Driven by new technologies and discoveries — and by rising global demand — America’s recoverable reserves of crude oil are soaring. And U.S. oil production would be soaring, too, were it not for the Obama administration’s systematic effort to reduce it.
To be sure, domestic production is increasing, but only because a historic boom in oil production on private and state-owned land is making up for a significant constriction of production on federal land and federally controlled offshore areas, which in recent decades is where about a third of U.S. oil has been produced. According to the Department of Energy, oil production under federal leases could decline by 100,000 barrels per day or more from its 2010 level by the end of this year. In 2010, the administration issued the smallest number of onshore federal leases in decades. Future declines are built into Obama’s recently announced five-year plan.
Together with Obama’s refusal to approve the Keystone XL pipeline, the forgone North American production could soon amount to as much as 1 million barrels a day. Under rational energy policies, the United States would be on track to double domestic production by the end of the decade. Instead, U.S. daily oil production will have increased by just a few hundred thousand barrels by the end of Obama’s first term, while demand will have increased dramatically in Asia, and OPEC will have achieved the strongest cartel position it has enjoyed in decades.
“Anybody who says we can get gas down to two bucks a gallon just isn’t telling the truth,” the president recently asserted. Yet gas was cheaper than that when he took office and, more illuminating, it hovered around that price (adjusting for inflation) for nearly the entire 20th century. Through depressions and world wars and decades of historic economic expansion, one thing was almost constant: Gas was about two bucks a gallon.
The reason was not that we had plenty of oil until we started running out, but that we always had excess production capacity except when we failed to invest in more of it. A bit of spare capacity ensured that increased demand resulted in increased supply, not increased prices.
Until the last decade, the major exception to the pattern of stable prices was in the 1970s, when a combination of Nixon-era price controls and environmental policies started reducing U.S. production, and Middle East supply shocks pushed oil prices to today’s levels (adjusting for inflation). That led to a brief rush of capacity expansion and increased U.S. production. But the government soon stopped interfering, cartel discipline collapsed among OPEC countries, non-OPEC producers joined the fray, and prices crashed, bringing about the oil glut of the 1980s and 1990s. U.S. production then declined, from nearly 9 million barrels per day in the early 1980s to just under 5 million in 2008, while prices stayed at rock bottom until the very end.
The current period of rising prices is due largely to the historic rise in demand from Asia; its effect on prices was interrupted by the recession. While energy economists cite a myriad of other factors that influence price, the backdrop for all these factors’ interactions is the fact that OPEC countries have satisfied most of the new demand from Asia. A recent industry report projects that by 2030, OPEC’s market position will rise from 40 percent to 46 percent, “a position not seen since 1977.”
The combination of market concentration and high prices is the ideal setting for cartel discipline. Right on cue, Senator Chuck Schumer (D., N.Y.) recently called for the Saudis to ramp up production. But by limiting U.S. production in a period of high prices, the Obama administration is only incentivizing the Saudis to do the same.
The president blames higher prices on “speculation of war in the Middle East,” although that often describes the tenuous state of peace in that region. Yet he would have you believe that increasing North American oil production by 1 million barrels per day by the end of next year — as a sound energy policy might have done — wouldn’t have any effect on global prices.
When excess production capacity starts to vanish (as happened between 2002 and 2005), increased demand results not in increased production but in increased prices. That is called “scarcity pricing,” as distinct from “commodity pricing.” And we saw the opposite effects between 2007 and 2009, when global oil demand declined from a high of 86 million barrels per day to 85 million and gasoline prices fell by half from their peak.