There are more misunderstandings about the oil market than perhaps any other. Everyone is blaming the current round of inflation on high oil prices. Wrong.
High oil prices can indeed force consumers to spend more on gasoline at the expense of other purchases. But they can’t trigger a rise in the general price level — inflation — unless someone pumps money into the economy so that, to use an oldie but goodie from the economists’ lexicon, there is more money chasing the same amount of goods.
If you want something to blame for inflation, don’t look at oil prices, look at the billions the Federal Reserve Board’s monetary policy gurus and their confederates at the U.S. Treasury are pouring into the economic system.
The cost of saving the financial system is the run-up in inflation, never mind any losses you take as taxpayers if some of the collateral the Fed is accepting from the banks proves not to be worth the paper the signatures are written on.
Another myth: We are running out of oil. According to WorldPublicOpinion.org, “majorities in 15 of the 16 nations surveyed around the world think that oil is running out. … Only 22 percent on average believe that ‘enough oil will be found so that it can remain a primary source of energy for the foreseeable future.’ ” Those majorities include 76 percent of the Americans polled. Luckily, they are wrong.
Production of oil is being constrained by several forces, none of them due to God’s failure to put enough of the black gold under our feet. Several countries that are important sources of supply are in political turmoil.
Think Nigeria, where security problems have shut down about 20 percent of the nation’s 2.5 million barrels of capacity, and Iraq, where political paralysis and terrorists have kept production at less than half of its potential and prevented new exploration.
Nigeria and Iraq are not the only places where politics stifles oil output. Foreigners who invest in Russia’s oil industry might be playing a game with Vladimir Putin known as heads I win, tails you lose.
Find nothing and you lose your money; find substantial reserves and the state squeezes you until your shareholders’ pips squeak. Little surprise that oil output dropped in the first quarter of this year.
Mexico’s President Felipe Calderon wants to revive Petroleos de Mexico (Pemex), the world’s third-largest oil producer, by contracting with foreign companies to introduce modern methods of extracting more from existing fields and finding new ones. But legislation is stalled by left-wingers who have seized and are sleeping at podiums in both houses of the Mexican Congress.
Saudi Arabia’s royal family has announced it will not expand capacity. The oil is there, but with current production yielding about $120 per barrel, there is no incentive to find more, especially since new production might drive down prices as demand for oil from the slowing American economy drops.
In Venezuela, President Hugo Chavez’s cronies are inadequate substitutes for the technicians they have replaced, so production is falling, while foreign investors are reluctant to trust hundreds of millions in exploration dollars to a regime that treats contracts as the first step in a negotiation.
In America, Congress alternates between calls for “energy independence” and refusals to allow drilling in what it considers environmentally sensitive areas in Alaska and offshore California and Florida.
There’s more, but you get the idea. There is a lot of oil out there to be found and produced. We might have reached the age of peak panic about oil supplies, but not of peak oil.
One thing we think we know about the oil business is correct. High oil prices and the greenhouse gasses produced by using oil have important geopolitical consequences.
These $100-plus prices have led to a massive flow of wealth, and hence power, from consuming to producing countries. If oil were still priced at $20 or even $40 per barrel, Russia would not have the wherewithal to revert to its bullying foreign policy, and America’s banks would not be going hats in hand to Arab capitals in search of new capital.
And if oil did not produce so-called greenhouse gasses when propelling cars and heating homes, there would be no massive subsidies for ethanol production, acreage would not be diverted from growing food to growing fuel, and the current run-up in food prices would be less steep.
So oil indeed matters. But not in the ways we most often think.
