Recent headlines provoked by two positive but modest developments — a slight early-summer decline in gasoline prices and a laudable increase in domestic oil production — have trumpeted that these developments mean we are on the verge of achieving “energy independence.”
Oil monopolizes about 95 percent of the world’s transportation, and OPEC — eight nations in the Middle East and four others — controls nearly 80 percent of the world’s conventional oil reserves. We cannot change anything fundamental if we continue to permit oil and OPEC, a monopoly with a cartel nested inside it, to maintain their dominance of the transportation-fuel market and if we relegate ourselves merely to working within the framework of that dominance to increase our share of the oil market. It’s true that by doing so we can improve our balance of payments and add some domestic oil-related jobs. Good. But this won’t fill the basic need: to break oil’s monopoly and OPEC’s cartel.
Why is that essential? Because oil is not just a commodity. It is a crucial strategic commodity, as salt was for many centuries when it was the only means of preserving food (to borrow Anne Korin’s excellent analogy). So long as transportation is almost exclusively dependent on oil, we are in thrall to OPEC and its decisions on how much to pump and what to charge us. OPEC has made the basic decision to maintain oil prices at a level where we borrow about a billion dollars a day — equivalent to a tax of some $4,000 a year on every American family. OPEC has this power to, essentially, tax us (without any more representation than George III provided our ancestors), because the Saudis and some others in OPEC can lift oil for less than five dollars a barrel, whereas for the U.S. and most other non-OPEC nations the cost is tens of dollars a barrel.
Saudi Arabia, the swing producer — the nation with large oil reserves that it can tap or not, as it wishes — has indicated that, to meet its domestic-welfare commitments, it needs oil’s price to be more than $90 per barrel. What it means is that, if the price of oil were lower, the Saudi government would need to go to the trouble of putting together an economy in which it couldn’t afford to keep a staggering half of its men unemployed and on the dole.
This low cost of lifting oil, especially in Saudi Arabia, and OPEC’s control of over three-quarters of the world’s reserves of conventional oil is why improved fuel economy for our vehicles, although a good idea, is not the solution to our central problem. Seeing us economize, OPEC can just cut production to keep prices up. We could never reclaim anything like the oil-market dominance we held in the Fifties and Sixties. OPEC would manipulate the market to plunge the U.S. deeper and deeper into debt and force us to spend the maximum it can wring out of us.
OPEC chooses to sell only about 31 million barrels of oil a day, almost exactly what it sold 40 years ago when both oil demand and the size of the world’s economy were about half what they are today. Like John D. Rockefeller at the beginning of the 20th century, OPEC withholds oil from the market to keep the price up. It holds nearly 80 percent of the reserves of conventional oil, but only about a third of what is sold daily on the world market is sold by OPEC. We cannot escape the consequences of OPEC’s price-fixing by buying more oil from, say, non-OPEC Canada and less from Saudi Arabia. There is essentially one worldwide oil market. Other countries will just buy more from Saudi Arabia and less from Canada.
But suppose we become what many, inaccurately, call “energy independent” — that is, we produce about as much oil as we use. Wouldn’t that solve our problem?
The U.K. was, by this distorted definition, essentially energy independent in 2008, and yet there oil hit the same peak, over $145 a barrel, that it hit everywhere else. The high price of diesel fuel in the U.K. led truckers there to strike.
A good idea would be the creation of a North American Energy Alliance. In the event of major hostilities that halted international shipping, the U.S., Canada, and Mexico could still share resources among themselves. Our two major neighbors are allies and good friends, and we should work with them when we can — for example, by permitting construction of the Keystone pipeline in an environmentally sound fashion — from Canada to the Gulf of Mexico.