STRATEGIC THINKING TAKES A HOLIDAY

The United States doesn’t have an energy policy to speak of, but the government isn’t idle on the matter of oil and gas. Washington’s latest effort on the energy front includes scolding oil companies for the bull market in crude and killing the idea of drilling in Alaska and thereby tapping America’s largest supply of untapped domestic crude. Welcome to “progress” on the energy front in 21st century America.


It’s any one’s guess if the Senators who grilled the oil company execs yesterday understand the long lead times required for developing oil supplies. Today’s oil production is the result of planning in years, in some cases decades previous. At some points in that planning, oil prices were low and the idea of investing large sums of money to increase production required strategic thinking. It’s also unclear if the Senate as an institution can grasp the fact that the five big oil companies represented in yesterday’s hearing–ExxonMobil, Royal Dutch/Shell, BP, Chevron and ConocoPhillips–are collectively on the front line in an uphill battle of keeping non-Opec oil production from falling, as it almost surely is destined to do in the coming decades. And it’s unclear if Senators appreciate the reality that spare production capacity is extremely low in the world, and that the only excess of any magnitude resides with Saudi Arabia, whose crude supplies are managed exclusively by Saudi Aramco, the world’s biggest oil company and one that was most definitely not in attendance at yesterday’s energy inquisition.
Although we don’t know what the Senators know, we can read what they said. Alas, all too many of the questions posed yesterday in the Republican-contolled body inspire less than confidence that the American government is prepared for the strategic energy challenges that lie ahead. Indeed, big-picture strategic issues were hardly the priority at yesterday’s hearings. Consider the question from Senator Barbara Boxer (D-Calif.) that was personally directed at the oil execs: “Will you consider making major personal contributions or corporate contributions to help Americans get relief from high prices?” she asked, via the San Francisco Chronicle.
Republicans are the majority party, of course, and so any praise or blame ultimately goes to the GOP. So far, there’s more blame than praise to go around.
Perhaps the most chilling evidence that what passes for energy policy in America is out of step with reality came in an exchange between Senator Ron Wyden (D-Ore.) and the execs regarding the $2.6 billion of tax credits in energy legislation that was signed into law a few months back. As a bit of background, Wyden has made it clear that he wants to repeal the credit, and as it turned out he found some unlikely support for doing so when the execs said that the tax credit has limited, if any relevance for their companies. “The tax breaks will have a minimal impact on our company,” Chevron’s David O’Reilly said, according to McClatchy News Service via Winston-Salem Journal.
The good news is that yesterday’s chatter didn’t frighten the oil market. Oil prices closed under $59 a barrel yesterday for the first time since July. But politicians will do America no favors in the long term by demonizing oil companies as the cause of America’s energy woes, an ill-advised idea that’s akin to attacking the messenger for bad news. Yes, price gouging, corruption and all the other evils that inhabit the human condition no doubt have infected the oil industry to a degree, much like any other business. Capitalism is many things, but perfection isn’t one of them. Still, it’s the only system that has any chance of reasonably allocating finite resources in an efficient manner, and Big Oil is the least worst alternative for bringing crude oil from remote locations to American consumers. In any case, an investigation of price gouging, whether it’s tied to gasoline or bananas, is separate and distinct from solving long-term challenges.
Speaking of long-term challenges, the current problem with tight global supplies didn’t happen overnight, or spring from the fact that oil company executives make millions of dollars. Lots of corporate chiefs pull down huge salaries. Some don’t deserve it. But if the heads of Big Oil magically started earning no more than $50,000 a year from here on out, the same challenges that confront America on energy would remain. And if the oil industry started donating massive sums of money to help Americans pay for energy consumption the effect on global crude supply would be exactly zero.
There is a potential crisis brewing for the U.S. on the energy front, as the recent price spike in oil, gasoline and natural gas makes clear. Indeed, today’s report on the surge in the U.S. trade deficit, to a new record provides yet another piece of evidence that the energy challenge is a broad economic challenge. One reason for the jump in red ink, the Commerce Department reported, was increased gasoline imports to compensate for the loss of production due to Hurricane Katrina.
Big Oil, like it or not, is America’s best resource at the moment for increasing energy supply–other than relying on the kindness of Opec–in the quest to mitigate the pain that awaits in the decades ahead. Even under the best of circumstances, satisfying the America’s growing energy consumption threatens to be the oil industry’s biggest challenge yet. There are almost certainly no new super-giant oil fields waiting to be discovered. Meanwhile, the relative share of global supplies under Opec’s control is growing. And unlike the scenario of a generation ago, America and the developed world won’t have the equivalent of a new Alaska or the North Sea to pull out of a hat to counteract Opec’s rising power and influence.
Big Oil, in short, needs America’s help to keep what could be an energy squeeze in the years ahead from becoming an energy crisis. Judging by yesterday’s political theater, the jury’s still out on whether the U.S. government is up to the challenge.

4 Responses to STRATEGIC THINKING TAKES A HOLIDAY

  1. Alex Ambroz says:

    While I believe that Congress’ decision to perhaps enact a windfall tax on oil company profits is misguided, foolish and against the American concept of free-market capitalism, I don’t think that drilling in ANWR is going to solve the energy crisis or lower our dependence on OPEC. In fact, it may increase it.
    At the moment many of our domestic auto companies are seeing strong declines in SUV sales – a direct reflection on this past several months enormous gas price increases. At the same time, increased sales and demand for hybrid vehicles signal the start of a conscious push towards more fuel-efficient autos. The miniscule amount that ANWR would add to our capacity might lower our reliance on foreign oil (might!) but the increase in supply and corresponding lowering of prices will surely do another: maintain American dependence on non-renewable fossil fuels as an energy source, whether domestic or foreign. Seeing as how almost the entire geopolitical power of the Middle East depends upon that very substance, I would posit that a much better strategy would be for Americans in general to rely less on fuel inefficient autos (SUVs et al) than to try to increase our own domestic supply by what many studies say would be only a notional amount.
    -Alex

  2. mh497 says:

    Ever wonder if perhaps the whole ANWR and coastal stand off is in fact a strategic move? Why develop our last resources as long as we can convince other people to sell us theirs first, at prices that are still fairly reasonable to boot.

  3. old ari says:

    Don’t forget, Canada is the largest supplier of energy to the US, so why are you doing your best to piss them off?

  4. quintsquarry says:

    I think we should leave the ANWR oil in the ground for now. Let’s use up Saudi Arabia’s first.

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