Will 2012 Renew 2008’s Drill Baby Drill?

Even before threat of conflict with Iran, oil prices—and hence, gasoline prices—have been rising in recent months. In part, this upward trend stems from the higher costs of finding and producing oil in a world market. Additionally, the “risk premium” due to political instability in the Middle East accounts for another $10 of the current price of $102 a barrel.

The history of oil and gas prices is one of cycles. Low prices don’t persist and neither do high ones. There’s no reason to expect 2012 to diverge from that pattern.

The Department of Energy reported U.S. gasoline demand to hit a 10-year low of 8.77 million barrels a day in 2011 and expects the country to continue on a plateau for the foreseeable future. That makes sense considering Americans have been logging fewer miles on the roadways since the recession hit. However, our crude prices will remain robust because crude is a global commodity. In fact, amid increased domestic production of shale oil and gas along with rising energy demand in developing countries, America is on track to become a net exporter of refined petroleum products for the first time since 1949.

If the economy stages an unexpectedly strong recovery in 2012, demand for gasoline and diesel will increase and prices will surge accordingly. Current prices are already at a high for January, and analysts predict this year’s average will trump 2011. And higher prices will thrust energy policy front and center in the political debates. (Remember the calls to “drill, baby, drill” prompted by 2008’s record high of $145 a barrel.)

If Iran attempts to shut the Strait of Hormuz, prices will sky rocket. Though unlikely, such a move would also qualify as an act of war—triggering a naval conflict that would likely the pattern of the first Gulf War, which was measured in hours and days. Though short, a military conflict would send oil prices to levels not seen before. And then they’d likely fall just as fast, as they did in 1991.

Though the U.S. and our allies can do little to prevent this kind of spike, there’s much we can do to moderate it. All developed nations have stockpiles. America’s is the Strategic Petroleum Reserve, which can be used to replace the loss of oil coming through the Strait. Announcing coordinated plans for using that oil, if necessary, would have a calming effect on markets.

Longer term, the Persian Gulf’s influence on global prices will diminish as more exploration and production increases in other regions. The more oil produced elsewhere, the less influence OPEC can exert. America’s potential role in this will play a major role in the 2012 campaign.

The Americas are rich in natural resources. Canada is developing theirs, and so is Brazil. The U.S., however, faces a presidential administration hostile to domestic production of traditional fuels. Although crude oil production has been increasing and drilling has resumed in the Gulf of Mexico, we’re still underperforming. In fact, Wall Street Journal writer Ryan Tracy reported that the Obama administration is putting solar and wind projects on the fast track for approval while still slow walking oil & gas permits.

An energy policy that gave domestic production a real priority, with appropriate environmental safeguards, would lead to a significant growth in production over the remainder of this decade and beyond. There is no reason that we can’t increase production by 2 million barrels a day by the end of this decade. Yet, political obstacles continue to prevent economic benefits and job creation.

Our current incoherent, irrational, energy policy will remain so until President Obama and congressional Democrats accept the fact that fossil energy will remain the world’s dominant fuel source for decades to come. Fully developing those resources while having a robust R&D program is best way to improve our energy security and protect our economy in the long run.

This article appeared in the National Journal’s weblog on Jan. 9, 2012 at http://energy.nationaljournal.com/2012/01/how-could-high-oil-prices-shap.php#2147395

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