Home Ken's Commentaries We Cannot Afford Cheap Gasoline

We Cannot Afford Cheap Gasoline

by Ken Root

The oil and gas industry is on the rocks.  The Exxon Valdez has nothing on this wreck, brought on by large oil producers inflicting pain on their economic and political adversaries. This time, the users of petroleum products, from aviation to agriculture and manufacturers to motorists are relishing low prices for natural gas and gasoline.  The longer term results of this euphoria are unknown but likely to be painful.  It is time to realign our energy priorities and have more control over our destiny when the next energy cycle comes along.

No industry that touches rural America can fly higher than the oil/gas business and none can plunge (subterranean) more quickly.  I witnessed the uptrend of the 1970’s and the downtrend of the early 1980’s, when oil relate companies made millions and lost millions more.  Owners of mineral rights, who were often farmers and ranchers, profited along with the oil drillers, pipelines and petroleum refiners.  It was inappropriate to brag about new wealth but farmers could erect a big blue A.O Smith Harvestore silo to symbolize each well on their land.  When the market broke, it took no prisoners as every segment of the industry imploded. The same appears to be happening now but for different reasons.

As explained to me by energy analysts, it all started with Saudi Arabia deciding that high oil prices would be bad for their long term business interests.  Renewable energy was becoming more cost effective and destroying demand for oil.  The high price of oil also put the Bakken region of the U.S. and Canada in business.  That oil is expensive to retrieve but profitable above about $70 per barrel.  The Saudi’s action to increase supplies easily took it out of play.  Finally, and maybe most important, political differences with Syria, Russia and Iran moved advantage of an international chess game to the Saudi royal family.  In this case, U.S. foreign policy paralleled theirs so our government did not object.

Back at the ranch, all we have done is react to the wealth created by the lower cost of oil.  The price of gasoline is less than half what we paid two years ago.  Here is another phenomenon that is a little too close to home: Energy companies in the United States made enough money in the high income years to invest in more discovery technology, including horizontal drilling of many wells from the same location and “fracking” of formations to yield much more oil and natural gas.  They increased the supply of natural gas and it took on a life of its own as environmental regulations, lower costs and easier handling resulted in coal fired plants switching their fuel source to relatively clean gas.  My parallel in this is the 2006-2014 uptrend in farm prices which increased production efficiency and ethanol production to the point both are in trouble due to very large supplies and low competitor prices.

So here we are enjoying low fuel prices at the expense of big companies and foreign nations.  Should we just wallow in it or take some action that insulates us from the next upswing and downturn?  Legendary oil trader, T. Boone Pickens, predicts oil will hit $52.00 per barrel by year’s end while noted analyst, Dennis Gartman, says Boone is wrong and the price won’t go over $40 in his lifetime.  Do we really think OPEC countries won’t collude sometime in the future to cut supply and raise prices?

What we need to do now is control our dependence on oil and keep building a domestic renewable infrastructure.  We also need to deter consumers from buying gas guzzling cars and expanding discretionary driving that burns more fuel.  Stand by to explode: It is time to examine President Obama’s $10 per barrel oil tax.  The proceeds must go to repair and upgrade roads and railroads plus fund new technologies to make transportation systems safer and more efficient.  We can pay it now without pain and we will decrease the amplitude of the next price cycle while continuing to fund repair of roads, bridges and expand other infrastructure that we desperately need.

It is interesting to me that we have an affection for oil companies and an addiction to their products.  It comes from a lifetime of seeing positive messages in media and equating gasoline with cars and trucks which represent our personal freedom and status.  But we are also price sensitive to gasoline.  The filling station that is one cent cheaper will get more business, even though you will go in and buy a bottle of water for $1.79.  It is in our being to use less fuel when the price is high.

It is amazing to examine the amnesia we currently have on the disruption caused by dependence on foreign oil.  The United States began reacting during the Arab Oil Embargo of 1973.  We spent billions subsidizing the formation of renewable energy industries such as wind, solar and biofuels.  Development of U.S and Canadian reserves of oil was encouraged by both governments but recent environmental concerns and property rights have pretty much killed the Keystone XL pipeline project that would have brought the oil south in a much more efficient manner than transporting it in rail cars.

We have a unique opportunity to take our long standing policy to the next level by laying in a tax on oil that will fund infrastructure and head us to the next level of highway safety and efficiency.  This tax is not about climate change, it is about controlling our own destiny when OPEC countries decide they want to make money again and put the squeeze on American consumers rather than their political enemies. For country and climate, I don’t think we can ever again afford cheap gasoline.