Daniel Gallington is the Senior Policy and Program Adviser at the George C. Marshall Institute in Arlington, Va. He served in senior national security policy positions in the Office of the Secretary of Defense, the Department of Justice, and as bipartisan general counsel for the U.S. Senate Select Committee on Intelligence.
In the news a lot recently is "fracking," the shorthand for "fracturing". It's an oil-drilling technique that's becoming increasingly effective for recovering lots of oil and gas from rock formations—and is undergoing widening application in the United States.
In fact, a recent public report by the National Intelligence Council says that modern fracking for oil in the United States is a "technological revolution, which won't be completely understood for some time." And that "in a tectonic shift, energy independence is not unrealistic for the US in as short a period as 10-20 years."
Perhaps even more important, the report observes that:
A dramatic expansion of US production could also push global spare capacity to exceed 8 million barrels per day, at which point OPEC could lose price control and crude oil prices would drop, possibly sharply. Such a drop would take a heavy toll on many energy producers who are increasingly dependent on relatively high energy prices to balance their budgets.
While many of us might hope there is a real possibility for the demise of OPEC price control, it's also possible that it might not be allowed to happen—for reasons of corporate greed—together with a basic failure of our strategic energy policy. Why? OPEC not only sets the world price of oil, but the price it sets also directly affects—and thereby indirectly sets—the prices of alternative fuels, and also the oil produced from fracking.
In other words, if you were a "fracker" would you prefer to sell your oil at 1) the high OPEC-set price, or 2) a price that was derived—and thereby lowered—by the wide-scale effects of your own production? Also, let's not forget that the primary reason fracking has flourished as robustly as it has is because of the historically high oil prices set by OPEC—i.e., if prices were low, would frackers be motivated to produce oil at all?
So, it's not surprising that most everyone in the "oil business", whether alternative fuels or not, wants high prices to continue forever—the higher the better—no matter how they are determined and no matter who does it. And, because price fixing is mostly illegal here, the huge, multinational oil companies gladly defer to the simple greed reflected in OPEC world oil price setting.
Then, of course, they have to argue that world wide demand for oil is the primary driver for high prices. However, this specious argument breaks down when even slight reductions in U.S. demand cause disproportionate price adjustments and wild activity in the oil futures market. And, it most always works this way when we have a "gas shortage" and reduce consumption.
What is clear is that "Keynesian economic models"—patterned mostly after agriculture, where there are very large, even infinite, numbers of suppliers—simply do not apply to oil, since OPEC began setting world oil prices in the 1960s.
Politically, of course, it would be extremely unfortunate—and very unwise—if pressures from domestic environmentalists succeeded in preventing or even limiting wide-scale fracking. This, because fracking is also one of the best longer-term economic and political strategies for dealing with OPEC, the Middle East, and the fomenting of radical Islamic terrorism, which is mostly a result of all that oil money. And, let's face it: No one would care much about the Middle East if they didn't have lots of oil—and/or if OPEC didn't set oil prices for the rest of the world.
It may also be that algae-produced diesel and aviation fuels—on a wide scale—will eventually displace an even larger percentage of OPEC crude oil and thereby operate to further reduce world oil prices. The Chinese probably understand this better than anyone and will probably fuel their longer-term infrastructure and aviation growth with algae-produced fuels.
In sum, the real answer to high oil energy prices is very, very simple and always has been simple: Lots and lots of "product"—the more the better—and "product" that's "fungible" enough so that classic Keynesian economic models can legitimately apply to world oil pricing, thereby breaking OPEC's cartel. It also goes—almost without saying—that if oil prices were determined this way, instead of by OPEC, they would be a lot lower!
And, just as important for our national security, a Middle East without OPEC price control would cause everyone a lot less trouble—way too much oil money has been a common factor in most of the world's terrorist violence.
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