Anne Korin’s work is a great antidote to all the energy independence talk swirling around Washington.
She’s co-director of the Institute for the Analysis of Global Security and author of Turning Oil into Salt: Energy Independence through Fuel Choice.
First the good news: US net petroleum imports have dropped a lot in absolute and relative terms in recent years. They fell from 12.5 million b/d in 2005 to 8.5 million b/d last year, and from 60% of domestic demand in 2005 to an expected 42% this year. The Energy Information Administration sees foreign oil falling to 36% of US consumption by 2035.
“What we’ve always been told is if we only reduce our imports of oil, then we’re going to be spending less, our economy’s going to improve, the countries that sit on the bulk of world oil reserves will weaken,” Korin told the Renewable Energy Technology Conference in Washington last week.
Now the bad news.
“Yet what we are seeing is we are spending more on oil, spending more on these imports, not just per barrel but overall,” she said. “We’re importing less oil but we’re sending more money overseas for oil.”
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Funny how both President Barack Obama and Republican contender Mitt Romney left out that last part when they heralded surging US oil production during last week’s debate.
Same with Congress. Korin said the right thinks “drill, baby, drill” will save us from imported oil, while the left says we just need to reduce demand through vehicle efficiency.
“There’s certainly nothing wrong with domestic drilling and a lot of good things to say about efficiency,” she said. “But it should be very clear to us that merely by reducing imports, we’re applying a solution to the wrong problem. Our problem is not volume when it comes to oil, our problem is price.”
So what’s the solution to apply to the price problem?
World demand for oil isn’t going down, with China and India wanting more and more of it to fuel their economies. Korin said the only option is to break the monopoly oil holds over transportation.
“It’s the ability to essentially play the market onboard your car, to make an on-the-fly choice what to put in your car, how to fuel your car depending on the comparative price of fuels made from a variety of diff resources,” Korin said.
When there’s true competition at the pump, she said, prices will settle at an equilibrium point per mile and drag down oil to $45 to $50 per barrel.
Korin said alternatives will have to run the gamut of technologies and feedstocks to include plant-based fuels, alcohol fuels, electricity and others. And because every commodity is volatile, the best choice will vary.
“May the best fuel at any given time win and it will be different fuels at different times, in different parts of the country,” she said. “And that’s just fine.”
Korin has part of her analysis right, regarding fuel efficiencies, domestic drilling activities, etc., however she has missed the mark as to how to individuals can best make a difference in the price he or she pays for gasoline (or diesel).
For a motorist looking for the cheapest (price) gasoline pump or the trucker looking for cheaper diesel prices, all trying to “price shop” for the lowest price in town or local area is an exercise is akin to digging a hole in your back yard with a spoon and tooth brush.
The bulk of gasoline and diesel prices in the US are no longer totally determined by market forces in the US (certainly not a local process). Market forces for crude oil (and subsequently all petroleum products) globally, determine about 45% to 60% of the prices for all retail markets in the U.S.
To analyze all these global market forces you need more than a crystal ball or a dart board on the wall. The dominent market force for today will be replaced tomorrow by something else entirely different. On a day fundamentals may be the most dominent factors in play and the next day it could be the Iranians rattling their sabers and making threats to global peace and will become dominent. Actually, traders, hedgers and the “trade” (in general) will intrepret and determine how these market forces will or should affect energy future’s prices and enter the futures markets and buy or sell futures contracts, accordingly. Retail (pump) prices for gasoline and diesel will directionally follow the directions dictated by the crude and product futures prices.
When we get into “technical trading”, which is part and parcel of the futures market pricing pictiure, it also helps determine retail price directions (up or down), Upon hearing these comments most folks (including many oil marketing players) will shake their heads and concentrate on factors less complex that fall into the perview of their own experience and understanding.
World demand (everywhere) for oil is and has been going down. This reduction of oil demand is not felt in every country,equally, but is and will be more widespread over the next 2 or 3 years. The fiscal health of the US, Eurozone, China, India, etal.,will determine price directions for all of us for the next few years.
Thank You
Robert Fitzsimons
This article has two major flaws. First, “alternative fuels” such as biofuels are unlikely to match the price of petroleum unless oil prices are much higher than at present, and are a threat to food supplies. Electricity as a fuel requires expensive batteries which aren’t going to reduce overall costs.
Second, the fact that reducing imports hasn’t reduced our import bill doesn’t mean that further import reductions won’t. Oil prices are determined by global supply and demand. Demand is rising around the world – rising prices mean that supply hasn’t kept up. Fortunately, new drilling technology means recoverable oil reserves are rising rapidly, but taxes and regulation are preventing these new reserves from adding to global supply as rapidly as demand is increasing.
Since no alternate fuel on the horizon has the realistic potential to compete with oil at or near current price levels, the only way to bring prices down is to accelerate production here and around the world. The US once again has ample reserves to boost supply, eliminate oil imports, and bring down prices if government would get out of the way.
Robert, thanks for reading. Her point about consumers making a choice at the fuel pump depends on alternatives being developed on a large scale and at prices competitive with petroleum.
You can read more from her argument here: http://www.the-american-interest.com/article.cfm?piece=1266
NSJ4, the longer piece at American Interest (http://www.the-american-interest.com/article.cfm?piece=1266) addresses many of your points.
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