Fires in Canada, Folly in Washington

Everyone has seen the dramatic footage of flames rising hundreds of feet in the air as convoys of residents flee Ft. McMurray.  No human lives have been lost, thanks to prompt action of authorities and company personnel, but the fires rage on, and there is no telling when workers can return.  At this point, the blaze has not reached the oil sands facilities, but it has shut down large operations, reducing overall oil sands production by 645,000 barrels a day.  That alone is more than half the estimated oversupply of global crude.  Combined with disruptions in Libya, Nigeria, and Venezuela, the Canadian shutdown may be enough to eliminate oversupply altogether, at least for some time.  This possibility has already driven up global prices.

Exogenous events such as this have potential to move oil prices.  Oil prices affect the global economy in a profound way.  Any increase in energy prices, especially a sudden increase, has the potential to drive the economy into recession.  It is the responsibility of political leaders to foresee this possibility and make provision for it by reducing government interference in energy production and allowing the free market to operate unimpeded.

In terms of American energy policy, this means standing back and allowing safe oil and gas drilling with a minimum of regulation.  It also means opening up drilling on federal lands and offshore.  The Obama administration has failed on both accounts.  Multiple agencies (EPA, Fish and Wildlife, Interior Department, SEC) have imposed onerous regulations that drive up costs and make domestic energy production less competitive against imports.  These include proposed EPA regulation of methane emissions from existing oil and gas wells (alongside regulations for new drilling announced in 2015).  These new rules are on top of existing regulation of drilling in every state.  By the EPA's own admission, they will increase the cost of drilling.

It is no accident that under this and other new regulations, more than the industry has seen under any prior administration, dependence on foreign oil has begun to increase after declining for ten years.  Just as America has the potential for true energy independence in its grasp, Obama has stolen it away.

Eventually, the Canadian fires will be brought under control, though the extent of damage to worker infrastructure is impossible to predict at this time.  In the city of Ft. McMurray, thousands of homes are at risk, airport buildings have been lost, and some 80,000 residents have fled.  Exxon's Imperial Oil, ConocoPhillips, and Canadian Natural Resources are just a few of the companies that have suspended part or all of their oil sands production.  It will take time for things to return to normal, even after the fires are contained.

Events of this kind are unpredictable, but they are inevitable.  They have occurred many times in the past, most notably with the 1973 OPEC embargo and the Iraqi invasion of Kuwait that led to the 1990-91 Gulf war and the torching of Kuwaiti oil fields.  At some point in the future, global energy supply may face much greater shocks.  By its very nature, the price of oil is subject to extreme price fluctuation, and unpredictable events such as the Ft. McMurray fires only add to the price fluctuation.

There are several ways to prepare for oil price fluctuations. One is energy conservation.  Americans have already converted much of their transportation fleet to highly efficient vehicles.  Home and office appliances are far more efficient than they were just a decade ago.  Building codes are more stringent.  In addition, America is slowly adding alternative energy supplies to the mix.  Even after tripling in the past seven years, wind and solar still supply less than 2% of total U.S. energy demand.  Given ever rising demand and population growth, there is little hope that wind and solar will supply more than 20% of America's energy needs by mid-century, despite strong mandates and generous subsidies.  Based on what is known at this time, carbon-based fuels will remain essential to the U.S. economy for decades to come.

The most important safeguard against spikes in global oil prices is the free market itself.  Washington must reduce interference with U.S. energy production, open large new areas to exploration and production, and allow the market to operate at it was intended to do.  By reducing regulation and opening up leasing on federal lands and offshore, government will allow production to grow in line with demand.

Nothing will eliminate price fluctuation in the energy market.  As with all commodities, oil and gas prices are by nature volatile.  Assuming that the Canadian fires are brought under control and production returns close to previous levels, one might expect global prices to moderate.  That, however, would depend on hundreds of other unknown factors – and the potential for another exogenous event to crop up, swinging prices one way or another.  (It should be stressed that betting on the price of oil and other commodities is highly speculative and, in my opinion, should be left strictly to professionals.)

The Obama administration, including former secretary of state Hillary Clinton (who dragged her feet and then opposed approval of the Keystone XL pipeline from Canada), seems oblivious to the dangers posed by the inherent volatility of energy prices.  The best way to prepare for that volatility is to ensure adequate supply.

Obama has spent nearly eight years driving supply down below what it would otherwise have been.  Sooner or later we will face a greater shock than Ft. McMurray, and America will be left unprepared, more dependent on foreign oil than it might have been and with global oil prices higher than they should be.

A prudent energy policy makes full provision for exogenous events by harnessing "all of the above," just as Obama promised to do – and as he has not done.  The current increase in global oil prices is just a taste of what we will face once a greater oil shock strikes world oil markets.

Jeffrey Folks is the author of many books and articles on American culture including Heartland of the Imagination (2011).

