Rebuttal to Zubrin's Article, "How to Reduce Oil Prices"

Sunday, August 19, 2012

The following is a rebuttal by David Ruggles to Robert Zubrin's National Review article, How to Reduce Oil Prices.

RE: "It is in this light that the extreme malfeasance of the Obama administration in delaying the approval of the Keystone pipeline becomes apparent. While much has been made of the loss of 20,000 jobs building the pipeline, that is the smallest part of the matter. The real issue is that by refusing to approve the pipeline, the Obama administration is acting to block the introduction of 270 million barrels per year of Canadian oil into the world market. In doing so, the administration is acting in accord with the interests of the OPEC oil cartel, which wishes to see supplies limited so that it can maintain high oil prices at the expense of the West. At current prices of $100 per barrel, this will cause a loss to the North American economy of $27 billion per year — an amount sufficient to create 270,000 North American jobs. (Canada draws 65 percent of its imports, which amount to 31 percent of its GDP, from the United States. The two nations effectively share one economy.)"

Malfeasance?  First, Obama "Fast Tracked" the part of the pipeline project to relieve the bottleneck around Cushing OK.  Second, I have NEVER seen job estimates of 20K for the pipeline.  4K to 5K max.  Third, the Obama Administration is NOT acting to block introduction of 270 million barrels of Canadian oil in to the world market.  That oil can be transported to a Canadian port.  OR Canada can build a refinery to process it.  The premise that there is only one way this oil can be brought to market is patently FALSE.

Further, oils shale, oil sands, and oil from fracking depend on a relatively high world market price of oil.  The break even point is about $65. - $70. per barrell.  This oil REQUIRES a relatively high price at the pump to be viable.  Flood the market with oil, the price goes down, producers stop producing and/or go bankrupt.  What happens if money is borrowed to build the pipeline and OPEC opens its spigots, driving down the world price of oil?  Who pays the debt on all of the borrowed money?  After driving the pipeline and high cost producers out of the market, OPEC raises prices again.  They have a history.  There is a reason OPEC produces no more oil today than 40 years ago, despite the fact that the world population has doubled since then, and consumption of oil based energy has tripled.

RE: "small changes to the supply can cause large fluctuations in price. The 2 percent temporary reduction of Middle East oil supplies caused by the disorders associated with this year’s putative “Arab Spring” caused oil prices to go up 20 percent — a ten-to-one ratio."

The out of proportion increase in world oil prices seen when a relatively small reduction on world supply occurred was not rational.  In fact, it wasn't even a real supply reduction as there was extra supply injected to match the reduction caused by the "Arab Spring."  The price spike was caused by oil speculators and market manipulators using contango strategies.  It was all based on initial perception exacerbated by the manipulators buying and hoarding.

Further, the oil shale/sands oil is thick and nasty.  We are already exporting refined fuels because we produce more than we can use.  What we need is to invest in refining methanol from coal and natural gas, ethanol from non food stocks, CNG, and other alternative fuels so there is actual competition among the fuels.

Another point - High fuel prices have not hampered Europe and Japan.  What impacts the U.S. is volatility more than price.  IF we had a steady price of $4.50 at the pump for gas, the economy would adapt.  Extrapolating statistics based on the whipsaw reaction of American consumers to SUDDEN fuel price movements does NOT reflect reality.  Americans are NOT entitled to cheap fuel so they can ride around in their Excalades and Navigators with impunity.  Why write a piece that intimates that we are so entitled?

Its bad enough that so many Americans think that "Drill Baby Drill" would lead to cheap fuel prices.  Most Americans don't understand the concept of fungibility.  They don't understand that OPEC has had a decades old strategy of reducing their own output to match up with others' increased output.  They don't understand that American oil companies are NOT going to sell for less than world market price to Americans.  Why not try to educate them first, instead of attempting to enflame them based on their ignorance.  What do you have have to gain?

