Sunday, December 07, 2014

How the U.S. could fight OPEC and win (and why it won't)

OPEC has declared war on American oil production with the intention of making the country more dependent on imported oil and on oil in general. By refusing to cut production in the face of weakening world demand, the cartel has allowed oil prices to fall more than 35 percent since mid-year to levels that are likely to make most new oil production in America's large shale deposits unprofitable. That could not only halt growth in U.S. production, but may lead to an actual drop because production from already operating deep shale wells declines about 40 percent per year.

The United States could chose to fight back and possibly win this war with OPEC by employing one simple, big move. But, I can confidently predict that the country will not do it. Why? Because it involves a tax, a tariff actually.

Back in 1975 then-Secretary of State Henry Kissinger proposed that the world's oil importers adopt a floor price for oil. The purpose was threefold: 1) encourage domestic oil production, 2) accelerate the development of alternative energy sources by making their price more competitive with oil and 3) encourage conservation of oil and oil-derived products such as gasoline and diesel fuel.

The easiest way to achieve the floor price, of course, would be to slap a sliding tariff on imported oil. The formula for such a tariff would be simple: The floor price minus the price of imported oil unless the price of imported oil equals or exceeds the floor price, in which case, the tariff would be zero. Imposing a tariff that keeps U.S. oil prices above, say, $100 per barrel would only return the domestic price of gasoline and other refined products to their level of just six months ago. Presumably, that wouldn't be much of a shock to consumers.

I suspect, however, that Kissinger's proposal would be about as popular today as it was when he proposed it. Back in 1975, it never got off the ground. This was, in part, because the Europeans and the Japanese objected that, unlike Americans, the two had few oil resources that might be exploited as a result of such a price guarantee. In the end, America was unwilling to go it alone.

Ironically, since that time the Europeans and the Japanese have opted for high taxes on energy including motor fuels--taxes that have had the effect of achieving Kissinger's objectives two and three, alternative energy development and energy conservation. Americans have maintained low energy taxes which in part are responsible for the fact that the average American uses twice as much energy as the average European.

An oil tariff could actually garner considerable well-heeled, heavyweight political support from two unlikely bedfellows: the domestic oil industry and the renewable energy industry. The domestic oil industry, of course, would love a tariff because it protects the industry's high-cost deep shale deposits from the competition of cheap OPEC oil imports. The cartel's price suppression strategy specifically targets the high-cost hydraulic fracturing or fracking in deep shale deposits that has been largely responsible for the rise in U.S. oil production from a low of 5 million barrels per day (mbpd) in 2008 to 8.8 mbpd as of September this year.

The renewable energy industry might well join the oil industry in supporting such a tariff because a high oil price makes alternatives to oil more attractive.

But individual, commercial and industrial consumers of oil and oil products would object to higher prices. Industrial users, in particular, would complain that they must compete against other industries abroad that pay less for their petroleum products (though this might not be true in such high-tax places as Europe).

Another group would almost certainly object to such a tariff: those concerned about the environmental damage associated with fracking for oil. High domestic oil prices would only encourage exploitation of more deep shale deposits across America, and that would necessarily result in broader environmental effects. These activists might well argue that a hefty carbon tax which would tax oil and all other carbon energy sources would be better targeted for reducing energy consumption and spurring alternatives to fossil fuels--with no need for an import tariff that encourages domestic oil production. But, recent history suggests that such a tax remains politically implausible. So, the question is: If the tariff were to be adopted, would the support provided to alternative energy be an acceptable trade for the damage done to the landscape?

Of course, anti-fracking activists will retort that they'd like to ban fracking altogether while the country speeds up deployment of alternative energy. But, the chances for such a ban, either federal or state, while not zero, are probably smaller than the chances that the United States will enact an oil tariff.

The beauty of the oil tariff is threefold: 1) The mechanism for collecting it is already in place. 2) It doesn't mandate exactly how people should go about reducing their petroleum use; it only incentivizes them to do so. And, 3) it makes significant headway in addressing one of America's greatest vulnerabilities, our dependence on foreign oil and on fossil fuels in general. We'd get all this with one tax.

