Wednesday, June 6, 2012

The Scare Over Peak Oil, Obsessing Over "Insane" Oil Profits, and Four Other Gas Myths Worth Debunking

I recently watched the Stossel show in which he discussed myths pertaining to oil and gasoline. Being libertarian, my views more or less line up with those of Stossel. However, I wanted to see if the data lined up with what he presented on his show.

1) Energy independence is good policy. Why not advocate independence of corn or television sets? The response would be that oil is necessary for national security. As compelling as that might seem, we don't live in an isolationist world. Even if we got all our oil from ANWR (See Myth #6), it wouldn't help with keeping the oil prices down because the oil market is an integrated, global market. Crude oil in Saudi Arabia is going to have comparable costs to American crude oil. Energy independence does not protect us from supply disruptions abroad.

2) Oil companies make huge profits, and that's bad. Let's set aside my philosophical qualms about chiding profit-making for a moment. We see how such oil companies as Exxon Mobil, Chevron, and ConocoPhillips top the list of profit-making. However, some companies are larger than others, which means the size of the profit relative to the size of the company is more useful than simply looking at the profit. Let's analyze to return on revenues for a moment. Although looking at individual companies is somewhat interesting, the most recent data on return on revenues by industry is more telling. Out of the industries that make the most return on revenues, the oil industry ranks ninth. You don't hear Americans clamor against the securities industry or Internet services, both of which rank higher than Big Oil.

3) Our oil is coming from Middle East dictators. America's foreign policy is disproportionately focused on the Middle East. This brings about the conception that we are heavily dependent on Middle Eastern oil. Interesting how that's not the case. First of all, 55% of our oil comes from the United States. A third of imports comes from Mexico and Canada (see composition of import data here).

4) We're running out of oil, and it's a big problem. There is the debate as to whether we have reached peak oil, which dates back to the 1970s. I don't want to get into whether we have reached that peak or the extent to which advanced technology has tapped into previously unreachable sources of petroleum, particularly because that would require a separate blog entry. The point I would like to make is that it doesn't matter if we have reached peak oil or not. Why? The reasoning goes back to supply and demand. If there is a continual contraction of petroleum (i.e., supply decreases, supply curve shifts to the left), the prices will rise. Since petroleum is a normal good, the market, and more specifically, consumers, will react. There will be a greater push for alternative energy. Consumers will either buy less gas or buy more efficient vehicles, such as hybrids. Prices will gradually increase to the point where petroleum will become a niche market, by which time consumers will have found alternative modes of transportation that make good economic sense.

5) Oil speculators screw over the little guy. Especially because JP Morgan recently lost $2B in speculation, people have a problem with big companies "running amok." Speculation is actually a good thing because it keeps the markets from becoming volatile (see my blog entry from last year on the topic here).

6) Drilling in the Arctic National Wildlife Refuge (ANWR) will solve all of our problems. ANWR would create jobs and bring in revenue while using eight percent of the land, which would minimize the environmental impact. As nice as this all is, this creates two unrealistic expectations. The first is that of energy independence, which I already discussed in the first myth. The second is drilling in ANWR will bring down the price of gas. The government projects that ANWR would have a production peak of 780,000 barrels per day in its mean oil resource case. Looking at world impact, the current global supply of oil is at 87 million barrels per day. Since the oil market is a global one, the impact that ANWR oil would have on the price of oil would be negligible.

Concluding Thoughts: It's nice to bust myths about oil production because it provides a more productive forum to discuss energy policy. Whether it is a matter of running out of oil or figuring out whether we should tap into previously unreachable sources of oil, oil will not solve our problems forever. Having a diverse energy portfolio is a good idea. However, until we reach a point in which we legitimately have to worry about supply contractions, the economically wise thing to do is to make best of what we can procure while simultaneously investing in alternative energy.

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