Everyone has seen the dramatic footage of flames rising hundreds of feet in the air as convoys of residents flee Ft. McMurray.  No human lives have been lost, thanks to prompt action of authorities and company personnel, but the fires rage on, and there is no telling when workers can return.  At this point, the blaze has not reached the oil sands facilities, but it has shut down large operations, reducing overall oil sands production by 645,000 barrels a day.  That alone is more than half the estimated oversupply of global crude.  Combined with disruptions in Libya, Nigeria, and Venezuela, the Canadian shutdown may be enough to eliminate oversupply altogether, at least for some time.  This possibility has already driven up global prices.

Exogenous events such as this have potential to move oil prices.  Oil prices affect the global economy in a profound way.  Any increase in energy prices, especially a sudden increase, has the potential to drive the economy into recession.  It is the responsibility of political leaders to foresee this possibility and make provision for it by reducing government interference in energy production and allowing the free market to operate unimpeded.

In terms of American energy policy, this means standing back and allowing safe oil and gas drilling with a minimum of regulation.  It also means opening up drilling on federal lands and offshore.  The Obama administration has failed on both accounts.  Multiple agencies (EPA, Fish and Wildlife, Interior Department, SEC) have imposed onerous regulations that drive up costs and make domestic energy production less competitive against imports.  These include proposed EPA regulation of methane emissions from existing oil and gas wells (alongside regulations for new drilling announced in 2015).  These new rules are on top of existing regulation of drilling in every state.  By the EPA's own admission, they will increase the cost of drilling.

It is no accident that under this and other new regulations, more than the industry has seen under any prior administration, dependence on foreign oil has begun to increase after declining for ten years.  Just as America has the potential for true energy independence in its grasp, Obama has stolen it away.

Eventually, the Canadian fires will be brought under control, though the extent of damage to worker infrastructure is impossible to predict at this time.  In the city of Ft. McMurray, thousands of homes are at risk, airport buildings have been lost, and some 80,000 residents have fled.  Exxon's Imperial Oil, ConocoPhillips, and Canadian Natural Resources are just a few of the companies that have suspended part or all of their oil sands production.  It will take time for things to return to normal, even after the fires are contained.

Events of this kind are unpredictable, but they are inevitable.  They have occurred many times in the past, most notably with the 1973 OPEC embargo and the Iraqi invasion of Kuwait that led to the 1990-91 Gulf war and the torching of Kuwaiti oil fields.  At some point in the future, global energy supply may face much greater shocks.  By its very nature, the price of oil is subject to extreme price fluctuation, and unpredictable events such as the Ft. McMurray fires only add to the price fluctuation.

There are several ways to prepare for oil price fluctuations. One is energy conservation.  Americans have already converted much of their transportation fleet to highly efficient vehicles.  Home and office appliances are far more efficient than they were just a decade ago.  Building codes are more stringent.  In addition, America is slowly adding alternative energy supplies to the mix.  Even after tripling in the past seven years, wind and solar still supply less than 2% of total U.S. energy demand.  Given ever rising demand and population growth, there is little hope that wind and solar will supply more than 20% of America's energy needs by mid-century, despite strong mandates and generous subsidies.  Based on what is known at this time, carbon-based fuels will remain essential to the U.S. economy for decades to come.

The most important safeguard against spikes in global oil prices is the free market itself.  Washington must reduce interference with U.S. energy production, open large new areas to exploration and production, and allow the market to operate at it was intended to do.  By reducing regulation and opening up leasing on federal lands and offshore, government will allow production to grow in line with demand.

Nothing will eliminate price fluctuation in the energy market.  As with all commodities, oil and gas prices are by nature volatile.  Assuming that the Canadian fires are brought under control and production returns close to previous levels, one might expect global prices to moderate.  That, however, would depend on hundreds of other unknown factors – and the potential for another exogenous event to crop up, swinging prices one way or another.  (It should be stressed that betting on the price of oil and other commodities is highly speculative and, in my opinion, should be left strictly to professionals.)

The Obama administration, including former secretary of state Hillary Clinton (who dragged her feet and then opposed approval of the Keystone XL pipeline from Canada), seems oblivious to the dangers posed by the inherent volatility of energy prices.  The best way to prepare for that volatility is to ensure adequate supply.

Obama has spent nearly eight years driving supply down below what it would otherwise have been.  Sooner or later we will face a greater shock than Ft. McMurray, and America will be left unprepared, more dependent on foreign oil than it might have been and with global oil prices higher than they should be.

A prudent energy policy makes full provision for exogenous events by harnessing "all of the above," just as Obama promised to do – and as he has not done.  The current increase in global oil prices is just a taste of what we will face once a greater oil shock strikes world oil markets.

Jeffrey Folks is the author of many books and articles on American culture including Heartland of the Imagination (2011).