OIL AND AMERICA

OIL
Many claims are made during an election time, however most people would agree that very few are actually upheld. A lot of what a politician says during this time of year is, honestly, whatever people want to hear. Politicians go after culprits and evil doers at a much higher rate than in non election years. This all makes sense from a politicians’ standpoint, given their incentives and restraints. However, it is very dangerous to continue to take any politician just on their word. Studies and facts need to be taken into account. When for example, a politician says they will bring down our dependency on foreign oil while at the same time fight global warming by curbing c02 emissions. The question a voter must ask themselves is how this could possibly happen given the incentives and constraints on these particular sectors of our economy? On one hand if we are attempting to decrease our foreign oil dependency it makes sense to increase America’s refining and drilling capabilities. This is not very plausible given the incentives and constraints which are allowed by American explorers and refiners of oil. So the solution for a politician is rather complex. A politician will have a hard time convincing extremist environmentalists, and many in the general public, that freeing up the energy market would actually allow the increase of America’s supply and drop the price of gas and other products affected by oil. What a politician does instead of this is they go for the oldest and most trusted of allies, blame. Pointing fingers at all the people who seem to be villains by merit of their actions. Such as the greed of corporate CEO’s, especially those of oil companies, claiming that while these companies are getting rich the constituents of a particular politician are being hit where it hurts them the most, their pocket books. Politicians point fingers at these CEO’s and exclaim that these companies profits are to extreme to be mere “economics” and how America having to pay 4 dollars a gallon while oil companies make record breaking profits is just too much of a coincidence.
Whenever an economist comes on the air to defend the profits or to explain that what is happening is the most basic of economic principles they are often pushed aside as idealists. If the average voter would investigate the facts a little more they would begin to realize it is just that, basic economics. Oil companies are getting larger and larger amounts of profits, as well they should. What people fail to realize is that these profits don’t go straight into the CEO’s pockets, a large portion of profits are reinvested in oil exploration, drilling and refining. This allows for a higher amount of supply to be developed by a particular oil company which will in turn allow them to offer cheaper gas at the pump and undercut their competitors, which will in turn increase that oil companies future profits. This is the first thing everyone who went to public school in America should have learned, that of supply and demand. As supply goes up relative to demand prices go down. To blame oil companies of being greedy and over charging their customers is to claim that those oil companies are setting prices at will. However, if these companies could just set prices whatever they wanted to then they would never have allowed gas to be priced under a dollar in the 1990’s. In actuality if the oil CEO’s could have their way they would simply charge prices at the most outrageous amounts possible, but they don’t set prices at will prices are set according to supply and demand. At the same time, if customers could have their way they would pay as little as possible to get the gas they need, but customers don’t set prices at will either, prices are set according to supply and demand. The claim that CEO’s are greedy is a no brainer, but as economist Thomas Sowell once said “you can be the greediest man in the world and it won’t increase your income by one cent.” That’s because greed doesn’t make money, productivity makes money.
So this begs the question of what are the real causes of the increased barrel of crude and thus the higher gas prices at home. The answer to that question has to do with a few things. One reasons is the fact that 85% of our coast is off limits to drilling and so is the Arctic National Wildlife Refuge (ANWR). Secondly, is the limitation put on refining capabilities, which has caused there to be no new refineries to be built in America for over 30 years. Thirdly is the growing demand at home and abroad.


DRILLING
America has large sections of its underground oil off limits to oil explorers. This causes the U.S. to have to purchase more of its oil from outside of the country (which by the way would happen whether these sections of our country were opened up or not, the problem being America would not have to rely as much as we currently do on other countries) . If these sections were to be freed up to allow for oil exploration there would be a larger supply of world oil to help with the ever increasing demand of oil all over the world.
REFINING
There have not been any new refineries built in America in over 3 decades. This does cause there to be many inefficiencies in the much older and out of date refineries still in existence. The reason there haven’t been any new refineries built in so long is the government has passed so many environmental laws to make it uneconomical to build a new refinery. This has also led to many old refineries to be shut down, 50 out of 194 refineries were shut down from 1990 to 2004. Moreover, these regulations have caused the current refineries to be producing at full capacity. When a major disruption, such as a hurricane, shuts down a section of oil refining in America it is nearly impossible to shift oil production from one sector to another since every refinery is producing at full capacity rather than at a less than full capacity. Another unfortunate byproduct of a government that creates restraints rather than incentives to build new refineries is that there has been an overall decline in the actual capacity refineries can handle, while at the same time, demand has increased. What this all equates to is a country that has less ability to create more supply as demand increases.


DEMAND
It is pretty obvious to most people that with China, and India, growing at such a fast pace there is going to be a much larger global demand for oil. No matter what would happen the price of oil would have gone up because again the price of oil goes up according to supply and demand. The problem is the amount it would have gone up, and it is very hard to be able to calculate such a number (although people have tried).
In the end it is a textbook example of what happens in an ever increasing world economy. However, there are some really good things that are happening just in America. One is the decline of consumers purchasing gas guzzling Sports Utility Vehicles (SUV’s), and trucks. For example; trucks for the first time in decades, have lost their spot as the number one vehicle sold in America which will trigger a decrease in oil consumption at home. The Boeing Corporation has been creating a new more efficient jet airplane, and much more is happening in the free market. Also there could be enough pressure to free up some of restraints on America’s ability to supply itself oil. What is beginning to happen with the price of oil going so high is that in current oil fields which were abandoned because they were not economically viable at the old price of oil, but are not profitable at the current price of oil. This is why profits are a good thing, now oil companies have more money which allows them to reinvest in the drilling and refining of oil, so long as the government doesn’t get in their way. Oil Companies receive a bad rap whenever something bad happens in the economy. However, the fact remains that American oil companies remain the most efficient at producing oil as cheaply as possible, despite the regulations and restraints imposed by the government. It is time for American voters to write their congressmen and implore they step aside and to allow the professionals to do their job.