simple question: suppose that the energy industry is all nationalized and the ExxonMobil’s of the world are taken over by the government. Does anybody believe that gasoline prices would be lower? It may surprise almost all to realize that, having to buy oil from militant nations with little control over them, US Big Oil and the consumers are in much closer predicament than taxing and regulating government or elitist, touchy feely politicians and environmentalists.

And of course the biggest boogieman is climate change hysteria. Both Hillary Clinton and Barrack Obama have bought the man-made origin and have adopted the slogan of 80 percent reduction in carbon dioxide emissions (the main greenhouse gas produced from burning fossil fuels) by 2050. John McCain is not far behind. If they succeed they will bring a growing United States to the level of the lowest 5 percentile of the world’s poorest countries. Maybe that is the egalitarianism they seek: to make all of the world that poor.