No One Holds Us Over a Barrel
June 1, 2008
William F. Shughart II
Times-Tribune
With oil prices reaching a record $135 a barrel, everyone is racing to find the most convincing culprit to blame. Particularly vehement are those who believe American “imperialism” is the root of the problem. However, they ignore an important fact: the crude oil market is global and few consuming countries—including the United States—are dependent on only a handful of suppliers. No one really holds us over a barrel.
In fact, Canada and Mexico are our two biggest sources of crude oil, according to the U.S. Department of Energy. Venezuela, led by socialist strongman Hugo Chavez, is No. 4. The Middle East accounts for only 11 percent of U.S. oil imports. Indeed, the United States imports oil from 47 different countries, providing a diverse mix of oil sources and supply contracts.
The energy supply story is even starker when focused on natural gas, the second most popular fossil fuel consumed nationally. About 15 percent of the natural gas we use is supplied by pipeline from Canada. Just 3 percent comes from overseas. Currently, natural gas is shipped from Trinidad, Algeria, Qatar, Egypt, and Nigeria. As natural gas imports grow to meet rising domestic demand, Indonesia, Russia, and Peru will likely be added to the list of U.S. suppliers.
Supply diversification makes it more difficult for any political leader like Venezuela’s Chavez or Iran’s Ahmadinejad to cause long-term harm to the U.S. economy.
Chavez, for example, has threatened to cut off oil shipments to the United States to “punish” America and some of its large oil companies for lawsuits filed last year. The lawsuits sought compensation for American-owned assets seized by Chavez in his drive to nationalize Venezuela’s oil industry. But if Venezuela stopped selling oil to the United States, Chavez would harm his own economy more than the U.S. economy.
If and when Venezuelan oil enters the world market and finds new customers, the oil these customers would have purchased elsewhere would become available for purchase by the U.S. The cost for purchasing oil from countries other than Venezuela would be negligible. However, half of Venezuela’s “heavy” crude oil is routinely refined in the United States because refineries in few other countries are equipped to handle it. So finding other customers for the oil they refuse to sell to the United States wouldn’t be easy.
Broader market forces explain why the market price of crude oil has reached an all-time high when a barrel sold for just $10.72 only a decade ago. Prices have marched steadily upward as a result of a perfect storm of economic and political events.
First is the well-known fact that energy demand is surging in the developing world. This is especially true in China, where power supplies are under strain and factories have been consuming substantially more diesel fuel to run backup electricity generators. In 2004, world oil demand surged unexpectedly by 2.8 million barrels per day; China is estimated to have accounted for a third of that year’s spike.
Second, Hugo Chavez’s presidential win in early 1999 brought more discipline to the OPEC cartel. Some members had been periodically exceeding their production quotas. In addition to reducing and stabilizing OPEC production rates, Venezuela, like many oil-producing countries, began to heavily subsidize the prices at which gasoline and other petroleum products are sold at home. These artificially low prices have encouraged domestic consumption in oil-rich nations and helped push up global demand.
A third and perhaps more serious and long-term problem for oil markets is that most of the world’s proven oil reserves are controlled by 12 large state-owned companies, among which are Saudi Aramco and PetroChina. National ownership of oil reserves and oil production not only facilitates petro-politics, but also puts these resources into the hands of inefficient bureaucratic enterprises that are unable to respond nimbly to market price and profit signals.
For profit-driven oil companies, the decade-long rise in prices is an incentive to expand production. Unconventional oil and gas fields that were once passed over as too costly are now more appealing. However, huge investments are required. Since 1992, the U.S. oil industry has spent more than $1 trillion on oil and natural gas development, according to the American Petroleum Institute. Additional supplies will help moderate prices, but moving from the discovery of a new oil field to active production can take many years.
Expanded global production by the myriad oil-producing countries can meet the world’s energy needs. Doing anything other than letting the free market work, including going to war in the name of energy security, is the height of folly and imposes huge costs on everyone involved.
William F. Shughart II is a Senior Fellow at The Independent Institute, Frederick A. P. Barnard Distinguished Professor of Economics at the University of Mississippi, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.