We don’t often cover the oil price at Fortune & Freedom. This is despite energy being “the master resource” and oil being energy’s key component.
The reason we call energy a master resource is that you need energy for everything. From existing biologically to the most complex economic function, energy is a key input in everything. And so… energy prices matter, a lot.
Another key part of this is the idea that energy production can be measured in terms of how much energy it takes to produce energy. For example, how many barrels of oil are used to produce a barrel of oil? How many barrels of oil are used to produce a tonne of copper?
As the world uses up cheap oil, what is really going on is that it is using up the oil which costs a small amount of oil to get at. The margin of energy used to energy produced is getting tighter.
The same ideas apply to non-energy related economic activity. How many barrels of oil does it take to get a pencil in your hand?
And, whatever that number is, if the cost of oil rises, is it still worth getting that pencil in your hand at all? Or do the costs outweigh the activity?
Keep all these vague ideas sloshing around in your head as we delve into some of the recent events in the oil market. Because, just as oil is in chaos, so everything else must be too.
The oil price is up seven-fold since April 2020. Indeed, it went negative in the United States and now trades around $80 per barrel, so the percentage increase could be a little meaningless.
Nevertheless, the change in the US oil market over the last 19 months or so has been dramatic.
The U.S. Energy Information Administration notes that heating costs for American families will increase by 54% this winter, making heating the most expensive in over a decade.
According to Irina Slav of OilPrice.com, quoting stats from Deloitte and Bloomberg, the US’ shale oil companies – famously high-cost producers of oil – are raking in bigger profits than ever before.
But the United States, after spending 75 years becoming a net oil exporter, is returning to a net importer again. This is a vast shift. And it is a carefully chosen one…
Now, the one thing you do not want to do when the oil price is troublingly high is to go after those who pump it.
On cue, the Biden government is out vilifying everyone with oil to pump.
Ignoring the vast existing domestic production potential, and requesting OPEC (the Vienna-based cartel of exporting countries) to open the spigot instead, while also placing a moratorium on oil and gas leases on US government land, and revoking the Keystone pipeline permit, and announcing an investigation for anti-competitive behaviour by big oil companies, is not going to ease the oil price mess.
Indeed, it will make it far worse.
Citing “mounting evidence of anti-consumer behaviour by oil and gas companies,” Biden wrote in a letter that, “I do not accept hard-working Americans paying more for gas because of anti-competitive or otherwise potentially illegal conduct.” He failed to add, “Unless it’s by the government, of course.”
It’s the same story in Europe, where delaying the Nord Stream 2 approvals process is not going to solve gas price problems. Nor is the Dutch government’s refusal to get the Netherlands’ vast gas field ramping up production.
The growing commitments by banks, governments, funds and investors to avoid funding oil companies only worsens things again. In the UK, after prognosticating at COP26, the government is under pressure to abandon an 800 million barrel oil field during an energy crisis…
So, to be clear, governments seem to be doing what they can to make the energy crisis worse.
And they have succeeded. The price of petrol has doubled in a year in parts of the United States. And you’ve seen no end of similar headlines around the world.
In a Breitbart News interview, US Senator Tom Cotton argued that that country’s petrol price spike is a deliberate consequence of the Biden administration’s energy policy:
“Most notably, more and more people tell me that they’re not even able to fill their pickup truck tank up for the entire week.
“They’ve got to fill up half a tank and hope that the price comes down by the end of the week. That, in particular, is the intended effect of Joe Biden’s energy policy. It’s not unintended or some accident. They want gas to cost $4 a gallon because they want all of us to get out of pickup trucks and SUVs and get into small electric compacts or bicycles or scooters or whatever else Pete Buttigieg takes to work.”
Now, it’s important to note that part of this argument is just plain nincompoopery.
Filling up half a tank is a very bad idea if you want to reduce pollution, because you add extra trips to the petrol station.
The same goes for consumption and spending – an extra trip to the pump costs you fuel, making the problem worse.
Moreover, if petrol prices are rising, people buy more petrol, not less, to try and get ahead of future price rises.
Then there’s the issue of supply chain disruption amongst cars, which are causing long waiting times for new vehicles, triggering price spikes amongst used cars. It’s a bad time to be pressuring people into lower pollution cars, in other words.
Anyway, Cotton’s comments no doubt sound like a crazed conspiracy theory. What sort of government would be dumb enough to impose policies that raise energy prices, while also going after companies for raising energy prices in the courts?
But raising the cost of energy is a basic part of government policies like carbon taxes, emissions trading schemes and more. If it costs you more, you’ll use less.
Having achieved their goal, the government is also busy saving us from higher energy prices.
In both China and the United States, the governments are considering releasing oil from their strategic reserves, as well as requesting others do. Having created a problem, or should I say solution, they now seek to solve it… or make it worse…
Remember, the underlying idea here is to artificially increase “bad” energy prices in order to incentivise “good” energy. This uses market forces to impose policy.
But is it politically viable? Do people want to be squeezed by their betters in the aftermath of a pandemic?
Well, we did stop burning wood to stay warm thanks to carbon taxes hundreds of years ago.
And we stopped using coal in our fireplaces thanks to the EU’s emissions trading scheme.
We stopped using horses when governments subsidised automobiles over methane concerns.
And we dumped sailing ships when the government published Health and Safety guidelines.
Not to mention transitioning to diesel cars when incentivised by government policies…
My point is that trying to dump an energy source before it makes sense is a dangerous thing to do. It undermines the economy itself. That, in turn, makes green energy subsidies harder to pay for.
Editor, Fortune & Freedom