Alternative energy and the reasons why pipelines and more oil won't lower gas prices.

            In the last couple of years, there has been a lot of talk about how to reduce energy prices in The United States.  Proposals for a solution have usually centered around working to make the U.S. more energy independent, yet, it seems that many are unable to agree as to how this should best be carried out.  Ideas have ranged from producing more alternative energy to building additional pipelines and drilling for more oil in the U.S.  However, the people who support these latter arguments, those who supported the formerly proposed Keystone XL Pipeline and say that we should merely try and produce more oil, appear to be ignoring some basic economic principles.

           Firstly, fuel prices, as will be explained, have little to do with domestic production and more to do with world oil prices.  It doesn’t mater how many pipelines we build or how much oil we produce, in either case, there will be little effect on our own gasoline prices.  The primary reason that our own gasoline prices are so high has to do with international uncertainty and turmoil in the Middle east.

Secondly, oil is, after all, a finite resource.  Like it or not, no matter what side of the political fence you are on, we will eventually run out of it.  Even if you don’t care about the environment and you believe that we still have quite a bit left, shouldn’t we still be looking ahead and investing resources into alternatives energies for that time when we do ultimately run out?  Surely, that is what a sensible person would do, right?

            However, citing the fact that oil is a limited resource and that using it is harmful to the environment will hardly turn heads.  Most people, even if they are unwilling to do anything about it, already know this.  If someone is still insisting that the answer to all our problems is more domestic oil production, you will likely get nowhere repeating these facts to them.  So, in order to formulate a more contextually relevant argument, let us focus on the purely economic side.  Why wouldn’t producing more oil here in the United States, or building a pipeline to the Gulf Coast, reduce prices at the pump?

            Well, first off, let us look at a bit of history.  Back in the 1970’s, when Richard Nixon was in office, the government tried to lower domestic gas prices.  They did this by creating a price ceiling, meaning that they legally set a maximum price at which gasoline could be sold.  The results, as you may well know, were disastrous.  OPEC and other oil producers diverted shipments elsewhere to where prices were higher, and America faced a severe fuel shortage.

            Now, the point to be made is that it is virtually impossible for one country to enjoy substantially lower fuel prices without severe government intervention and powerful domestic production.  Imagine, if the rest of the world were paying $100 per barrel of oil, but Americans were only paying $50 per barrel, no one would sell their oil to us.  They would divert it to places like China and Europe, where they would be paid more.  Additionally, why would American producers sell oil to other Americans at such a low price?  They would similarly ship it overseas.

            The only way that America could enjoy such a disparity in prices would be if we had the ability to produce all of our own fuel, at a lower price then that set by the world market, and if it were made it illegal to export oil.  However, here too, there are problems.

            Right now, we purchase oil from such a diverse group of producers for national security reasons.  Think of the saying “Don’t keep all of your eggs in one basket”.  We do not want to be reliant on one single source for all of our oil, and this includes American producers.

What if our own oil wells eventually run dry?  After that, we would have absolutely no choice but to rely on others.  To think of it from a cold, purely analytical point of view, you might say that we should conserve our own natural oil reserves so that if, and when, the world’s oil supply is consumed, America could continue to sustain herself, unthreatened.  If we use up all of our own resources now, what will we do when the rest of the world runs out and we have nothing left?  A realist might say that it would be in America’s interest to use everyone else’s oil first, before we use much of our own.

            Now, as for the supposed economic benefits of building yet another pipeline, some of the same false assumptions exist here too.  As with increasing domestic production, simply channeling a larger amount of oil through the U.S. will not reduce prices.  How could it?  The more oil that is pumped into the U.S. from one source, the less we will purchase from another.

Really, it does not matter where a raw material comes from.  The world market distributes resources to the highest bidders.  If, somehow, America had so much oil that it allowed for lower prices, we would no longer be one of the highest bidders and the market would stop distributing to us.

Short of nationalizing the oil industry, there really is not much that the U.S. government could do to significantly change gas prices (if they could, don’t you think that they would?  It would certainly get votes…).  In the end, it all boils down to the world market.  As long as our economy is dependent on oil, not just foreign oil, but any source of oil, we will remain under the thumb of market whims and groups like OPEC.

So, on the one hand, America could greatly increase domestic production and make it illegal to export oil.  However, our own reserves are painfully limited with respect to demand and we would be in a very nasty situation a few years down the road.  Yet, on the other hand, where we go about things as they now are, we will remain at the mercy of OPEC and the world market.  Do either of these routs seem appealing?  Although the latter option will likely lead to a more gradual transition within our own country, both alternatives will eventually end with our running out of oil.  Neither approach suits itself to the long run.

We could continue to play this crippling and sometimes bloody game, or we could begin to seriously look for a way out of it.  Oil is a nasty, risky business, and as long as we continue to rely on it, we will be in danger.  This is not where we want to be, especially if you wish for America to remain the leader of the world.

A person with a severe drug addiction can hardly be expected to be as prosperous as one who can remain above such influences.  The same dynamic exists among states. If a person could produce their own drugs, would they really be that much better off? They might be able to avoid the financial costs, but they would still have to tolerate the ill-effects of the drug.  Is sticking our heads in the sand and pretending that the addiction can be made not to harm us really the answer?

To go anywhere, we have to put this country through rehab.  There are almost innumerable options available for us to choose from, and I will not attempt to list or explain them all.  However, it remains that we must find and use alternatives now, while we still have the chance and the ability.  We do not want to wait until gasoline is at $10 a gallon, and when our economy is ailing, to then look up and try to find some substitute.

So, you be the one to decide.  Looking past rhetoric and party lines, which path do we ultimately want to travel down?  Which alternative seems the best to you?