Topic Brief: High Oil Prices

By Logan Scisco

Extempers receiving questions on the price of oil and its relationship to the United States economy just keep coming.  In fact, I can hardly remember a tournament that I attended in high school that didn’t have a single question on the price of oil, OPEC, and/or what the United States could do to reduce its dependency on foreign oil.  Why do extempers get asked these questions a lot?  The answer boils down to a combination of question writers needing to think of questions that most people can answer and most judges will have some knowledge about and also the fact that high oil prices (which lead to higher gas prices) affect the vast majority of Americans in some way, shape, or form.

High oil prices are one of those unique issues that tends not to divide along partisan lines.  Sure, the GOP accused the Clinton administration of never having a real energy policy for the country, but the same was said of George W. Bush’s administration until this year when an energy policy was finally crafted.  Americans may differ in their views about abortion, gun control, gay marriage, etc. but when more and more of their income is going to gasoline then they become quite angry.

However, in light of how high oil prices tend not to be a partisan issue they due spark controversy over energy policy.  Conflicts emerge between the poor, who are most affected by a price increase of gasoline, and the rich, who for the most part can still afford to drive their cars or fly their fancy jets although they may have to cut back on it.  Conflicts also emerge between environmentalists who want cleaner, renewable sources of energy that will benefit America in the future and businessmen who want more supplies of oil on the market that will benefit America in the present.

This brief is an attempt to briefly show why the price of oil has risen, the economic impact of high prices, what can be done to combat the influence of OPEC (a topic that never seems to want to go away), and a brief explanation of some types of renewable energy sources.

Why Are Prices So High?:

To understand how we can solve the problem of high oil prices we have to first examine what is causing the price of oil to be so high on the global market in the first place.  When dealing with this issue it can be broken down into four fields:  increasing demand from developing countries, refining capacity, possible price gouging, and investor anxiety over possible disruptions in supply.

First, there is an increasing demand from developing countries for oil and the two biggest culprits in this regard are India and China.  As both of these emerging markets in Asia start to compete more and more with the developed world in industry they will need more oil.  In some ways, this is a negative aspect of globalization because while it has reduced costs for businesses who can relocate in both of these countries for cheap labor costs, among other reasons, it has also given these countries the tools to boost economic performance and become more competitive with the West over raw materials.  Additionally, China needs more oil because its domestic industry is increasing.  This has made China surpass Japan as the number two consumer of oil behind the U.S. as it has added over 19.2 million automobiles to its roads in the last decade (9.4m in 1994 to 28.6m in 2004) and by 2020 China is expected to have 140m motorists.  To some this might not be a big issue and they might say that the world should just produce more oil, right?  Well it’s not that simple.  At a time when refining capacity is being stretched too thin, some oil fields are slowly drying up, and businesses are reluctant to explore new fields there is a decreased quantity of oil on the market and there are more countries competing for it.  Thus, by having a limited supply and an increasing demand the price of oil is being bid up and the oil companies are raking in the profits.

Second, the price of oil could be attributed to incidents of price gouging.  This has been alleged by consumers and politicians after gas prices shot up to five dollars or more in some parts of the nation following Hurricane Katrina earlier this year.  Also, recent reports from the oil business that they have made record profits this year and the fact that profit margins are on unprecedented levels hasn’t helped their cause either in the eyes of the average Joe.  It sounds good for politicians to rail against the big oil companies, but to tell the truth there isn’t much they can do.  Price gouging is very tough to prove and if its going on in the status quo it could very well continue.  In response to this, some politicians have proposed going back to a system of “windfall taxes” whereby oil firms would have fractions of profits made over $40 a barrel for their oil taken away to give to consumers in the form of rebates.  However, such a move by politicians could reduce the incentive of oil companies to invest in further production and therefore make the problem worse.

