The Cost Of "Cheap" Oil

The United States has deployed troops and missiles to Saudi Arabia in the wake of the attack on the Saudi oilfield.  Saudi Crown Prince Mohammed bin Salman declared on the September 29 edition of 60 Minutes that the attack was not simply one against Saudi Arabia but one against the entire world.

At the Rice University Energy Transitions Conference on October 2, former Secretary of State James A. Baker III repeated the old dogma—that if the U.S. is not in the Middle East, someone else will fill the void.  Notwithstanding that Secretary Baker is a leading proponent of increasing the cost of fossil fuels by applying a carbon tax to combat climate change, he reiterated only the need to protect the cheap oil supplies of the Middle East.

Why?  There is only value to the oil supplies of the Middle East if someone buys the oil.  Does the U.S. care who pumps the oil we buy?  For more than 50 years, U.S. policy decisions indicate that we have not cared if one dictator or another “owned” the oil as long as we could buy it.  Suppose no one bought the oil?  What would be the value of the IPO of Saudi Aramco?

President Eisenhower recognized that the world would buy cheap oil from anyone and that such cheap oil would be a threat to U.S. national security and the ability to project our military around the globe.  He imposed an oil import quota in 1959, limiting U.S. oil imports to no more than 12% of U.S. domestic oil production.  It’s worth noting that OPEC formed just weeks later in view of the plummeting world oil price.  President Eisenhower protected the U.S. oil industry from cheap competition and absolute dependence on Middle East oilfields.  His vice president, Richard Nixon, as president removed the import quota in 1974, hoping that cheaper OPEC oil would reduce U.S. rates of inflation.  Instead, he cemented U.S. dependency on foreign oil even as he as called for energy independence.

A compelling cost-benefit analysis points to an alternative U.S. policy.

Politically, increasing fuel costs are hazardous to re-election campaigns.   But the cost is still there even if it is borrowing from Peter to pay Paul—that is, borrowing from the national credit card instead of realizing the cost at the pump.  The Watson Institute at Brown University estimates that the out-of-pocket cost is now more than $5.9 trillion of national debt versus a “pay at the pump tax” of more than $1 per gallon for every gallon of fuel we have purchased since 9-11.

The blood cost in military personnel has been 7,028 Americans killed in action and in support, and 53,000 wounded in the Middle East wars since 9-11.

Many have argued recently that the U.S. is shielded from the impact of the oil interruption.  This is simply wrong.  The U.S. still must import 6 to 8 million barrels of oil each day to feed domestic refineries in their current configurations.  Light oil from the shale plays makes up a large amount of the widely touted U.S. oil exports, but this is oil that is not suitable for many U.S. refineries.  As Saudi oil, or Iranian oil, or other supplies are withdrawn from the world market, the U.S. consumer will eventually be competing with the Tokyo and Beijing consumers for heavy crude stocks to produce fuels.  Unlike the national policy of China, it has never been U.S. policy to first make use of what is produced domestically.

Reinstating the oil import quota against OPEC suppliers would insulate the U.S. market from the manipulations and military conflicts of OPEC nations. This would require both reconfiguring at least some U.S. refineries to use the light crude oil produced in abundance domestically, as well as perhaps increasing our imports of heavy crude from Canada and Mexico. In return, feared interruptions in oil supplies from OPEC would have less impact, and the U.S. would be insulated from devastating future price wars. Both producers and consumers will benefit from higher incomes, higher tax revenues, stable employment and higher GDP.

Sourcing our oil from all of North America would help stabilize our country’s relationships with Canada and Mexico. The prospect of increased development of Mexico’s resources would work to stabilize economic development and employment in Mexico.