Saudi Arabi... Unbelievable

Remember this post? Well, if you thought that was outrageous, see this headline and article: Saudis Seek Payments for Any Drop in Oil Revenues

Let me get this straight, they want us to pay them if we pass climate change treaty? Somehow it is our responsibility to compensate them because they built their economy - and therefore their autocratic government's ability to rule - around one commodity that is finite and its overuse is harming our planet?

Saudi Arabia kills me.

Royal Family, Royal Pain

The former ambassador to the United States from Saudi Arabia, Prince Turki Al-Faisal, has written a piece that is critical of American talk about energy independence. Of course, it is in his interest to talk us out of our search for alternative sources of energy. The less we rely on oil, and therefore Saudi Arabia, the harder it will be for the Saudi royal family to retain their authoritarian and oppressive reign.

Al-Faisal does a good job of describing all the ways Saudi helps stabilize oil prices, and I do not doubt what he says. However, he clearly ignores the other aspects of the Saudi government. He does not defend the way they have spread a violent and hateful form of Islam, one that is intolerant of Shias and western ideology. And he does not defend a government with serious human rights violations and no democracy whatsoever.

The prince says that energy independence is mirage. He clearly means complete independence, and in that he is right. However, the less oil we need, the less dependent we are. We will not completely rid ourselves of oil anytime soon. But we can find ways to insulate ourselves from oil's volatility and from the often corrupt, inhumane, and dangerous governments that export it.

We have a choice coming up. We can do as the Prince says, and remain interdependent with Saudi Arabia and all the baggage that comes with that. Or we can pursue alternatives, giving us the ability to tell Saudi Arabia the truth, and to maybe one day put pressure on the government to provide real change, even if that means having a free government that does not like the US.

What You Need to Know About Oil

If you are curious about why oil prices have changed so much recently (or even if you think you know), read this article in the Times. If you don't have time, I have highlighted the main points below. If you don't even have time for that, then I would send you away with this main point: Current capacity for the production of oil is flattening while global demand is rapidly increasing. Because of oil futures speculators, prices will fluctuate, but in the long term, prices will rise. We need to decrease our consumption and find alternate sources of energy. The author believes (as does Thomas Friedman, and as do I) that we should create an artificial price floor (through taxes) to accomplish this because every time prices decrease, we forget and we stop conserving.

Those Damn Speculators

According to skeptics like George Soros and Michael Masters, a hedge-fund operator, the only thing wrong with the oil market is the market itself. Speculators, they say, drove the price away from its "fundamental" value; worse, a new breed of institutional investor has been buying oil futures, hoarding the supply.

On the other hand:

Of course, capitalism demands that people, or at least investors, make bets. That is how resources are allocated and money is invested where it is needed; high prices communicate scarcity. You could even say the oil market has performed a vital service to the country by telegraphing the need to conserve and to develop alternative supplies.

Recent History of Oil Prices:

The reason that the history of oil is basically one of attempted price fixing is that, as technology has improved, drilling costs have fallen, meaning that prices have been under near-continuous downward pressure. Like most commodities, oil should sell for whatever the cost of producing one additional unit is — in this case, one more barrel. Economists call this the "marginal" cost. If someone charges much more than that, a competitor can offer to sell it more cheaply.

It’s only when oil is scarce that things become interesting. If there isn’t enough to go around, then the marginal cost no longer matters because, at the margin, there is no more oil to produce. Under such conditions, oil will rise to the price at which people stop using it — either because they drive less or because they find another energy source. This is called the price of demand destruction. Think of that as the upper bound on the price. With the twin shocks of the ’70s — the Arab embargo and the Iranian revolution — oil did reach an upper bound, jumping tenfold to $40 a barrel in 1981. Demand quickly collapsed, and the price eventually sank all the way back to the marginal cost, $12.

Low prices were good news for consumers but a mixed blessing for society. Since it takes time for oil companies, as well as consumers, to react to price changes, markets tend to respond with a perilous lag. In the ’80s, oil companies were spending billions looking for oil, and Detroit was retooling its plants to make smaller cars, even as the price of oil was collapsing.

In the mid-1980s the oil industry suffered a terrible slump. Thousands of petroleum engineers were fired or left the business. Congress lost interest in energy conservation, and projects to develop shale oil and other alternatives were dropped. In Europe, high fuel taxes meant that people still had an incentive to conserve. In America, families became unwilling to ride in anything but trucks.

Even as oil prices rose in this decade, big oil companies — still responding to the price signal of an earlier period — plowed most of their cash flow into dividends and stock repurchases rather than risk it on exploration. State oil companies overseas, like Saudi Arabia’s, which control four-fifths of the world’s reserves, refused to make the investment to develop their fields to full potential for fear of flooding the market (another reaction to low prices). For similar reasons, there was a lull in building critically needed refineries.

By the time oil companies woke up to the consequences of low prices, it was in some sense too late. There was "a missing generation of engineers," according to Daniel Yergin, the chairman of Cambridge Energy Research Associates and the author of "The Prize," a history of the oil industry. There was also a lack of drilling rigs and men to work them. Drilling costs soared, and equipment was often unavailable. Also, countries where oil is abundant, like Russia and Venezuela, were increasingly chauvinistic and hostile to foreign operators. Civil unrest set back production in Nigeria.

By the middle of this decade, various big oil regions — Mexico, Nigeria, the North Sea, Colombia, Venezuela — were experiencing production declines.

The lesson here is that a high price of oil is the only thing that forces us to conserve and invest in alternate energy. Hence the need for an artificial price floor.

Also, if you think compressed natural gas (CNG) is the solution to our problems, read this article. Basically, if we really want to decrease our dependence on foreign oil and fight global warming, we need to decrease our consumption, not change the form of our consumption.

What Contradiction?

ENERGY INDEPENDENCE - LOWER GAS PRICES
Free America from dependence on foreign oil and create a cleaner environment with initiatives for energy-efficient technologies and domestic alternatives such as biofuels. End tax giveaways to Big Oil companies and enact tough laws to stop price gouging.

I saw the above on the HouseDemocrats.gov site under their "Six for '06" plan. I have to say that the above paragraph is the stupidest thing I have ever read and it makes me want to slap someone. Seriously, if there are two things that don't go together at all, it is energy independence and lower gas prices. Basically, what the Democrats tried to do with this was say two very popular things without thinking through how those two interact.

The only thing that will force us to decrease our dependence on foreign oil is if prices stay high. I am sick and tired of political parties that are incapable of saying what voters don't want to hear. We need high prices because we need to change our habits. This is the same unfortunate mentality that Bush tried to use after September 11, 2001 when he told Americans to go about their business - only the military would have to sacrifice. Voters need to realize that they will have to sacrifice in some situations to make progress possible. But neither Democrats nor Republicans are capable of saying that.

I can't wait for the next Democratic talking points:

"Increase government spending - Cut Taxes"

"Smoke, drink, eat unhealthy foods - Live much longer"