Oil prices are monthly average import prices at the refinery in 2011 dollars. Prices run through May 2011 and annual imports through the year ending May 2011. (Sources(1)Refinery cost are from EIA’s MER, Table 9.1 in Energy.  Import are fromEIA’s MER Table 5.1.)

September 19, 2011.  We are witnessing the second largest drive toward energy independence in our history. The first was in response to the 1973-1985 OPEC crisis, and the second started in 2006 soon after oil prices broke $60/bbl tripple their price seven years ealier.

Currently imports are down 37% below the conservative trend line in the graph. That is not only the result of the Great Recession. Parly it is, but mostly it is the price effect. About 5% out of the 37% is explained by increased production, but most of it is price-induced reduction in oil consumption. Contrary to environmentalists (who love command and control) prices work.

The increase in production, though relatively small is impressive considering the U.S. has been runing out of oil since 1974.

So what drives oil prices?

The key is to realize that the oil market is a world market. This has some amazing consequences:

• Drill baby drill and the Chinese will thank you.
• Making ethanol replaces 30% less gasoline than environmentalists think. 
• Exxon loves OPEC more than you can imagine.
• Form an OPIC with China to cut gas prices and you’ll help the climate. 

Drill baby drill

The world market produces and consumes about 95 million barrels a day. The US, uses about 19 and produces about 7.5 million bbl/day⁽²⁾EIA Petroleum. In 2010 Alaska produced 0.6 million bbl/day, or about 0.6% of the worlds oil. As you can guess, that does not change the price of oil by much. So if baby drills like crazy in the Gulf and the Alaskan National Wildlife Refuge, the most you could hope for would be about a 1% drop in the world price of oil. So how much is that for gasoline?

Well when oil is $126/bbl, which is $3.00/gallon, gas is about $4.00/gallon. So another Alaska might save us and the other oil addicts about 3¢/gallon. China, the next biggest addict expects to be importing 80% of its gasoline by 2030. Of course Japan, Korea, and Europe import almost 100%. So they will all thank us (or they should) for drilling in our wildlife refuge and our fishing grounds.

More Ethanol  ⇒  Cheaper Oil  ⇒  The World Uses More Liquid Fuel

Use ethanol and you don’t use gasoline. But where does the gasoline go? Do the Saudi’s put it back in the ground? Nope. They pump their quotas no matter what. Does BP put it back in the ground? Nope, but they might pump less. But why? Because they notice we are using ethanol and they think, “Oh, so we should pump less oil?” Never. Oil companies with expensive production will pump less if and only if the price of oil falls. And since it’s a world market, increasing supply (with ethanol) will drive down the price. But here’s where the enviros are wrong. They think the lower price only reduces supply. But remember, it’s supply AND demand, that rules the market. A lower price will increase the demand for oil. Because of this ethanol is about 30% less effective than the 100% supply-cut that EPA counts on. And since corn ethanol is not so good to start with, producing it actually increases CO2 emissions, once this global rebound effect is factored in.⁽³⁾ “Renewable Fuel and the Global Rebound Effect,” by Steven Stoft, a report filed by the Clean Air Task Force, in a complaint againt EPA’s Renewable Fuel Standard Program (RFS2)

Exxon Loves OPEC

But you knew that. Every time there’s a big oil price spike Exxon makes about an extra $30 billion per year. That buys a lot of love. And it’s a free ride. The Saudi’s have to cut production to raise the price, but Exxon, does not help at all. So they appear to have clean hands, and it’s all gravey. In return, they quitely protect OPEC.

Form an OPIC; Save the Climate !?

Back in 1975 many advocated an Organization of Petroleum Importing Countries. In fact, the U.S. led the formation of the International Energy Agency (IEA), which Henry Kissinger designed specifically to act as a counter-cartel against OPEC. And it did give it a try, but the the Iranian revolution knocked out Iranian supply and sent prices throught the roof. This had the effect IEA intended to have—non-OPEC supply grew, and global oil demand fell. The result was OPEC crushed itself for about 18 years. Surprisingly the demand-side effect was far stronger and much longer lasting. (You can read about that in my book, Carbonomics.)

So what is by far (many times over) the strongest climate policy ever implemented. Of course, it’s OPEC. But OPEC hates climate policy! Exactly. They hate other people’s climate policies. If they run the climate policy, they collect all the carbon taxes—something like $500 billion a year. But if the world organizes an OPIC, we could make quite a dent in that. But we need to start more modestly, big organizations are tricky to organize. So we make a deal with China. We both tax oil imports. So we use less, so the world price of oil falls. That’s win-win. The price only falls if the world uses less and emits less carbon. This brings together environmentalists and everyone who hates paying OPEC’s exhorbitant prices. That’s one powerful political coalition. Except it’s not because environmentalists don’t want to talk to those interested in paying OPEC less (to be honest, they are mainly confused⁽⁴⁾

Environmental Oil Confusion

Enviros think that if we reduce the world price of oil everyone will consume more oil. But that’s not true if we all tax oil imports. Then there are two prices: the world price and the after-tax internal price. The low world price saves America billions, while the high internal price makes us (and the Chinese) use less—and using less is what cuts the OPEC price.

But won’t the government get all those tax revenues? If the enviros have their way, then, Yes. But, instead, we should refund all the money on an equal per-person basis, as Alaska does ($1000/person per year), or like British Columbia, or like the Climate Scientist James Hansen advocates.).