Drill, Baby, Drill (Again)
The answer to our economic problems lies beneath our feet.


Jim Lacey

If a foreign power tried to dictate our energy policies to us, we would declare war. But no foreign power is to blame for our energy troubles. Rather, we’ve pointed a gun at our own head. In a case without historic parallel, the United States has opted for national suicide when the answer to many of our energy problems lies literally under our feet.

As I write this, oil prices are hovering around $100 a barrel and seem set to rise further, despite a reduction in global demand caused by the earthquake in Japan. But make no mistake about it, oil prices were going up under any circumstances. Collapsing Arab governments had brought us to the $100 threshold a few months earlier. Regardless of what happens in the Middle East, the price of oil is set to go much higher, not because we are running out of the stuff, but because we are not looking hard enough for new sources or exploiting the sources we have. By 2015, or quite possibly earlier, the world will hit a crunch where new supplies will not be coming online fast enough to meet soaring demand.

The last time demand got ahead of capacity was in 2008, when the price of a barrel of crude hit $147 and helped spark the global economic collapse that is still haunting our economy. When, as a result, the price of gasoline pushed through $4 a gallon, a single battle cry threatened to sweep all resistance before it: “Drill, Baby, Drill.”

The resistance revolved around two points. The first was that the U.S. had only 2 percent of the world’s oil reserves, so no matter how much we drilled, there was not enough oil in the country to make a difference. Second, even if we started drilling immediately, it would be years before the oil started arriving on the market. The first was and remains a lie. The second may be the dumbest argument for sitting on our hands ever created. Did anyone think that there would never again be a shortage of oil? Here we are a few years later and its déjà vu all over again.

Unless we start drilling immediately, in a few years we will look back at $100-a-barrel oil as a fond memory. Surging demand in emerging nations, a ravenous China, and the needs of hopefully growing U.S. and European economies will soon outstrip supplies. Once that happens for a prolonged period, the price of oil will not stop south of $200. Present estimates place spare oil-production capacity at approximately 4 million barrels a day (MBD), most of which is in Saudi Arabia. As demand grew at an annualized rate of 3.3 MBD last quarter, it is clear that we are almost at the end of our tether.

Even as gasoline once again pushes towards $4, the United States remains at the mercy of foreign suppliers to meet its needs. Each year we use almost 7 billion barrels of oil, of which more than half are imported. About a quarter of our imports come from the Persian Gulf. Every year we drain our economy of $350 billion to pay other nations for their oil, many of whom would welcome the demise of American power. Despite the promises of eight consecutive presidents to reduce our demand for foreign oil, we are worse off than ever.

The old rule of thumb was that for every $10 increase in the price of oil, the nation’s GDP was reduced by .02 percent. But that approximation was based on a healthy economy at or near full employment. In an economy that is still struggling to recover, an oil-price shock is likely to have more dire consequences. As unbalanced capital flows return and oil-based inflation takes hold, there is a real chance that the U.S. could slip back into recession. The resulting demand destruction will lower the price of oil for a time, but at a terrible cost. Moreover, the same roller-coaster ride will happen again and again, whenever we begin to recover economically. The only long-term solution is to find and consume our own energy reserves.