Duke of Oil and Other Myths

I am astounded at the general belief in the United States that if we didn’t have to import “foreign oil” (Canada and Mexico don’t count as foreign to most of us, at least when it comes to oil), oil prices would fall and all would be good in the world. In order for this assumption to have the slightest hope of being true, we would have to return to the output we were able to generate in 1950 before we pretty much depleted the vast reserves of light sweet crude that was so hugely available in places like Texas, Louisiana, Oklahoma, etc. We would literally have to produce so much additional oil beyond current output that we would actually materially distort the current global supply-demand curve by flooding the market and thus driving the price down. Fact is, we import well over half the oil we use, more than half of that import quota comes from our neighbors in North America (especially Canada and Mexico), and only about 25% of our oil comes from the Middle East (mostly Saudi Arabia, Iraq and Kuwait). The above chart is from 2007, but even in 2011, the ratios haven’t changed that much.

Unfortunately, with what we have identified in Alaska and off-shore reserves, even if we went to full capacity maximizing what is possible, we don’t have a shot of generating the kind of surplus we would need to impact the global supply and drive prices down, and with more energy being sucked up by cars and fuel plants in India and China as their surging middle classes seek better lifestyles, demand for petroleum will easily outstrip our ability to keep up even under the most optimistic situations. We’re going to be relying on imports until we get off of our gasoline addiction. And prices are going to drift upwards, no matter how stable the world might be (and we know it isn’t). Until the next time we deplete our “new” reserves, we might have an improved trade balance, but growing global demand and Middle Eastern instability will keep costs high.

We do, however, have lots of coal and natural gas, but there is a very large environmental catch. These is actually no such thing as “clean coal.” We “clean” burning coal by blowing all the toxic hydrocarbon effluents underground where they are pressure-stored until some future fool figures out what to do with it all. And natural gas often requires toxic chemicals that have poisoned thousands of underground aquifers in order to “frack” that deeply embedded gas and force it to the surface.

But let’s deal with the notion of exactly how oil is priced. First, it is a global commodity, so a barrel of oil in Texas has exactly the same price as a barrel of equal quality oil from Saudi Arabia. Think of a global bathtub into which all oil is dumped and which has the same value no matter where in the world it is sold (unless the local government subsidizes the price at the pump). So if political uncertainly in Iran spikes up the cost of local Iranian oil, guess what? It spikes up the price of oil all over the earth. And trust me, some rich Alaska oil company is not about to sell its fellow Americans oil at below global market values. So no matter how much local oil we use and how little “foreign oil” we import, if anything spikes up the price of oil in one region of the earth, it spikes that value up everywhere. Makes you kind of wonder if Iran likes creating controversy with their nuclear program, holocaust denial, and threatening to blow Israel into the sea just to increase the price of their largest export to make billions and billions more dollars. Naw, they wouldn’t do that, right? Of course not.

But there is one huge additional factor that impacts the price of oil: quality. And quality is generally a function of how much gasoline can be pulled out a barrel of oil. “Light sweet crude” is the best and most efficient gasoline producing oil and is found in the North Sea and many parts of the Middle East. It certainly doesn’t come from the shale oil and oil sands of Alberta, Canada. Impurities in oil can impact its usefulness and its value. Too much wax or paraffin, for example, seriously undermines how much high grade gasoline can be extracted from a given barrel of oil. So oil from various regions is priced differently, not because the locals are more generous to the global community, but rather because of the purity of the extracted product. Once a barrel of oil falls into a certain grade, that barrel becomes a global commodity with the same price (plus shipping costs, etc.) everywhere.

So when politicians tell you if we produce our own oil, we can control the price, unless they can find a pile of really polite oil barons who don’t mind selling stuff cheaper to American buyers than they can get on the open market (which has not happened in recorded history, by the way), THEY ARE LYING TO YOU! Are you shocked? Politicians lying en masse to the voters?! Noooo!!!! Yessssssss!!!! OR WORSE, THEY REALLY DON’T UNDERSTAND THE MARKETS EITHER. That so many Americans passionately believe the myth of foreign oil not only is a profound expression of the failure of our educational system, but it also allows us to continue to believe that reliance on fossil fuels in general, and petroleum distillates in particular, is both sustainable and affordable well into the distant future… and keeps us from truly focusing on non-fossil fuel alternatives. It’s time to wake up and deal with what is real… not what hideously incorrect mythology dictates.

I’m Peter Dekom, and sometimes I feel like I am beating my head against a wall… except the pain doesn’t dissipate when I stop.