Third, the price of oil could be linked to refining capacity.  Many economists are pointing out that right now the high price of oil isn’t so much due to the Oil and Petroleum Exporting Countries (OPEC), the oil cartel created on September 14, 1960 that the U.S. loves to blame for the ills of the global oil market, but rather to the lack of refining capacity in the U.S. economy.  The process goes like this:  you can pump as much oil out of the ground that you want to, but if that oil has to sit in storage because you can only refine so much of it into gasoline then it’s not going to help lower the price of oil.  Some are blaming the fact that the U.S. has not seen a massive overhaul of the refining industry in terms of construction in decades (the last refinery was constructed in 1976) and also blame lax regulation that has allowed a tidal wave of mergers creating a situation where the top ten refiners in the country control 83% of the market.  To some degree, OPEC has lost its ability to individually shape the global oil market and they’re laughing at our expense by claiming they aren’t responsible for the high oil price and will do everything in their power to decrease prices, knowing full well that whatever they do isn’t likely to change the price of oil anytime soon.  When addressing a speech about high oil prices YOU MUST address the refining capacity issue, because simply increasing the supply of oil will do nothing to reduce the gas costs passed on to consumers.

Finally, investors are very anxious about various oil markets and coupled with the wave of hurricanes that have hit the Gulf region, where 1/3^rd of U.S. oil production occurs, their anxiety has yet to be put at ease.  The problem with the U.S. being dependent on “black gold” (which oil is commonly referred to as) is that we have to rely on some of the world’s most volatile places to obtain it.  For example, the continent of Africa may be moving forward economically, but places like Nigeria are hardly accommodating to property rights and markets aren’t as transparent as they need to be.  The Middle East suffers constant risk of turmoil due to the actions between the Israelis and the Palestinians and the violence in Iraq which now has the potential to land Syria in hot water has not helped matters either.  Additionally, Hugo Chavez in Venezuela looks to be the new thorn in our side in Latin America, replacing Fidel Castro in that particular category and as Mr. Chavez grows more bold in seizing land for the country’s poor and demands billions of dollars from oil companies who have allegedly “overproduced” and stolen oil from the country it’s hardly a situation the U.S. can be happy with.  Therefore, every time there is a foreign policy blunder, an attempted coup in an oil rich nation, the risk of violence spilling over into an oil rich country, or a natural disaster emerging that has the potential to wipe out production spots (that is, if we can spot it early like a hurricane) chances are that oil prices can increase because those who invest in oil futures will sense chaos is on the horizon and take cover.

Economic Impact of High Oil Prices:

Without a doubt, higher oil prices contribute to tons of economic problems for the United States economy as well as that of the rest of the world.  I will only focus on the United States, though, for this particular section because this is the U.S. extemp brief portion.  When analyzing the economic impact of high oil prices there are four areas to concentrate on:  increased levels of inflation, a decline in consumer purchasing power, how consumers will cut back on other activities, and possible unemployment problems.

First, and probably most important, is the inflation problem.  As any extemper who is economically literate knows, inflation is the persistent increase in prices that are charged to a consumer.  The definition can get a lot more complicated, but for simplicities sake we are only going to focus on the one I just provided.  Understanding the link between high oil prices and inflation can sometimes be a difficult one so I will try to explain it as best I can.  To start, let’s suppose that the price of oil has increased and because of the problem of refining capacity in the U.S. (which we have detailed earlier) the price of gasoline has shot up immensely.  Now, let’s suppose you are running a business that depends on car transport (ex. Wal-Mart, Kroger, a pizza delivery place, etc.).  Faced with increasing gas costs you are faced with some tough choices.  You could reduce the amount of staff or resources you are using (ex. drivers/trucks) OR to make up for the cost you could pass along the cost to consumer.  This might make a $7 cheese pizza now $9.50.  Since firing staff or cutting resources can be difficult to stomach, the simplest thing for the firm to do is to pass along the cost to the consumer.  As a result, since a lot of industries are tied into the automotive sector and they are just as likely to pass along costs to consumers as well, you could see price increases in other goods that on face don’t seem to have a strong link to the price of gasoline (ex. the price of frozen foods at a grocery store that had to be shipped there).  This inflation risk is always dangerous in a powerful economy, especially the U.S. economy right now when wages have not necessarily increased with inflation levels over the last several years.  Also, when inflation hits the market it tends to erode people’s confidence in the economic system as savings are reduced to lesser values and to some degree it makes the economic system seem unfair in benefiting those with assets (ex. homes, stock) as opposed to those who have none.  Finally, and most troubling on inflation, it could cause the Federal Reserve to rapidly increase interest rates to encourage people to save money and reduce the money supply.  Thus, high oil prices could have a very detrimental effect on the U.S. economy.

