Whether this is the third or fourth shock is academic because either way it's bad news for the United States.
Will U.S. policy makers ever learn? The inanity of the nation's energy policy -- indeed, non-policy -- boggles the mind. The U.S., the largest, most-technologically advanced economy in the world, is at risk of being tipped into recession -- again -- due to its over-reliance on oil.
More Drilling Won't Prevent Another Oil Shock
Investors and Americans in general should not delude themselves regarding the U.S.'s oil production capabilities. The ominous reality? The country can't meet its daily consumption needs of roughly 18.7 million barrels per day (bpd) through increased drilling, so it has to import to make up the deficit. In November 2010, the U.S. imported an average of 8.25 million bpd , about 2 million of which came from Middle East oil producers.
Middle East unrest could send oil above $125 per barrel this spring, and that would probably push the average U.S. price for regular unleaded gasoline -- currently $3.25 per gallon -- above $3.50. Add the normal price increase stemming from the summer driving season, and the price could push past $4 per gallon by the Fourth of July.
This assumes that oil's price tops around $125 per barrel. There are other, more-sobering scenarios. Nomura Holdings Wednesday forecast that if Libya and Algeria halted production, oil could peak above $220 per barrel.
Natural Gas: A Better Way ?
An oil price above $200 would most certainly tip the U.S. into another recession, just as oil price surges did in 1973 and 1979 .
However, it need not be this way. If the U.S. were to implement a rational energy policy, it could achieve energy independence and enhance its foreign policy flexibility.
One solution is natural gas. Abundant, domestic, price competitive, clean -- natural gas has many advantages over oil.
Abundance is perhaps at the top of the list. The Potential Gas Committee (PGC) estimates that the U.S. has 1,451 trillion cubic feet (Tcf) of recoverable natural gas, out of a total natural gas resource base of 2,119 Tcf, good for about a 100-year supply (less if natural gas consumption increases). Also, of the 22.8 Tcf of natural gas the U.S. consumed in 2009, 90% was produced in the U.S.
Federal tax policy could speed the development of new natural gas vehicle designs that place bulky natural gas tanks under the vehicle's frame, in dead space. It could also help build the natural-gas station filling network, which in the U.S. currently totals only 1,100, compared to more than 160,000 gasoline stations.
While the price of natural gas -- currently about $2.50 per gasoline gallon equivalent(GGE) in Los Angeles, $2.30 in New York City -- would rise with its increased use as a transportation fuel, it's likely to remain competitive with gasoline. Most U.S. motorists know the days of $1.50 gasoline are ancient history, but very few are prepared for a price closer to $5. Given current global growth trends, $5 is looking more likely this decade, and that will help keep natural gas competitive.
To be sure, new natural gas vehicles won't hit auto showrooms soon enough to save the nation from the impact of any oil shock this year, but the sooner the nation increases the number of natural gas vehicles on the road, the better insulated it will be from the next oil shock.
Congressional Action Needed
Congress should implement vehicle tax credits that encourage the production and purchase of natural gas vehicles, with the goal of having at least 50% of the new vehicle fleet -- about 6 to 7 million vehicles per year -- running on natural gas by 2020.
Meanwhile, the shift toward natural gas in bus, taxi, and truck fleets and as an energy source for industrial, commercial, and residential uses will continue. In these energy consumption areas, the nation is making the prudent choice.
It's pointless to debate whether Big Oil has played a role in preventing increased natural gas use -- both as a transportation fuel and for other uses. We know that most oil companies benefit from a higher oil price. However, many also have natural gas operations that would benefit from increased U.S. consumption of natural gas. The point Congress should focus on is that if by using too much oil, the oil companies are strong and the U.S. economy is weak, the move has to be away from oil and toward natural gas.
In addition, greater use of natural gas will also enhance the nation's foreign policy flexibility. Currently, the U.S. has to balance competing -- and at times conflicting -- demands in the Middle East, and is ever-wary not to offend key oil suppliers. A U.S. that does not import oil from the Middle East doesn't face that potential cross-pressure.
What's more, although the natural gas sector is not as job-intensive as the oil sector, greater use of natural gas would increase domestic jobs. That would mean more dollars re-circulating in U.S. towns and counties -- something that should benefit local economies and support U.S. GDP growth.
The U.S. has a great deal to gain and very little to lose from increased use of its abundant, domestic natural gas for its transportation energy needs, and for other energy needs. And that sure sounds like the rational choice compared to debating whether the price of oil will be $60 or $160.
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