Saturday, February 26, 2011

How many oil shocks is it going to take?

By Nick Sorrentino

If there is anything that unites suburban Washington DC it is the traffic. It’s not the Nationals, it’s not even the Redskins, it is the traffic. Washingtonians have the dubious distinction of driving in what was recently called the worst traffic in the United States. Walk into the break room at work on a rainy day, I guarantee you that the topic of conversation will be how long it took to get from x place to y place. It is a constant source of frustration for Washingtonians. Just the other day it snowed a few inches during the evening rush hour and it took my wife 5 ½ hours to drive 24 miles.

Now though drivers have something else to complain about, gas prices.

The Exxon near my house was pricing regular gasoline at 3.04 per gallon on Monday. Today (Saturday) it is $3.30 per gallon. So that’s a rise of roughly 9% in less than a week. Not fun.

In some places out west gas prices are already over $4.00. The rest of the country might be knocking on $4.00 a gallon soon.

Rising gas prices are bad for a myriad of reasons. But perhaps worst of all is the way it sucks money out of the economy.

For many people a 25% increase in the cost of their commute will impact them quite a bit. For those on the edge of poverty such a rise might push them over. For those a bit better off things will soon get that much tighter after 2 years of already tight times.

Additionally, while rising gas prices take money out of the consumer’s pocket it also pressures the cost of the staples most people need to live. Nearly everything in the US is shipped. Shippers incur the higher fuel costs and pass it along to their clients who in turn pass it along to the consumer. Upshot, your bread, milk, and diapers cost more.

Now, not only is there less money in the pockets of many but the price of things has also increased. The net result is a reduction in the purchasing power of the consumer which even in the wake of the recession is responsible for between 60-70% of the US economy.

This most recent flare up in the Middle East and its impact on the price of fuel must be considered carefully by common sense conservatives. Does it make sense to leave our country exposed to such shocks? No, I think not.

Unfortunately just turning on the oil spigots in the US isn’t going to do it. First it takes quite a long time to bring wells online. Second we don’t even get much of our oil from the Middle East. We get the vast majority of our imported oil from Canada and Mexico. We get practically none from Libya. Yet the reason why gas prices at my local Exxon are up 9% in a week is because the market fears Libyan oil going off-line. What gives?

The price of oil is set in the futures markets. If traders think overall world demand is likely to go up or the supply to go down on a global scale the price is going up. It is unlikely that any drilling on the North Slope of Alaska or off the coast of New Jersey will move markets enough to make a huge impact.

The only country at this point with the ability to move the oil markets at will is Saudi Arabia and things are looking increasingly tenuous there. Should we at this point still be at the mercy of the Saudis? As a conservative I would say absolutely not. It’s not like we haven’t been warned after all.

What’s more is that Saudi Arabia may not have as much oil as they say they have. Many experts within the industry are questioning the official reserve numbers.

I would encourage anyone interested in Saudi oil capacity to read this brief but very good article on the subject by Kent Moors in Seeking Alpha.

Regardless we must take the development of “alternative” resources of energy seriously. It’s not fair to subsidize them, but we have for too long not factored the real cost of oil dependence for this country. It’s time we did and made some bold changes.

Do you think that the Middle East is likely to settle down any time soon? It hasn’t for 2 millennia. Maybe we as conservatives should consider the idea that wind, solar, and even natural gas are things we should embrace as responsible people who want the best for our country. We just can’t afford the risk of being nearly entirely dependent on oil any longer.

This article was originally written for the Republican Leadership Network. If you liked the piece please join the LER on Facebook. (See right margin.)

About Me

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Nick Sorrentino is the Editor of The Liberty and Economics Review and CEO of a social media management company.