How to Reduce Oil Prices
Approve the Keystone pipeline, and mandate flex-fuel vehicles.

Map of the proposed Keystone Pipeline (TransCanada)


Robert Zubrin

The United States is by far the world’s leading oil importer. Thus, when the price of oil goes up, our economy is severely taxed. At the beginning of 2011, many economists were talking about an emerging U.S. economic recovery. Yet by spring, as oil prices climbed above $100 per barrel, it became apparent to all who were paying attention that no escape from recession was in sight.

The economic impact of oil prices on the American economy is shown on the graph below, which compares oil prices (adjusted for inflation to 2010 dollars) to the unemployment rate from 1970 to the present. Every oil-price hike for the past four decades, including those in 1973, 1979, 1991, 2001, and 2008, was followed shortly afterwards by a sharp rise in American unemployment.

The distress to American workers caused by such events is manifest, but the economic damage goes far beyond the impact on the unemployed themselves. A sustained oil price of $100 per barrel will add $500 billion to the U.S. balance-of-trade deficit. This represents a subtraction from our gross domestic product equal to that required to support 5 million jobs at $100,000 per year each. And when Americans are out of work, many cannot pay their mortgages — a factor that undoubtedly contributed to the recent crash of home prices and the resulting recession.

Looking at the data in the graph, it is clear that cap-and-trade plans, or alternative methods of carbon or fuel taxation, are not the answer. Indeed, by increasing the cost of energy, they will only make the economic situation worse. Rather, what we need is a policy that will force world oil prices down. The way to do this is to flood the world market with liquid fuel from every source available to us.

It is in this light that the extreme malfeasance of the Obama administration in delaying the approval of the Keystone pipeline becomes apparent. While much has been made of the loss of 20,000 jobs building the pipeline, that is the smallest part of the matter. The real issue is that by refusing to approve the pipeline, the Obama administration is acting to block the introduction of 270 million barrels per year of Canadian oil into the world market. In doing so, the administration is acting in accord with the interests of the OPEC oil cartel, which wishes to see supplies limited so that it can maintain high oil prices at the expense of the West. At current prices of $100 per barrel, this will cause a loss to the North American economy of $27 billion per year — an amount sufficient to create 270,000 North American jobs. (Canada draws 65 percent of its imports, which amount to 31 percent of its GDP, from the United States. The two nations effectively share one economy.)