David Ruggles is a contributing columnist for variety of auto industry and finance publications. His family has been in the oil business since the 1920s. He also does consulting work and gives presentations at conferences and for local organizations. He did a yearly seminar in Japan for eighteen years on the U.S. Auto Industry. Ruggles wrote a positive review of "Turning Oil Into Salt" (read the review here). He blogs at autosandeconomics.com with Professor Mike Smitka, a leading expert on the automotive supplier chain. 

I showed Robert Zubrin the rebuttal above and asked him if he had a response. He did, and here it is:

1. It is certainly true that the Obama administration has acted to block the Keystone pipeline, and 20,000 direct jobs is a low estimate. Furthermore, while the Canadians can, in principle, find an alternative route to market by building a trans-Canada pipeline, this will both delay the introduction and add cost to the Canadian oil, both of which serves the interests of OPEC.

2. Yes. it is OPEC's policy to limit the amount of oil on the world market in order to drive prices up. That is why the United States, as the world's leading oil importer should seek to throw additional fuel on the world market, from all sources, including domestic oil, Canadian oil, and non-petroleum sources, in order to drive the price down.

3. We do not produce more oil than we use. The United States uses 18 million barrels of oil per day and only produces 5.5 million barrels of oil per day. That is why it is in our interests to have the price of oil driven down by the addition of more fuel to the world market.

4. It is not true that high oil prices have not hampered Europe and Japan, As major oil importers, both Europe and Japan are severely taxed by high oil prices, and their economies are suffering severely as a result. For example, the EU 27 official unemployment rate is now 10.4 percent, and it expects a negative rate of growth for this year. This compares horribly even to the to the US, which under current recession conditions has an 8.1 percent unemployment rate and a positive rate of growth of 1.5 percent.

5. Cheap oil helps the economies of the Western industrial democracies. Expensive oil hurts the West and props up the Islamist tyrannies. The reader should consider this and choose his side accordingly.

Dr. Robert Zubrin is president of Pioneer Astronautics, a member of the Steering Committee of Americans for Energy, and author of Energy Victory: Winning the War on Terror by Breaking Free of Oil. His next book, Merchants of Despair: Radical Environmentalists, Criminal Pseudoscientists, and the Fatal Cult of Antihumanism, will be published by Encounter Books in February.

2 comments:

darcyfamily August 20, 2012 at 9:19 AM  

By criticizing President Obama's opposition to the Keystone pipeline in a conservative journal, Mr. Zubrin is able to capture the attention of those conservatives who might otherwise be antagonistic to the Open Fuel Standard. Zubrin acknowledges that the "Drill, Baby Drill" mantra of conservatives (and I am a conservative) is no long-run answer to rising fuel prices and contrived oil shortages.
Zubrin understands as well as anyone that the answer to our transportation fuel problem is to break the monopoly of oil, and he has done as much as anyone to promote that policy.

Has Ruggles endorsed the Open Fuel Standard Act? Bickering over Keystone is a waste of time when the real solution flounders in Congress and has no apparent champion in the White House.

ruggles September 22, 2012 at 10:12 PM  

For the record, I am in complete support of the Open Fuel Standards Act. But I also have an allegiance to facts even if we ultimately get to the same conclusion.

There is a LOT more to this discussion. It should at least be mentioned that the President fast tracked the part of the project around Cushing OK. It should also be noted that most of the oil transported on the proposed leg to the Gulf Coast is NOT light sweet crude. It is the heavy stuff that can't be refined just anywhere. It is also high cost to extract. IF we somehow manage to drive the world market price of oil down, it will bankrupt the high cost producers. What impact would that have on those who borrowed money to build the pipeline in the first place.

Aftr we figure out some of these details, we might discuss potential the environmental impact of the pipeline.

Alain Sherter wrote a great piece on the pipeline:

http://www.cbsnews.com/8301-505123_162-57361212/keystone-pipeline-how-many-jobs-really-at-stake/

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