Oil Markets and Our Future

Dan wrote an interesting post about oil and our future and the power of capitalism to resolve our problems. While I am generally optimistic about capitalism, the oil markets have been and will continue to be rigged for the foreseeable future unless deep structural problems are fixed. These barriers will cause our current problems to drag on out indefinitely.

For one, we limit drilling in lots of places where there is known oil, from Alaska to off the coast of the US. We limit natural gas drilling, as well. When you take huge swathes of potentially productive resources off the market, you are crippling the resolution to your problem right there.

The EPA and local NIMBY groups, which are emphatically averse to capitalism, basically prohibit the building of new refineries which would reduce our crippling bottlenecks, and the EPA's asinine rules on gasoline additives only make things worse.

Try building a new gas pipeline? Forget it. Not only are the costs prohibitive, you can't get rights across most of the USA, especially in California and the Northeast, where lots of the demand is concentrated.

And who benefits from high prices, anyways? One big group - state and local government. Ever look at how much of the gas price at the pump is due to taxes - it is huge! Here is a link that shows levies by state. Note that there are 2 components - the "cents per gallon" tax which is flat on every gallon sold, and the state tax component (here in Illinois) that goes up at about 6-9% per gallon depending on your jurisdiction (you can guess which jurisdiction has the highest sales tax rate in Illinois and almost the nation, Chicago of course). Thus on $3 / gallon gas the government is taking in an extra 27 cents / gallon - this is pretty much a windfall that they are using to fund their chronic deficits and miserable programs. Don't forget that your home heating bill, powered by natural gas (probably), also has a big government tax on top of your costs, so they are also benefiting from the rise in prices there.

Another group crucially linked with our transportation infrastructure, which consumes most of the fuel, are the car makers / parts makers / airlines. Each of these industries are basically "circling the drain" in terms of survival, with Delphi threatening bankruptcy, GM / Ford's credit at junk levels, and Northwest / Delta filing for chapter 11 and likely to dump their retiree obligations on the Federal government. It is hard to see much capitalism here, since these industries are all propped up by our capitalism-defeating bankruptcy system that allows companies like United Airlines to languish in a zombie-like state for years, dragging down the healthy companies with it. When the car industry starts to die the same way the government will likely follow the same broken model to keep them half-alive for years to come.

Another element to our energy problems that usually is not discussed is the fact that Mexico is energy rich but their constitution and obtuse government does not take advantage of these resources. We could be receiving natural gas and oil from Mexico to a much larger degree but Pemex, the local monopoly, is starved for capital to re-invest because the government siphons off the cash for their dubious plans and foreign firms are generally barred from significant development, so their technology is stale, as well.

We should be extremely thankful that we are right next door to Canada. They are providing a huge portion of our energy and will continue to do so into the future, unless the Greens go berserk and stop them from developing the oil shale or the federal government starts looting the proceeds that belong to Alberta, which will diminish their appetite to keep the energy pumping. Check out their proposal to build a nuclear plant to provide electricity for the oil shale project in Alberta - now that has guts - I can't even imagine how that request would be reacted to by the NIMBY crowd in the states.

Here are the imports by country, where you can see Canada, Mexico and Venezuela.

Thus the vibrant capitalism that usually allows us to overcome obstacles is blunted by the dead hand of government actions, government agencies, and our refusal to bring capitalism-hating NIMBY groups to heel.

The outcome of this is the sad continuation of us sending our money overseas to ruthless and morally bankrupt dictators and fundamentalist regimes in the middle east (and South America, let's not forget how much oil we get from that idiot Chavez).

The other outcome is that oil and gas prices are the most regressive of price rises, hitting the poorest the hardest. $3 gas is an annoyance to most people and a $250 / month heating bill is something to get angry about, but it pushes the poor right over the edge. I don't know how the NIMBY groups can sleep at night, forcing all of the poorest people to foot the bill for their schemes and protests...