The Economics of Oil Remain Unchanged

The Economics of Oil Remain Unchanged

by Mark Luedtke

In 2007 the New York Times reported, "In unusually urgent tones, the International Energy Agency warned that demand for oil imports by China and India will almost quadruple by 2030 and could create a supply “crunch” as soon as 2015 if oil producers do not step up production, energy efficiency fails to improve and demand from the two countries is not dampened." While demand for oil has dropped during the recession, the long term outlook remains unchanged - increases in demand for oil are outstripping increases in supply. Even if we discovered a cheaper, safer alternative today, oil would remain the world's most important energy source for at least the next 20 years because it would take that long to replace the oil infrastructure. But there is no cheaper, cleaner alternative to oil today or on the horizon. More than likely, oil will remain the world's most important energy source for the next 50 years. To satisfy the increasing demand, we need to produce more oil.

But the irrational response to the tragedy in the Gulf threatens to drag us backward. Despite 21 years without a major oil spill since the Exxon Valdez, environmental hysterics have worked the political sharks into a frenzy, and smelling blood in the water, they have vowed to use the government's gun to block any new offshore oil drilling even though they have no power to do so. If anybody's copy of the Constitution grants the federal government the power to ban offshore drilling, I'd like to see it.

The aristocrats in Washington never let a piece of paper limit their power-lust. They see the Deepwater Horizon tragedy as an opportunity to loot the American people and buy votes. Because everything is for sale at the right price, their ban on new drilling is really just an increase in the price to allow new drilling. Any company that wants to drill for oil offshore in order to satisfy the demands of the people will have to pay more than ever to the aristocrats. Those companies will pass that cost on to consumers in the form of higher prices. Every time we buy gas in the future, we'll be lining the pockets of Washington politicians even more than we already are.

It's interesting to examine how different groups have reacted to the spill. British Petroleum (BP), which leased the oil platform, has managed to stop one of the three leaks using its underwater robots. It employed chemical dispersants to break up the oil as it leaks into the sea and as it reaches the surface. It's lowering a containment structure over the leaks to capture the oil so it can be pumped into a tanker. In a parallel effort, BP is drilling a relief well to divert oil away from the leak. BP is tapping every available resource in a herculean effort to limit the damage, at least partly because it shares liability.

In stark contrast, Democrat politicians seem thrilled. Offering rare, honest insight into the nature of government, President Obama's Interior Secretary Ken Salazar said, "Our job basically is to keep the boot on the neck of British Petroleum to carry out the responsibilities they have both under the law and contractually to move forward and stop this spill." As if market forces weren't incentive enough. Obviously impressed with the line, Obama spokesman Robert Gibbs parroted it a few days later. It must be harder to clean things up with a boot on the neck than not, but the Obama administration cares more about the boot than the clean-up.

But scariest of all is how thrilled environmentalists are. They're reveling in the destruction of livelihoods and wildlife because it advances their Marxist agenda and cripples human development. They seem oblivious to the fact that 11 people are missing and presumed dead. If environmentalists really cared about the environment, they would want the most technologically advanced and clean nation in the world, the US, to supply as much of the world's oil as possible. Instead, they want to block the US from supplying oil, meaning that less advanced nations will supply it and ship it to us, doing significantly more harm to the environment than if we produced it here.

Which brings up the question of why Deepwater Horizon exploded in the first place. Obama had just reached a compromise with Senate Republicans to expand offshore drilling, upsetting the Bill Ayers, violent left wing of the Democrat party, then Deepwater Horizon exploded. A few days later a second oil rig collapsed in the same area. Those are pretty amazing coincidences. Because radical environmentalists had the most to gain, many speculated that terrorists blew up Deepwater Horizon, but the latest reports blame an unexpected high-pressure gas flow that overwhelmed the safety systems.

Like the financial disaster and the West Virginia mine collapse, this oil rig explosion fueled calls for greater government regulations even though a hundred years of regulations failed to prevent those disasters. Regulations are the problem, not the solution. Regulations add to the cost of doing business and therefore force small competitors out of the marketplace. The biggest companies grow bigger and capture the regulatory process through campaign contributions and seduction of regulators. In this case, because Obama was the single biggest recipient of campaign donations from BP over the last 20 years, the Obama administration had waived a requirement for an environmental risk study by BP. By protecting businesses from competition and market discipline, regulations enable companies to take greater risks than they would in a free market, and these disasters are the result.

Despite 3858 oil rigs in the Gulf of Mexico, this is the first major oil leak there. We should get government out of the way so private companies can clean it up as efficiently as possible, pay their liability and supply the oil people demand as cheaply and cleanly as possible.