Source: USA Today
In his recent article Michael Klare points to an often overlooked cause of higher gas prices in the U.S. – “a fundamental shift in the structure of the oil industry”. In any public discussion the usual explanations for rising gas prices are geopolitical pressures in connection with current tensions in Iran, Nigeria, Sudan, South Sudan and perhaps Syria as well as the relationship between supply and demand in general. The former are all temporary phenomena that create spikes in price. Admittedly, the definition for “temporary” is debatable. However, the larger point here is that it is only reasonable to expect higher prices for a protracted time and the future in general as Michael Klare aptly explains.
He argues that there was an expansion of global wealth after World War II on the back of “relatively accessible and inexpensive petroleum – “easy oil””. In his view, “this oil is now gone”. I agree with this assessment. In addition, future energy demand will only increase due to rising living standards and further industrialization around the world. In this respect, we have to look beyond the so-called BRICS countries – Brazil, Russia, India, China and South Africa – towards other rising nations such as Indonesia and many countries in Africa that have not enjoyed the broad-based Western expansion of wealth yet. Clearly, the main drivers for pushing oil demand further up will be China along with many other Asian nations given the economic shift from its gravitational center in the West to the East.
Discussing whether China is facing a ‘hard landing’ or ‘soft landing’ in economic terms to gauge energy demand should not distract us from the simple truth that demand will be higher in the decades to come. Business cycle fluctuations of certain countries will not change the upward trajectory of oil demand. Klare quotes the chairman and CEO of Chevron, David O’Reilly, as saying in a 2005 letter that “new energy discoveries are mainly occurring in places where resources are difficult to extract, physically, economically, and even politically.” In this respect, Klare elaborates on untapped “tough-oil reserves” in the Arctic and deepwater oil in offshore locations. Obviously, both aforementioned ecosystems are complex as well as precious and priceless. That makes clear that we will have to pay in either case sooner or later whether it is for potentially severe environmental consequences or higher gas prices due to lower supply. Moreover, the International Energy Agency (IEA) found in a 2010 review of the world oil outlook that the world’s largest producing fields were expected to lose about 75% of current world crude oil output over the next 25 years given the fields’ declining productive capacity. This will not only have wide economic but also security implications.
Thus, if oil supply is limited and/or relatively costly to increase, we need to tinker with the oil demand side of the energy equation to get at least a better outcome for the United States. The U.S. needs to become more energy efficient as well as energy independent. The latter is to a degree dependent on how comfortable we are with the potential environmental impact of gas drilling; namely, the contamination of underground water supplies. According to EIA (Report 2011) the U.S. has enough natural gas to supply its needs for 110 years. Therefore, T. Boon Pickens’ idea to convert the country’s heavy-duty vehicles to run on natural gas instead of diesel is straightforward given our estimated vast natural gas resources.
President Obama endorsed this idea. Nice. However, he needs to take a giant leap not a tiny step. The time is now when the price for natural gas in the U.S. hovers near a 10-year low. We need to shift gears now and it is the government’s responsibility to spend scarce financial resources for productive transportation infrastructure and to jump-start the construction of a nationwide infrastructure for natural gas vehicles. Once people see the benefits, they will follow but only if the goal also is to achieve lower prices at the “NAT Gas Pump”. The spending of federal money on those projects could be considered a productive allocation of capital in sharp contrast to the infrastructure projects included in the stimulus bill known as American Recovery and Reinvestment Act of 2009. To spend federal dollars on mainly fixing potholes and building roundabouts on New York Avenue in Washington D.C. – granted, I am exaggerating here – will not help us lower the rising costs of living already on the horizon.
Where is the money for critical infrastructure projects necessary in a globalized world to compete with China and others such as new ports, railroads, highways, LNG import and export facilities and much more? We should not be further behind the curve! We already have the disadvantage of not being indifferent towards the environment vis-à-vis China. However, living off a legacy will not increase our standard of living. The electorate will only follow if the administration – the President has to be the thought leader and lead the way – has a plan to try to lower transportation costs in general and gas prices in particular. Note, energy efficiency and independence is dependent on cost-efficient and existent transportation infrastructure.