Second, an increase in the price of oil decreases consumers purchasing power because of the increased gas costs associated with it.  A decrease of purchasing power can definitely happen if the inflationary impacts of increased gas costs happen, but it can also happen when people have to spend more on gasoline than on other goods.  In other words, it sucks up more income for someone to fill up their car which they might be settling aside for weekend entertainment to spend at Blockbusters or some other venue.  Therefore, high oil prices give consumers tough choices and it can make them very frustrated.

This leads into the third economic problem:  consumers cutting back on other activities.  For example, if the price of oil increases and the price of gasoline with it, then you may not be able to drive to the video store as often as you’d want to and therefore they make less money because you are not giving them your money anymore.  Additionally, in rural areas it may prevent some people from seeing their health care professional and they could allow medical problems to grow worse which only increases the long-term costs that have to come out of Medicaid or Medicare to take care of that person’s treatment.  Also, vacations may be cut by families which could negatively affect the travel industry.  Overall, the implications of economic problems associated with consumers cutting back on activities could be tremendous and economically devastating as a result.

Finally, there is the possibility of unemployment due to high oil prices.  The Economist in a recent survey about the global economy wrote that inflation may not be as big of a problem as originally thought because globalization has provided valuable checks against it.  For example, unions in Western nations have lost the ability to argue for higher wages when inflation hits because of the possibility of their jobs being sent to developing countries by way of outsourcing.  Also, companies can’t just increase prices as in years past because they are facing direct competition by way of cheaper goods from overseas.  Therefore, they have to absorb the costs in their profit margins instead of passing that onto the consumer, but that can be dangerous.  For example, if a company has to suck up the costs in their profit margins won’t they eventually try to cut costs?  The answer to this question might be yes and the result could lead to more Americans heading to the unemployment line.  This might be a weak analysis of a problem associated with high oil prices, but it is definitely something to consider doing more research about.

Combating OPEC:

How to deal with OPEC has been a debate for years not only in the extemp community, but also in the debate community, the political community, the international community, etc.  There is no real answer to the problem because OPEC does hold most of the world’s reserves by way of its kingpin Saudi Arabia.  The argument goes that even if we were to go into some promising areas like Russia and drain their oil at a rapid rate in the end we’d have to go back to Saudi Arabia because it won’t exhaust its oil fields for decades due to the fact they aren’t used as extensively.  However, this isn’t a cause for hopelessness.  Formulating an imaginary plan where the U.S. could deal with OPEC allows extempers a lot of creativity in rounds, something that I think should be encouraged more in the event.  Anyway, I think combating OPEC lies in three areas:  foreign direct investment (FDI) in non-OPEC countries, foreign portfolio investment (FPI) in OPEC countries that aren’t really that loyal, and the whole debate over the Arctic National Wildlife Refuge (ANWR).

