Oil and you

Russian oil is in the news. This concerns Americans because, well, take a look:


Here in the States we consume the most oil in the whole wide world. It’s worth noting that America consumes a lot of oil because Americans consume a lot of oil. Note the per capita figures! Only the Canadians and Saudi Arabians can match or beat the Americans.

Germany and Japan are modern countries with high standards of living, representative governments, and the rule of law. Note that per person they consume about half as much oil as we do here at home. Another modern, civilized place is South Korea. They use more energy than Germany and Japan but less than the U.S. (per capita). That’s most likely due to more a more extreme winter climate. Both Japan and Germany modernized sooner than South Korea and thus have more developed and more sophisticated infrastructures. Countries improve their energy efficiency over time. They get better at utilizing their resources. All three nations are dependent on large imports of crude oil and refined products as they have little or no domestic oil industry.

Canada is a very large country and of course it has very cold winters. To maintain their standard of living they have to consume a lot of oil. Canadians, like their southern neighbors, have huge transportation needs. Big countries need big roads and lots of trucks, planes, and ships. All require oil. Saudi Arabia also has an extreme climate, just in the opposite direction, and their energy needs involve not only cooling but the desalination of salt water. The Arabian peninsula is mostly desert. The sheikhs that run that place are also very grandiose fellows and love big, flashy, capital-intensive building projects. Those need a lot of oil. Canada, the U.S., and that Middle Eastern Kingdom are blessed with very large domestic oil reserves. So large in fact that they all export oil.

Russia exports a lot of oil. About 10% of the global supply. In fact, if you have a lot of oil, you export a lot of it. Countries don’t supply their needs exclusively with their own oil. The U.S. and Canada, for example, both import oil despite being major world producers.

Oil is a global commodity. International markets determine the price. Even OPEC can’t set oil benchmarks any more as the worldwide demand is too large and too inter-connected for any one entity to control the outcomes.

We hear a lot about “energy independence.” American politicians and pundits of all political stripes pull out this canard whenever we see spikes in oil prices. We have this notion that we can drill and pump and refine and consume in an entirely domestic market. It’s sort of a quaint, 19th century idea of how capitalism works.

We don’t live in that world. Oil in the U.S. (and other modern democracies) is produced by oil companies, not governments. Oil companies have shareholders and other investors and they are obligated to create returns for those folks. So they sell oil on the international market. Oil companies need a steady supply of crude for their refineries. So they buy oil on the international market in order to manage their inventories. Think of the world as a giant bathtub filled with oil. There are lots of spigots—some dumping oil in, some sucking oil out. The bathtub goes up and down, and the rates of change set the prices.

I can’t imagine any thinking person supporting Putin’s invasion of the Ukraine. He’s a crude, stupid bully, and moreover a powerful and dangerous one. Whether the sanctions (including the oil import ban) will have the impact on his regime and his ambitions that the West is seeking I can’t say. I hope so, but I don’t have a crystal ball. And I don’t have a deep enough understanding of economics or international relations.

But I do know that this problem of higher oil prices is as much our making as it is Putin’s. We are gluttonous consumers of the stuff. We can’t get enough of it. Our entire vision of the American Way and the American Dream depends on massive expenditures of energy, and that energy comes mostly from oil.

We have always enjoyed relatively low prices for things like gasoline. Lately gas prices have taken off as well as prices for heating fuels and other important petroleum products. Those price increases hit consumers hard as they ripple through the entire economy. Everything costs more when it costs more to transport stuff. Those low prices are a thing of the past and not just because of Putin and the Ukraine.

Oil is messy stuff. The impacts of oil exploration, production, refining, distribution, and consumption are enormous. We pollute our air, water, and soil with oil and its by-products. The consequences are real. People get sick and die. Locales become uninhabitable. Natural regions and their wildlife are altered and disrupted, even destroyed. These things are called “externalities” by economists. Prices for commodities don’t generally include the costs of these externalities. In other words, when we pollute our world we don’t pay the price at the pump. We pay it later, but it’s dispersed, and we don’t see it.

Californians know a little about this. We pay more for our gas because it has to meet certain clean-burning standards. And excise taxes are high because 40 million people beat the hell out of the roads and freeways. So some of the externalities are included in the price we pay. These things work, actually. If you remember the air quality in the LA basin in the 1970s, for example, and compare it to today, it’s way, way better now even though there are more people and more cars.

This is only going to continue. Just about every strategy for combating the impacts of climate change involves paying higher prices for energy because we have to include more and more externalities. Prices for energy in developed countries are generally pretty low because modern societies depend on large per capita consumption rates. We can’t have wealth and freedom without abundant, low-cost energy sources.

Ultimately, the transition to lower-impact, less polluting energy sources will require enormous expenditures of both dollars and fossil fuels. Producing a solar panel, for example, needs a hell of a lot of electricity! We are all going to pay for this. In the short term, we’ll see lots of fluctuations. But the long-term trends are pretty clear. Energy prices will go up. Consumer costs will go up. A larger and larger share of our income, over the long haul, will go to cover our energy needs. And to taxes as well as governments will take an increasing role in national energy strategies that will include the associated external costs.

This doesn’t have to be a bad thing. Maybe it will force us to think more like conservationists. Maybe we’ll be encouraged to be less wasteful and to consume resources more thoughtfully. There are happy people in this world who enjoy high standards of living as well as personal liberty and yet don’t waste as much energy as we do here at home. What can we learn from them?

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