Will We Tank Again? | By Jason Oliver Cottrell After an ominous credit crisis in October and a luminous election in November, it’s easy to forget that 2008 saw one of the most frightening oil shocks in U.S. history. The average price of a gallon of unleaded gas in Florida reached $4.08 on July 16. Six U.S. airlines declared bankruptcy in a span of 27 days, each listing fuel prices as a primary cause. And a Goldman Sachs analyst (among others) predicted prices would march onward to $200 per barrel, which would’ve meant a staggering, if not crippling, $6 per gallon at the pump. What a difference five months makes. Gas prices are back to a comfy $2 per gallon in Miami. So what happened? There’s a saying in the oil industry: Nothing fixes high oil prices like high oil prices. The adage seems to have proven true in the second half of

2008. About the time crude oil prices reached $147 per barrel on July 11, Americans reduced the amount of gasoline they were burning, eventually cutting out a whopping 4 percent year over year. The phrase demand destruction” made its rounds in the media, while prices went into free fall. Now, the sluggish global economy continues to depress demand worldwide making high oil prices seem downright quaint. And with a set of new, enormous distractions – including millions of lost jobs, waning consumer confidence, a handful of
bank failures, an impaired credit industry and housing price declines unseen since The Great Depression – is it to be expected that energy independence moves off the national agenda? After all, it always did in the past.

Will the 2008 oil shock be simply filed away along with the shocks of 1973 and 1979 as merely unpleasant episodes? Are these lower oil prices merely a temporary reprieve? Or is it the beginning of another era of cheap oil
similar to the ‘80s and ‘90s, an era of increasing American energy dependence?

A DEFINING MOMENT

Jay Hakes says America is at a crossroads moment. Hakes was the administrator of the Department of Energy’s Energy Information Administration from 1993 to 2000 and he wrote the book on energy independence… literally. It’s titled “A Declaration of Energy Independence” (www.jayhakes.com) and was released this summer. Obviously, given the title of the book, Hakes doesn’t want to see the United States revert to energy policies defined solely by cheap oil.

“The age of energy complacency lasted from the early ‘80s to 2006 and we dug ourselves into a very deep hole,” says Hakes. “The two major features [of which] are the rise to 60 percent dependency on foreign oil, and the
reason that’s important is it jeopardizes our national security and economy. And the second is we’ve failed to stop the growth of greenhouse gas emissions, and these are creating serious long-term problems for our climate.”

“The government has put very little emphasis on energy efficiency and it’s increased the necessity to act boldly,” he says. “We could’ve done more – particularly in the area of more efficient automobiles.”

A Good Start; Can We Keep It Going ?

In 2007, America’s attention returned to energy as prices soared. But it takes a long time for a big country to become merely energy efficient, not to mention energy independent. This “time of solutions,” Hakes says, would need to last a decade to achieve significant results.

And now with oil prices roughly a third of what they were, will America’s attention drift backward? We’ve already seen signs such as the sliding stock prices of solar power companies. Will they and other alternative energy companies move projects to the sidelines?

Amid cheap oil prices Hakes still sees an opportunity to make what would be a landmark political change. “I think now is the ideal time to consider energy taxes. I know they are very controversial politically,” he suggests. “First, energy prices are going down and it’s much easier to put these (taxes) in place when prices are low rather than high.

Second, I think people are now more aware of the importance of reducing dependence on foreign oil and slowing greenhouse gas emissions and so they may be more open to bolder measures than they have in the past.”

In the meantime, the United States recently elected a new president. While Barack Obama doesn’t have much of a track record to predict results, we have at least learned he’s willing to ask a lot from America and he’s willing to talk to us in a nuanced, intelligent way.

Frank Denton is another champion of energy independence. With a Ph.D. in foreign affairs and a career spanning the military and the Rand Corporation, Denton was a practicing economist with the U.S. Foreign Service.

He is now retired in the Philippines and author of the discussion paper “Nexus – Oil and Al Qaeda”, that can be found at www. americanenergyindependence.com. According to Denton, “President-elect Obama has listed energy independence as a top priority – at least this was a position before the economic problem became so severe …

We have two energy issues at hand: supply and climate change. A determined and astute administration can perhaps use these to reinforce one another.”

Denton sees lower oil prices as an opportunity to move political and economic power from the OPEC nations to the United States. “It’s an opportunity … if Obama can somehow convince the American people that some current pain means long-term benefits and to also get enough other consuming nations on board,” he says. “Given the economic problems, that is a very tough recipe to sell.

But the essence of reduced oil prices is they give us more financial room to maneuver and shows the oil producers that they have limits on their power to extort. The latter is the critical element.”

And what does Obama say? In the third presidential debate, he made this statement: “I think that in 10 years, we can reduce our dependence so that we no longer have to import oil from the Middle East or Venezuela. I think that’s about a realistic timeframe. And this is the most important issue that our future economy is going to face. Obviously, we’ve got an immediate crisis right now. But nothing is more important than us no longer
borrowing $700 billion or more from China and sending it to Saudi Arabia. It’s mortgaging our children’s future.”

The “nothing is more important” talk sounds promising. Of course, if all the promising political speeches became reality, the world would be a very diff erent place.

Note that the $700 billion figure is based on roughly $140 per barrel of oil. At $70 per barrel, the amount of cash the United States was exporting gets cut in half. But as any energy independence wonk will tell you, the price isn’t the only concern regarding foreign oil. The U.S. economy and national security both depend on a steady flow of oil whether it’s $10 a barrel or $150.

ARE THESE LOW GAS PRICES TEMPORARY?

Spending $1 billion or $2 billion a day on oil makes it all that much more diffi cult to find the funding, whether it be private or public, for the capital expenditure necessary to recreate our energy system in whatever form
the country eventually chooses. Funding will be needed for things like wind farms, conversion to natural gas, solar thermal plants, geothermal plants, solar voltaic panels, nuclear power plants, a new electricity grid,
green building, more efficient automobiles, mass transit, synthetic fuels, bio-fuels, plugin hybrids and other possible steps toward energy independence. High prices make energy investment more diffi cult, but they
also incentivize conservation and innovation.

Hakes is one of the many who say the longterm trajectory of oil prices is upward. “The [three] main reasons are escalating demand in Asia with its high populations, which in the past hasn’t had much demand for oil but now
does,“ he explains. “And the second would be the policy among the OPEC nations to keep clamps on production. The third reason is the easy sources of oil have already been drilled or they are in OPEC countries … so we are going to have to be drilling deeper with more complex formations which increase the cost.”

Another reason high prices could be on the medium-term horizon is in part because prices are so low right now. Daniel Yergin, Chairman of the Cambridge Energy Research Associates and one of the most recognized oil
experts in the world, said in a Nov. 10 essay in the International Herald Tribune, “Lower prices are forcing energy companies to cut their budgets and hold back on starting some new projects. This will make itself felt in a new turn of the cycle after an economic recovery.”

So, it’s likely these low prices are preventing energy companies from investing in the more expensive drilling ventures, which would leave them at-footed if demand starts increasing again. That could mean more volatility in our future. Which makes this question all the more interesting: What will we do in the meantime?