In his State of the Union speech President Bush set forth a long-term goal to reduce the by 75 percent the amount of oil imports arriving from the Middle East. On its face, the notion that we could free ourselves from the uncertainties of Middle East oil policy by reducing purchases from that region is a false one. Worse, if carried to its logical conclusion, the goal could be economically damaging.
To begin, of the top five countries that supply our oil today, only one (Saudi Arabia) is a Middle Eastern country. Canada is our leading oil supplier, while Venezuela, Mexico, and Nigeria rank three, four, and five. Importantly, whom we buy from in no way impacts the cost of oil that reaches our shores.
If we reduce by 75 percent the 1.57 million barrels that we buy from Saudi Arabia on a yearly basis, we’ll still pay the same amount, only we’ll expand the amount of fuel we buy from other oil exporters while Saudi Arabia will simply redirect what we used to purchase to other buyers.
The oil price is a world price. Changing trading partners will in no way reduce our energy costs.
Assuming we stopped oil purchases from Middle Eastern countries altogether, we would still pay the prevailing world rate — one heavily affected by countries in the Middle East. This is so because with combined exports of 11 million barrels per year, Saudi Arabia and Iran (ranked number one and four respectively among oil exporters) alone will greatly impact the world price of oil though the sheer volume of their exports. Thanks to discoveries during the 1970s in the North Sea, England is oil sufficient, but the price of a barrel in that country is still affected by the vagaries in worldwide production and demand.
Implicit in the desire for oil sufficiency is the belief that through more domestic exploration and alternative fuel innovations, stable companies in our stable political climate will eventually serve as the major suppliers of our energy needs. Aside from the fact that this too wouldn’t impact the price of oil we consume, the secondary affects could be damaging.
One need only look at the price/earnings (P/E) multiples that the stock markets attach to energy companies to see that great harm could be done to our economy if we shifted capital and innovation into the energy space. Indeed, despite record earnings in recent quarters, Exxon presently has a P/E of 11.5, while Chevron and Shell have market multiples of 9 and 8.3 respectively. The multiple on the S&P 500 is 18, while Cisco, Starbucks, and Google possess P/Es of 19, 52, and 68 respectively. It’s not hard to see what tax breaks and subsidies in favor of energy exploration would do to the overall U.S. stock market. Quite simply, investors do not attach nearly as much value to earth profits, and if our economy mobilized in the direction of fuel production based on a misguided belief in energy “sufficiency,” we would lose big in the worldwide battle for investment capital.
This isn’t to say that intrepid Americans shouldn’t seek to develop alternative energy sources, but it is to say that if such alternatives exist, the markets will readily fund their development. Expensive oil is incentive enough for innovators to seek alternative sources.
And expensive oil today is also the strongest sign that it won’t be as costly in the future. High prices today will drive exploration worldwide, and eventually prices will fall as they have in the past. Lastly, it should always be remembered that oil is priced in dollars, and so long as the unit of account in which it is priced remains unstable, so too will be the very exploration that will do the most to insure stable oil prices in the future.
–John Tamny is a writer in Washington, D.C. He can be contacted at jtamny@yahoo.com.