Why have oil and gasoline prices soared for most of the last few years — and why, despite a recent dip in prices, do many analysts expect them to rise for years to come? It comes down to supply and demand.
On the demand side, more people are buying more oil than ever, and they’re willing to pay higher prices for it — whether that oil is powering a diesel backup electric generator in China, a young couple’s first automobile in India or a tractor in Brazil. But on the supply side, producers haven’t kept pace, despite the lure of high profits.
Why not? A popular explanation is that we are “running out of oil.” For example, Al Gore claims oil prices are increasing because oil is a “quickly depleting” resource that cannot “feed a rapidly growing demand all around the world.” Can’t it?
The supply of oil on the market at any given time is the amount that can be produced profitably at a given price. This, in turn, depends on three things: the earth’s raw materials, the state of industrial technology and the freedom of the oil industry to extract oil.
Over time, technology has dramatically increased the oil industry’s ability to find, extract and refine oil from the earth. Whereas once the only useful oil was shallow oil in Pennsylvania, in recent decades human ingenuity in exploration, production and refining has reached into the Arctic, remote deserts and the ocean floor miles down, extracting not only conventional, liquid oil deposits but also thicker heavy oil, still-thicker tar sands and solid shale rock.
Furthermore, modern extraction techniques make far larger percentages of any given oil reservoir accessible — from historical levels of 10% to today’s levels of upwards of 60%. And on top of that, commercially viable technologies can now turn both natural gas and coal into oil.
Thus, despite the fact that civilization has consumed one trillion barrels of oil to date, the amount of oil available to us has never been greater. Forecaster Michael Lynch says, “The consensus among geologists is that there are some 10 trillion barrels out there,” adding: “A century ago, only 10 percent of it was considered recoverable, but improvements in technology should allow us to recover some 35 percent — another 2.5 trillion barrels — in an economically viable way. And this doesn’t even include such potential sources as tar sands …” This exciting potential is on display in North Dakota’s Bakken shale oil fields, a former backwater that now produces a quarter-million barrels a day while helping slash the state’s unemployment rate to 3.8%.
That’s the good news. The bad news is that every single one of the technologies that could lead us to petroleum prosperity is being slowed or stunted by government, in America and around the globe.
All the technology and potent raw materials in the world are worthless if oil producers are not free to develop and profit from oil. The oil industry arose in a world where property rights were respected and development valued. Unfortunately, today’s government has the power to thwart nearly any industrial project — a power that is largely directed by environmentalists.
Over the decades, environmentalists have demonstrated a fundamental hostility to all forms of oil development. And they wield enormous influence, especially over the one-third of U.S. land (and all offshore seabeds) that the government has nationalized. The government delayed for five years and almost stopped the largest oil find in U.S. history, Prudhoe Bay, thwarting plans to bring online two million barrels a day, oil that was desperately needed during the 1973 energy crisis. The government has succeeded in prohibiting oil drilling in even a small fraction of the Arctic National Wildlife Refuge (which would yield an estimated 11 billion barrels — a trillion dollars in wealth at today’s prices) and in other promising locations throughout Alaska, leaving untold billions of barrels untapped. It prohibits drilling in one-half of the oil-rich Gulf of Mexico — billions of barrels unused — and the vast majority of the Outer Continental Shelf, which some experts estimate holds upwards of 100 billion barrels.
Environmental groups vehemently oppose the technology necessary to extract oil from the Canadian tar sands, which contain hundreds of billions of barrels.
Hydraulic fracturing (“hydrofracking”), the key that has unlocked previously inaccessible gas and oil from shale, is under attack by environmentalists who claim, with scant evidence, that the process may contaminate groundwater. Their solution? Ban the technology outright.
The process of turning coal into liquid petroleum fuels — the ultimate backstop against supply shortfalls, given the world’s hundreds and hundreds of years’ worth of coal supplies — is simply banned in America (on CO2 emissions grounds), the country most qualified to lead it. China, meanwhile, is turning coal into oil fuel at a cost of just $45 a barrel.
Unfortunately, international oil production is generally even less free than U.S. oil production. The vast majority of the world’s oil is nationalized (often seized from Western companies that discovered and developed the oil fields). Thus, instead of private property owners making deals with private companies to explore the world’s true oil potential, oil production decisions are often made by despots — such as the OPEC cartel.
America faces a choice: Do we want the affordable, portable energy that oil provides? If so, we need an energy policy that values oil companies’ freedom to produce and promotes that freedom around the world.
Alex Epstein is a fellow at the Ayn Rand Center for Individual Rights, focusing on energy issues. The Ayn Rand Center is a division of the Ayn Rand Institute and promotes the philosophy of Ayn Rand, author of “Atlas Shrugged” and “The Fountainhead.”