Squeezing the nozzle handle, staring at the ever-rising price of gas, hardworking American families are wondering when the increases will stop. Despite temporary dips in prices, the trend toward $5 seems almost unstoppable. Is that a bad thing?
It could be good news for America’s future energy independence. Rising oil prices give us the opportunity to break the back of the Organization of Petroleum Producing Countries (OPEC), whose stranglehold on our nation’s oil supply and influence on the price we pay has been an unfortunate fact of life since 1960.
OPEC has held together longer than might have been expected, in part because of unexpected and unknowing collaborators. For example, environmental groups and governmental regulators in the United States and elsewhere have for decades lobbied for policies that reduce oil production by businesses in non-OPEC nations.
Higher oil prices are powerful incentives that have gained the undivided attention of oil producers. Chevron, Exxon Mobil, and ConocoPhillips, for example, are refocusing their attention in the Texas Permian Basin, an old oil field that is once again booming. This is largely due to new technological developments, such as hydraulic fracturing and horizontal drilling, encouraged by higher prices.
In 2002, North Dakota produced just 30 million barrels of oil in the Bakken formation; as prices climbed, production reached 112 million barrels in 2010. Plans are under way to add thousands of new wells, making North Dakota fourth in oil production behind Texas, Alaska and California.
High prices are also having positive effects for America’s largest trade partner. Canada has the second-largest oil reserves after Saudi Arabia and produces more than 1 million barrels a day. Canada has been developing its vast oil sands deposits, which contain a substance called bitumen. This thick oil product can, at today’s prices, be economically processed into lighter petroleum products, which is what we use to fuel our cars.
The oil sands industry already accounts for about half of the oil exported to the United States, and Canadian output is expected to double over the next 10 years. Consider this: Would the United States be better off getting oil from our Canadian friends rather than OPEC, which is dominated by countries such as Iran and Libya that aren’t in sympathy with U.S. interests?
But independence from OPEC also requires tough choices to increase oil supply and eventually ease prices. This includes drilling off the coasts of Alaska, California and Florida and resuming oil drilling in the Gulf of Mexico.
In Economics 101, everyone learns that increasing the costs of production reduces supply and raises prices. Basic economics suggests there should be a moratorium on new energy production rules from the Environmental Protection Agency and no new taxes on energy producers.
The other energy alternatives do not appear to be satisfactory or, at the very least, timely. Even those who believe in nuclear energy should note that Germany recently announced it will join Italy in banning the use of nuclear energy. For the foreseeable future, there won’t be enough windmills, solar panels or hybrid cars to make us independent of the OPEC cartel.
Now is the time to open our domestic oil exploration. The grip of OPEC can be broken by the oldest enemy of every known type of business cartel: unbridled competition.
Mark C. Schug is an economic consultant and professor emeritus at the University of Wisconsin-Milwaukee. Gordon D. Gaster is a financial consultant.
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