2007 August 16 Thursday
Energy Secretary Wants More OPEC Oil Production
Sam Bodman needs to get on the clue train.
Energy Secretary Sam Bodman said on Wednesday he wants OPEC to pump more oil as crude prices hover near record levels and he will push that message to the group's ministers ahead of their meeting next month.
"We're continuing to struggle with higher prices -- prices higher than either they or we would like -- so I think it's time for them to look at it," Bodman said to reporters. "That's all. I've encouraged them to do that."
Sam Bodman is making a fool of himself. The Middle East doesn't have anywhere near as much energy as he imagines it has. Kuwait's real oil reserves are a half to a quarter of their official reserves. The rest of OPEC tells similar tall tales about their oil reserves. Look at the pretty graphs of recent oil production history in an assortment of big producers.
US foreign policy toward the Middle East is shaped by two main influences: Israel and oil. Well, Nixon made Israel important to the US as a Cold War card to play against the Soviet Union. But the Soviet Union is a ex-parrot. Similarly, the Middle East is running out of oil. The biggest Saudi field, Ghawar, is probably post-peak. US foreign policy toward the Middle East is outdated, obsolete, lagging, trailing edge, and just plain dumb.
I was a little bit alarmed after reading in the article that they hadn't been building back up the oil reserves because they want to time the purchases until after the 9/30/2007 summer driving season. While that sounds nice, we've got a problem where there's a non-trivial likelihood of a substantial hurricane disrupting gulf production in the next 45 days where having the tanks topped off might be nice. Using the strategic reserves to flywheel the oil prices seems stupid to me. It'd be far more efficient to have an import tax do that if you wanted to limit the price volatility. Instead the administration is trying to time the market.
Basically the demand for oil is very inelastic in the short run and much more elastic in the long run due to the ability to produce much more efficient vehicles. OPEC makes more money off of oscillations in price that send confusing signals out than they would if the price were gently rising. Due to the cheap oil running out, the supply of oil is getting very inelastic in both the short run and in the long run. These oscillations in price are going to get more and more violent as the cheapest oil runs out. Dramatic price oscillation have been shown to occur in other cases where a resource "peaked" like most believe that oil is near peaking now.
I think a solid case could be made for using a tax scheme to limit the variance on consumer prices. The idea I have is that when the prices are high, the tax is low and when the prices are low, the taxes are high. Of course, it would be difficult to judge what is a short-term oscillation and what is a long term adjustment in price. The reason I think that this is a good idea is that consumers and companies are still purchasing and producing vehicles with the idea that cheap gas may come again. If it were 100% certain that gas was going to be $3.50 a gallon, then the PHEVs would make clear economic sense and in 10 years, a meaningful portion of the nations fleet would get changed out to PHEVs or at least lighter cards with stiffer tires. Otherwise, a trivial portion of the nations's fleet will get swapped out and when gas shoots up higher, it'll be the House of Saud and Hugo making all the money instead of Uncle Sam.
I'm still shocked that in the Beltway all the wonks think that proposals showing real leadership in energy policy are political suicide. You'd think that every Joe-6-pack already understands that we're effectively making a bunch of Hugo-ista's and Emir's a lot of money by continuing to have the nations energy policy stuck in neutral.
Nothing more illustrates the cluelessness of the Washington establishment than this remark. It reminds me of when Nancy Pelosi said that the US needs to develop energy independence to reduce the price of gasoline. Helloooo - anybody home in there? World oil production is peaking or has already peaked - OPEC doesn't have lots of extra reserves tucked away. We're going to switching to alternative fuels - better to start now rather than wait until the crunch comes. Also, time to stop sending our money to the tyrants, fanatics and thugs who run many of these oil-producing states. Those of us outside the Beltway know all this - too bad the folks in Washington just don't get it.