Regulation of the Oil Industry

On the supply side, it’s simple: we don’t produce enough oil in the U.S. because the government prevents it. Because of extensive regulation, mostly environmental regulation, it is simply too expensive to explore, refine, and produce oil at a faster pace than we do currently. Additionally, the government maintains a monopoly ownership of land that has large oil deposits (for example, the government owns over 87 percent of land in Alaska). Because of environmental regulations, there has not been a new oil refinery built in the United States in more than 30 years, and the number of refiners has been cut in half in the last 15 years. Saudi Arabia has even offered to build two new refineries in the U.S., but only if “someone else obtains all the necessary environmental permits first.”¹⁴⁴ They would produce oil for us in the U.S. but environmental laws prevent them from doing so.

America’s invasion of Iraq, a former large oil producer, has also served to reduce the world supply of oil. And to the small extent that OPEC influences oil prices, we can blame government intervention in those countries, since OPEC is comprised largely of state-owned companies. Privately competing firms in Iran or Nigeria would have no incentive to withhold oil from the market, and competition would prevent these private firms from raising prices.

American consumers are also unable to consume as much oil as they would otherwise because stiff taxes make the price artificially high. Taxes vary by state, but they comprise about 50 cents of every gallon of gas, on average. Gasoline tax is just another method of extracting money from tax payers because one of the many other forms of tax money (state & local income tax, etc.) was spent on wealth redistribution instead of roads and highways. Of course, high taxes are also used as an incentive to make us drive less, since the government does not build enough roads with all the tax money it confiscates.

On the demand side of gasoline prices, we’ve already seen in Chapter 3 that prices rise mostly because of the printing presses of world governments. While speculators are usually blamed by governments (and even economists) for dramatic price changes (especially currency collapses), they are almost always caused by the government itself. But speculators (and investors in general) cannot just run a price up for no reason. They cannot control the entire world market for oil. For every trading position they open, they must close another. Therefore, their speculation must be correct or they will suffer losses. World governments dramatically reduced their rates of printing money in 2006 and 2007. As a result of this, and the recessions that action brought about, we saw world demand, and therefore prices, collapse in 2008. Any speculators betting that prices were going to rise in mid-2008 got slaughtered by betting incorrectly. Yet no one asks why the speculators supposedly decided to suddenly drive oil prices lower. Do they no longer want to make profits?

Analogously, though OPEC and oil companies were being blamed for manipulating oil prices, no one asked why they had decided not to manipulate prices as they were falling from the mid 1980s until the late 1990s, when oil prices ended up at $12 per barrel. OPEC produces only 30 million of the 80 million barrels produced each day;¹⁴⁵ plus, they still face consumers who will purchase less oil if prices rise too much. Not to mention that individual countries within the cartel regularly cheat on their quotas. In sum, OPEC thus has little pricing power. Along the same lines, the size of American oil companies pales in comparison to the sum of all other oil producers in the world. Therefore, it’s impossible for American firms to control oil prices. Still, a recent poll shows that 69 percent of the American people “can see the president making gasoline prices go up or down [manipulating prices].”¹⁴⁶

It is true, however, as commonly stated, that America consumes much more energy than other countries. Yet this is a wonderful fact, not one to deplore. America’s level of oil consumption reveals the amount of capital we have in our possession and reflects the amount of goods we are able to produce. It reveals, and is the reason for, the advanced technological state of our country. It reveals that our standard of living is that much higher than most other countries.

More importantly, we should consume more, not less! We need to consume energy — mainly in the form of oil, for now — in order to advance and progress economically. There is plenty of oil in the world to do this with, and as technology advances we’ll find more. If we don’t find more, so what? Given the price of oil that will exist when oil stocks are becoming depleted, the cost of producing oil will exceed the cost of alternative fuels, and we will then switch our production to those alternatives. While socialists claim that oil companies prevent the switch from taking place now, the truth is that oil companies, or any other entrepreneurs, will use their capital to produce any type of energy that’s possible at prices consumers are willing to pay. Currently, consumers are not willing to pay two or three times as much for energy. And government subsidies aimed at making alternative energy “affordable” do the opposite. Subsidies deduct money from our wages so that they can then be used to purchase alternative energy we would not choose to pay for on our own. This destroys wealth, as well as making us pay more for energy than we have to, leaving less money for other parts of our lives. It is simply not yet economically feasible to use most alternative energies.

Therefore, let’s use oil and use a lot of it. The more we use, the more prosperous we will be. At today’s rate of world consumption, there are enough oil reserves for 40 more years. That amount will likely increase, as it always has. The only reason, besides environmentalism, that we have a mindset of needing to conserve energy is that our government(s) does not provide enough of it. If we got government out of the way and allowed the free market to produce energy, we would have an abundance of energy and at lower prices.