Freeman

IT JUST AIN'T SO

We're Running Out of Oil?

SEPTEMBER 01, 2004 by JOHN JENNRICH

The rise in gasoline prices in the United States has become a political issue. Each side panders to its own constituency with the most extreme arguments and factoids, leaving precious little in the middle ground of common sense.

Take, for example, the March op-ed in the Los Angeles Times by Paul Roberts, “Say Bye-Bye to Cheap Oil.” The article rides the wave of public anxiety over current high prices of gasoline. Roberts—like countless others, including two men running for president of the United States and their supporters—makes a lot of extreme comments, including:

  • “the days of cheap crude [oil] are over”;
  • “the world’s surplus [oil production] capacity is disappearing”;
  • “the U.S. isn’t well prepared for a high-cost oil future”; and
  • “eventually, all of us, from the man in the Oval Office on down, may be forced to concede that the days of cheap oil are over and that the U.S. does need an entirely new approach to energy.”

A first logical response to this sky-is-falling view is: Remember $100 oil? That early 1980s prediction ($200 in today’s terms) was a rallying cry for extreme reactions. Well, it never happened. Our market-based system, which some said just had to be changed to save our mercantile souls, absorbed the blow of rising prices and responded as freed markets always do.

Today’s consumer response to rising gasoline prices (which, by the way, are not the only rising energy prices) is to consider fuel mileage when buying a car. That’s all it takes: consideration. Makers of trucks and SUVs will likewise consider the issue, and improve electronics and aerodynamics (to name just two) when building their vehicles. And, yes, some consumers will still buy the big ones, as they have every right to do.

But other consumers will take a different tack. They’ll buy smaller and look for gas mileage in the 30-plus miles-per-gallon range rather than just the 20s. They’ll consider gasoline-electric hybrid cars, which—no surprise here—are being supplied by foreign manufacturers, such as Toyota and Honda. Competition for the small-car market is resulting in high-quality cars that handle well and are comfortable.

Are they the cars for everybody? Obviously not, but they are a consumer response to rising gasoline prices that puts the lie to Paul Roberts’s view that “the U.S. isn’t well prepared for a high-cost oil future.” More evidence comes in a front-page Washington Post article (May 20) headlined “Fuel Sippers Gaining on Heavyweights.”

Buying gas-misers today still won’t do much to deflect Roberts’s concern that fuel prices would reach $3 a gallon by Labor Day. Unfortunately, he draws little distinction between a short-term concern and long-term issues (both government and private). The two don’t logically mix.

Actually it might be the government rather than the market—through the impact of election-year politics—that has the most immediate dampening effect on high energy prices this year, both through what the Bush administration might do to win votes and what other nations, such as Saudi Arabia, might do to keep Bush in office.

Regarding the longer term, it’s easy to knock down the Paul Robertses of the world. They’re like the energy analysts who revise their annual forecasts every week, so that by December 20 each year they can claim to be pretty accurate.

In the late-1970s, for example, James Schlesinger, then-energy secretary, predicted that the United States was running out of natural gas. With President Carter and many in Congress still queasy over the natural gas-delivery (as opposed to basic supply) shortages of the 1976–77 winter, the administration managed to get congressional approval for the Powerplant and Industrial Fuel Use Act, which sharply restricted the use of natural gas, to the point of prohibiting its use as a fuel to generate electricity.

Years later, as gas supply proved to be abundant and delivery problems were ironed out, Schlesinger was asked how he could ever have reached such a decision. “I asked Exxon,” he said. The oil giant may or may not have known any better, but at that time, oil-selling Exxon had a financial interest in downplaying natural gas. Schlesinger didn’t mention that.

Energy Naysayers

Roberts and Schlesinger are just two among the naysayers who since the 1900s have had the world running out of energy, specifically oil and natural gas. In the middle of the last century, it was the noted geologist King Hubbert who put the scare into people. The antidote is to listen to economic geologist William Fisher of the University of Texas at Austin, who properly adds a dollar figure to calculations about supply.

Roberts’s Chicken Little comment that “surplus capacity is disappearing” reminds me that a few years ago the Gulf of Mexico was dubbed the Dead Sea as far as natural gas production was concerned. Today, along with the Rocky Mountains, it’s where all the action is.

Roberts raises the flag of concern about China’s burgeoning economy, saying that it will consume more energy that might be used elsewhere. He concludes: “[A]s everyone knows, when supply falls behind demand, prices head for the sky.” Well, yes, and as everyone knows, when prices go up, supply follows even as demand declines to put things in balance again. Economists call it “regression to the mean”: extremes are just that, and most times life will plod along in a normal, average way. Alas, normal doesn’t grab headlines.

Finally, it is notable that a real pro in capturing the moments of public angst, Daniel Yergin of Cambridge Energy Research Associates, wrote a piece in the New York Times a few days after Roberts’s commentary appeared. Yergin trumped Roberts’s handwringing by “Imagining a $7-a-Gallon Future.” But Yergin did a thorough job of reviewing the history of oil-price predictions and subsequent lower prices. He cited a whole litany of bleak forecasts, noting that the 1980s $100 prediction was followed by oil as low as $6. Yergin said that historically “dire predictions have been undone by two factors. One is the opening (or reopening) of territories to exploration by companies faced with a constant demand to replace declining reserves. The second is the tremendous impact of new technology.”

Yergin noted that Persian Gulf oil reserves—1.2 trillion barrels—are almost double what they were thought to be in the 1970s. He acknowledged the expected increase in energy demand from China and India, but concluded that “it looks as if supplies will meet that demand. If there is an obstacle, it won’t be the predicted peak in production, at least in the next few decades. Rather, it will be the politics and policies of oil-producing countries and swings in global economic growth. And the extent of these difficulties, whatever they turn out to be, will register in the ups and downs at the gasoline pump.”

Uncertainty always begets price volatility. And in the case of global energy supply, uncertainty is as close as the next day’s news headlines.

John Jennrich

Senior Fellow

Institute for Energy Research


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