First, foreign direct investment might be a strategy the U.S. wants to use short-term to combat OPEC’s domination of the oil market.  Promising sites off the coast of Latin America around Mexico or Brazil provide the U.S. with opportunities to increase its oil supplies by making deals with foreign countries.  By using incentives for companies to participate in foreign direct investment, which defines joint ventures between U.S. companies and foreign companies, the U.S. could provide countries with expertise in getting the most out of their prospective oil fields and increase diplomatic ties while we were at it.  It is important to remember that while OPEC might like racking in cash, they HATE really high prices.  In fact, the last four U.S. recessions have occurred when oil was priced over $50 a barrel and OPEC knows the U.S. gets antsy when that number is passed and remains past the $50 benchmark (especially with current prices hovering around $80).  Also, high prices encourage oil exploration in areas that haven’t been looked at before which to some degree threatens OPEC’s supreme market position.

Second, foreign portfolio investment might work to divide OPEC.  Smaller OPEC countries have gone of the record for years in saying that they are tired of the way the Saudis run the institution with “an iron fist.”  Disaffected members in this group include Libya, who is yearning for better ties with the United States and the West, and Nigeria, an African political leader and who could be an economic leader now that its debts are being taken care of by the British government, the IMF, and the World Bank.  Both of these nations have exceeded quotas set by OPEC in years past and the U.S. might be wise to capitalize on this rogue nature.  Using foreign portfolio investment incentives, whereby the U.S. would encourage private citizens or even use its money to give a boom to businesses in these countries, might help rally the goodwill the U.S. needs in the oil market.  This sort of a solution might be worth a shot because even if OPEC were to flood the market with oil to try to and crush U.S. influence we would still benefit from cheap oil prices.  Thus, to some degree this could be treated as a win-win scenario.

Finally, some advocates say that to beat OPEC we need to look closer to home for oil supplies.  I hate to say it, but this is largely a pipedream.  Yet domestic oil producing advocates continue to point to drilling in the Arctic National Wildlife Refuge (ANWR) as the answer to our problems.  While the people of Alaska (for now), the Teamsters union, and the GOP support drilling in ANWR, the Democratic Party has blocked it going through in the Senate by way of a filibuster for years.  However, even if businesses get their way and get to drill in the reserve (which would have little environmental damage according to locals indicating that caribou like the Alaskan pipeline) it will not help us out much.  Experts argue that ANWR would only give us 10.4 billion barrels of oil (whenever we finally got it out of the ground) and while that might sound like a lot, when you weigh it against current consumption rates that’s only enough to meet demand for 1.4 years.  Therefore, people who preach domestic demand have a good rallying call, but unfortunately the facts don’t support ANWR being the answer to our problems of oil dependency.

Alternative/Renewable Energy Sources:

It’s fitting to end this brief with a little discussion about the chances of renewable energy sources emerging and what those sources may be.

Sooner or later the United States and the rest of the world are going to have to find renewable or alternative sources of energy that will be big enough and useful enough to push the world economy deeper into the 21^st century.  Every year people make ghastly predictions of oil fields drying up and people rioting in the streets as a result as the economy collapses, but it doesn’t look like that day is going to happen anytime soon.  However, every year we do not do something to make progress in this area and choose to be complacent we put ourselves closer to disaster.

One of the big problems with finding alternative or renewable sources of energy is research and development.  The United States loves to talk about finding a way off of energy dependence on oil, but when it comes to policy implementation we provide few incentives.  When the Ford Motor company tried to develop a hybrid model in the late 1990s it spent over $2 billion of its own money in research & development.  However, when the economy started to sputter out Ford had to cancel this operation and has now been passed by overseas competitors in this regard who today are starting to offer hybrids, which are seeing increased demand due to high gas prices.  All that was needed for Ford was a little government help, but even the energy bill passed by President Bush doesn’t do much to aid this mammoth quest for alternative/renewable energy as it simply outlines a strategy for America to get more supplies of oil.  All things considered, the R & D aspect of finding new energy may be painful, but it’s a task well worth supporting.  Extempers have to realize, though, that money is hard to come by in this regard and without R & D we can’t even begin to figure out how to cultivate new energy sources.  Finally, if the U.S. government and/or private sector decides to invest it needs to make it a long-term commitment because all too often what has happened (as in the 1970s) when the price of oil declines money stops being funneled into these projects and some communities (ex. Parachute, Colorado which lost 2,500 jobs in 1982’s oil shale bust w/Exxon Mobil) have been devastated by the consequences.

