Will the US economy strike oil?

US government funding for alternative energies is having little impact, and focusing instead on local oil production could boost GDP by around $250 billion.

Gas prices are zooming passed $4 a gallon, and the nation is hardly freer from the grip of imported oil or closer to robust economic recovery. With his approval ratings dropping precipitously, the president is blaming speculators and investigating fraud and at the pump, when this mess is the direct result of failed federal energy policies.

By word and deed, the Obama administration has sought to limit offshore oil exploration and development, and hasten the commercial viability of solar, wind and alternative vehicle technologies.

All this is based on two erroneous but strongly-held beliefs among liberal policymakers, academics and pundits – increasing oil US production would do little to lower US gas prices, and but for the vested interests of multinational oil companies, mankind would have long ago harnessed renewable energy sources and freed itself freed itself from the sin of burning hydrocarbons.

Oil prices paid by US refineries in the Gulf do move with global prices but not in lockstep. Despite a reduction in US refiner capacity, increasing North American production would lower refinery acquisition costs.

US refineries, like others around the world, are built to handle the special characteristics of oil produced by their primary sources of crude supply. And gasoline produced by individual refineries is not wholly fungible – differing fuel characteristics are required across the United States and Europe to meet regional environmental standards

Although tensions with Iran are growing and pushing up oil prices everywhere, prices have diverged, for example, between US and European markets. For years, prices for West Texas Intermediate and North Sea Brent moved closely, but now WTI sells for $20 less than its North Sea counterpart. This indicates US market is becoming somewhat separate and less determined by global conditions, and more domestic production and increased access to Canadian oil would lower US oil prices – more drilling in the Gulf and elsewhere in North America, and the Keystone pipeline would significantly lower gas prices.

Instead of acknowledging these realities, the administration first shut down deep water drilling in the western gulf of Mexico by all oil companies for the sins on one – BP – and now is slow walking new permits. As importantly, it continues bans on developing rich deposits in the Eastern Gulf, off the Atlantic and Pacific coasts, and in Alaska to pacify the president’s liberal base, which appears comfortable with Secretary Steven Chu’s statements about raising US gas prices to European levels.

At the same time, Secretary Chu has invested taxpayers’ money in Solyndra and a dozen other alternative energy projects that independent investment analysts advised were very poor commercial bets. One by one those are failing, but the administration refuses to acknowledge mistakes or relent, and pours money into battery technologies. But even with a $7,500 federal subsidy, Nissan and General Motors can’t persuade car buyers to purchase Leafs and Volts.

The facts are that 50 years from now mankind won’t be taking oil from the ground on nearly the scale that it does now, as science will have found better ways to capture hydrogen atoms to run more cleanly internal combustion engines, turbines and fuel cells, but oil companies are not conspiring to block the march of science and reckless federal spending won’t hurry the pace of discovery and commercialisation.

In the meantime, whether Americans pay $115 a barrel for oil from Saudi Arabia and Nigeria or obtained from US sources does make a profound difference for the economy.

The annual trade deficit on petroleum is about $300 billion. Raising US oil production to its sustainable potential of 10 million barrels a day would cut import costs in half and directly create 1.5 million jobs. Applying Administration models for assessing the consequences of stimulus spending, it would indirectly create another 1 million jobs.

Overall, attaining US oil production potential would boost GDP about $250 billion. Not bad, considering that it could be accomplished by reducing dependence on foreign oil, increasing federal royalty and tax revenues, and cutting the federal deficit.

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the US International Trade Commission. @pmorici1



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