Getting agreement for an oil tariff would be a grand bargain of the first order. It would require a sort of Alice-through-the-looking-glass transformation across the United States. Oil industry captains--who tend to have libertarian leanings and who have consistently and publicly denounced excessive government regulation and taxes--would have to champion a new tax. The renewable energy industry would have to embrace its new partnership with the oil industry.

Environmentalists might have to be appeased with new, much stricter environmental standards for fracking and with assurances that enforcement would be vigorous. (The oil industry would look foolish opposing such standards when it is being given such a big financial gift--one that would enable it easily to pay for better environmental practices.) And, the oil-consuming industries and the public would have to take the attitude that the tariff is the right thing for the country because it will force all of us to do the right thing: conserve and seek alternatives to oil and oil products.

The most likely course, however, is that no such tariff will be adopted. As a result America's oil industry will slip into a slump. The country will become more dependent on imports and oil in general. And, when oil prices rise again--as they surely will--the industry will go right back to fracking America's deep shale deposits at full speed without any additional environmental safeguards.

Where is Lewis Carroll when you need him?

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

4 comments:

Anonymous said...

Sorry, it is not plausible that Saudi Arabia can make oil production related decisions without tacit approval of the USG.

The more likely reason is that the USG is willing to forgo shale production in order to squeeze Russia.The thinking is: It worked before to bring down the USSR, so it must work to bring down Putin.

I do not have enough data to say that this strategy will work this time as well.

Anonymous said...

The suggestion that KSA and USA cooperate on anything these days is laughable. What's more likely is that KSA is waging economic warfare on USA, to wit- precipitating another financial crisis by undermining LTO production. LTO is about to peak. Peak production equals peak debt. And here comes KSA to pull the rug out. That's what you get for messing with ISIS, the Sunni proxi funded by KSA fighting the Shiite proxy funded by Iran. Russia has a lower marginal cost of production that USA, and Russians are hard people. They can handle more adversity than yanks. This price drop is asymmetrical warfare i.e. Economic warfare on USA by Sunni monarchs retaliating for USA messing with their dog ISIS. It's easy to see.

Anonymous said...

Or, the US could start buying crude to refill and expand the Strategic Oil Reseserve.

Dan Warren said...

Yes, this is the obvious smart play for America and Canada to make. Place a tariff on all foreign oil, and allow the newly robust North American oil industry to flourish.

I thought of this idea, too, recently, thinking about the problem. I am interested in working in the oil fields, and have been working to prepare for this. And, as I saw the oil price collapsing, I thought a tariff on foreign oil would solve the problem.

This is particularly apropos, if it is true that OPEC is deliberately trying to smash down North American production by maintaining over supply of oil.

Why should America and Canada have their hands roped behind their backs while foreign entities play us for fools?

A tariff is easy, taxes no North Americans, and allows the robustness of the new energy development to continue to flourish. Keep in mind that energy independence creates many other benefits for the nations of Canada and the USA, too.

Particularly, it offers strong reason to bring back manufacturing to North America.

I am partial to the notion that North America should strive to be self reliant in virtually all things. We are such a large entity that there really should be no sound reason to allow key elements of our economy to be reliant on foreign sources of production. This is very dangerous. The world is full of dire enemies and allowing our sources of key economic production to be located so far away makes us very vulnerable. To allow cheap labor to be a trump card, we have given the upper hand to China which has no good intentions for us. They play the long game and look to themselves as being the power center of the future. We are fools for allowing them to build themselves up rapidly by hollowing out our manufacturing base through their cheap labor. Free trade with low wage countries is simply disguise to destroy our home grown industries, workers and knowledge base of expertise.

Energy is a key underlying resource to the modern economy, and North America is blessed with energy abundance. A tariff on foreign oil would be a very simple, logical response to OPEC deliberately (or even not deliberately) planning to knock down our new success with sale oil. America and Canada should simply not allow such a n OPEC plan to succeed. All that is needed is a simple tariff.