What are some alternative forms of energy that are up for consideration?  What are some of their Pros/Cons?  Here is a brief chart:

Here is a list of other alternative/renewable sources of energy that extempers would be wise to research:

*Cold Fusion

*Biodiesel fuel

*Fuel Cells

Cards:

Scherer, Ron.  “Heating-oil and natural-gas prices are already up, and gasoline costs could rise, too.”  The Christian Science Monitor.  20 September 2007.  http://www.csmonitor.com/2007/0920/p02s02-usec.htm.

NEW YORK – Unless it’s a warmer than expected winter, heating the house this winter will cost consumers more money.

Indeed, this fall – even before the first real freeze – the first tank of home heating oil will cost consumers about 7 percent more than last year at this time.

Talley, Ian.  “High oil prices ‘unsustainable,’ energy chief says.”  Seattle Times.  22 September 2007.  http://seattletimes.nwsource.com/cgi-bin/PrintStory.pl?document_id=2003896229&zsection_id=2002119995&slug=oilprices22&date=20070922.

WASHINGTON – Current crude-oil prices above $80 a barrel can’t be attributable solely to market fundamentals and, unless there is a major supply disruption, are unsustainable over the next few weeks and months, the head of the Energy Information Administration (EIA) said Friday.

EIA chief Guy Caruso said that oil-market fundamentals continue to remain “very strong,” and the price rise in past months was “largely because of a need for more crude to be put on the market.”

“Nuclear Dawn.”  The Economist.  6 September 2007.

OVER the next few decades global electricity consumption is expected to double. At the same time, many power plants in rich countries, built back in the 1960s and 1970s, are nearing the end of their projected lifespans. Meanwhile, concern is swelling both about global warming, and about the Western world’s increasing dependence on a shrinking number of hostile or unstable countries for imports of oil and gas. The solution to this conundrum, in the eyes of many governments, is nuclear power.

“Pipeline Bombs.”  The Economist.  13 September 2007.  http://www.economist.com/agenda/PrinterFriendly.cfm?story_id=9804290.

A series of attacks on September 10th on Mexico’s natural-gas pipelines have dealt the country a triple blow: they have crippled affected businesses, caused losses to the state oil company Petróleos Mexicanos and hurt the government of President Felipe Calderón. Concern about the vulnerability of Mexico’s infrastructure and its vital oil and gas industry is likely to increase as a result. The incidents also suggest that Mr Calderón, who has proven to be more effective in his early months in office than had been anticipated, still faces considerable challenges from both within and outside the political system.

“Sheikh Up.”  The Economist.  13 September 2007.  http://www.economist.com/opinion/PrinterFriendly.cfm?story_id=9804057.

BY BOOSTING their output of oil for the first time in two years, the members of the Organisation of the Petroleum Exporting Countries this week finally signalled that the oil price, at nearly $80 a barrel, has gone high enough. This time last year, by trimming its output, OPEC indicated that it did not want the price to fall below $60 a barrel. Will the cartel be able to keep the oil price confined between this lofty floor and even higher ceiling-and if so, what is the outlook for the world’s energy supply from OPEC’s new penthouse?

“Three Factors Behind High Oil Prices.”  China View.  19 September 2007.  http://news.xinhuanet.com/english/2007-09/19/content_6752529.htm.

BEIJING, Sept. 19 — Due to the destruction of refining capabilities by hurricanes, and an expectedly large decline in commercial oil reserves in recent days, the New York market, for the first time, closed on a price above 80 U.S. dollars per barrel on Sept. 13; and hit a new record in the history of nominal prices. As a matter of fact, oil prices have been rising since 2002 at a pace and with a lasting time rarely seen in “peace” time. So, what exactly is behind this round of price hikes?