Is There a Platinum Lining in Sky High Gas Prices?

        Let’s start with some numbers. In August of 2008, the United States consumes almost 21 (20.7) million barrels of oil each and every day. That adds up to more than100 million barrels every 5 days, a billion barrels every fifty days, and 7.6 BILLION barrels each year.

    The numbers are important because they put contemporary solutions into perspective. Senator Obama, for example, wants to open the spigot of the nation’s strategic oil reserves and give us 70 million barrels of extra gas as a short term solution. His gift is 3 1/2 days of oil; that clearly qualifies as a short term solution.

     Senator McCain wants to open up the nation’s offshore oil reserves; he argues that we should let companies drill for new oil and we can tap into the 18 billion barrels of oil that the U.S. Interior Department’s Minerals Management Office says is potentially recoverable. This oil appears in six, eight or ten years. No one knows at what cost, and, assuming that we get every drop of the oil, and that companies only sell this oil in the United States, we get a little more than two years of supply. That’s better than 3 1/2 days but it nevertheless qualifies as very short term reasoning rooted in politics rather than the future of your children and ours.

   In trying to understand the rise in prices one sure “culprit” is the additional and ever growing demand from China and India. Reading some stories I get the feeling that the Chinese and Indians do not have the right to get in the way of our ugly habits. They should not imitate us; instead, the idea is to provide the cheap goods and somehow do it without draining the world’s supply of oil. Since neither China nor India possesses significant oil resources, that is a difficult trick indeed.

   China and India are certainly part of any equation that tries to understand rising prices. In fact, since they now use so little of their oil to power transportation needs, we can expect that their demands will significantly increase as they both complete highway systems to rival those in the United States.

      Neglected is the role of the Middle East. While countless commentators stress that five nations control roughly 65% of the world’s oil reserves (Saudi Arabia, Iran, Iraq, Kuwait and the United Arab Emirates), it took analysts at a Canadian investment Bank, CIBC World Markets, to highlight these points: China has a billion people. The Middle East has roughly 250 million. But, as CIBC’s Jeff Rubin and Peter Buchanan note, while exports from the Middle East fell in 2007, daily consumption increased by 300,000 barrels a day. That increase offset much of the reduced consumption in places like the United States, and, even more crucial, “the increase in the Middle East’s own consumption matched the increase recorded by China, a country with quadruple its population.” (http://research.cibcwm.com/economic_public/download/feature1.pdf

   Today Kuwait and the United Arab Emirates use (per capita) even more energy than we. By creating such a huge demand, we help fill their coffers and they are using the money to be, energy wise, the biggest gas guzzlers on earth. Dubai boasts about having the world’s largest indoor ski slope and one Middle East nation after another heavily subsidizes the use of oil. Saudi drivers pay only 45 cents a gallon and they turn on their subsidized lights or desalinate their water supply by bathing in oil. Rubin and Buchanan write that “oil makes up 50% of all power generated in Saudi Arabia and over 80% of Kuwait’s power. In essence, why turn off the lights or reduce consumption when cheap oil is a birthright item; and so too the subsidies provided by the state.

          Bottom Line: Especially with the increasing demands from China and India, we are not likely to get much help from the Middle East in increasing our own supply of oil. On the contrary, the United States relies on six nations (Canada, Mexico, Saudi Arabia, Venezuela, Nigeria and Iraq), one with significantly declining production (Mexico) and others with highly volatile politics (Nigeria, Saudi Arabia, Iraq and Venezuela). As we complain about Hugo Chavez we demand his oil and we also have no compunctions about embracing what many call the “kleptocracy” in Nigeria.

   Given so much negative information, where is the platinum lining in this sordid story? I again turn to CIBC and a provocative piece entitled, “Will Soaring Transport Costs Reverse Globalization?” (http://yaleglobal.yale.edu/about/pdfs/oil.pdf) To fuel their celebrated supply chains, corporations like Wal-Mart depend on container ships. You put the goods in a boatload of forty foot steel rectangles and you use boats that, as they go faster than ever, use more oil than ever. Rubin and Tal note that, in 2000, it cost (at $20 a barrel oil) only $3000 to ship a container from China to the U.S. Today it costs $8000 to ship that container; and if oil hit $200 a barrel, the cost jumps to $15,000 a container.

    To a large extent, China’s advantage in cheap labor and other low production costs just disappeared! Suddenly sky high oil could open a spigot that once again makes America competitive in manufacturing. In Bad Money, Kevin Phillips writes that manufacturing was 29% of U.S. GDP in 1950; the figure for 2005 is a pitiful 12%. With the rising price of oil we could level the playing field if Obama, McCain and Congress knew a good opportunity when it kicked them in their butts.

                Given increasing demand and the political volatility of many oil exporting nations (e.g., what happens if Israel actually attacks Iran?) the cost of oil could easily reach the $200 a barrel figure suggested by the CIBC. A politician with real vision would therefore root policy in an insight from the Apollo Alliance. Any energy or environmental problem is both a technical and a political problem. Many people will buy electric cars and use cloth bags to shop because it is the right thing to do. Others will do as they please – unless someone shows us how to, simultaneously, use less oil, save the environment, and produce the jobs that come with prosperity.

    We need to take advantage of whatever opportunities do and will exist because of rising fuel costs. We need an economic strategy -heavily subsidized by the government- to develop new energy resources. We could be in the lead on solar, wind and other technologies; and we could use those technologies to fuel the factories that will take long term advantage of China’s –and other Asian nations- long term disadvantage.

     Wal-Mart –the largest retail company on earth- might actually begin to “buy American”. While certainties are out of the question, the possibilities are endless if we can get our “change agent” leaders to show the courage and foresight they allegedly possess.