The New Year was barely a day old when Americans got a belated lump of coal. For the first time ever, oil prices hit $100 a barrel yesterday. This is forty percent more than the $58 per barrel price from one year ago. Chances are this price may slip in the coming days, yet a key psychological barrier has been broken. And high oil prices in January could lead to higher—perhaps record—gasoline prices this spring, particularly because oil prices are responsible for two-thirds the cost of a gallon of gas.
The $100 barrier was broken due to the same factors that lead to $97-a-barrel price levels this past Thanksgiving week. First, world demand continues to escalate. The International Energy Agency projects that oil demand will increase by 2.5 percent in 2008, with growth driven by China, India, and other lesser developed nations.
Second, the latest bout of political instability in Nigeria—the source of 1.1 million barrels per day of U.S. imports—contributes to uncertainty about the security of supplies. And third, speculators hoping to profit from future instability bid up the price on future deliveries of oil.
All of these factors are likely to continue throughout in 2008. Yet in the wake of these near record prices, oil industry allies are likely to haul out the lobbying equivalent of a Christmas fruit cake. They will once again push for more oil drilling off U.S. coastal areas and in the Arctic National Wildlife Refuge. These tired proposals have been rejected time and again because they would do little to reduce the price of oil in the short run or offset higher demand in the long run.
First off, additional offshore oil drilling in the eastern Gulf of Mexico, or off the Atlantic and Pacific coasts, would not produce any oil for five to seven years. It would take at least 10 years to produce any oil from the Arctic. Such plans will not reduce the spot market price for oil. In fact, we already tried this and it failed to reduce prices. In December 2006 Congress and President Bush opened new areas to drilling off the Florida Coast when the price of oil was $62 per barrel. The price is one-third higher today.
Second, oil companies hold over 4,000 undeveloped leases in the western Gulf of Mexico. If oil companies want to increase oil supplies, it would be much faster to develop these leases rather than plod through the laborious process to get Congress to approve offshore drilling in currently protected places. Interestingly, the Big Five oil companies—BP plc, Chevron Corp., Conoco Phillips Inc., ExxonMobil Corp., and Royal Dutch Shell plc—have been spending a huge amount of their half trillion dollars in recent profits buying back their own stock. Perhaps they should invest some of their record profits in developing these leases before they greedily ask for access to more protected places.
Most importantly, the U.S. oil supply-demand balance is insurmountable. We have less than 2 percent of the world’s known reserves, yet use 25 percent of its oil. Even if we drilled off of every beach, and inside every national park, refuge, and forest, the United States does not possess enough oil to significantly offset our growing demand.
Fortunately, our nation took a major step late last year toward slaking our thirst for oil with the enactment of the Energy Independence and Security Act. On December 19, President Bush signed into law measures that should reduce oil use by over 2.3 million barrels per day by 2020 due to requirements to improve vehicle fuel efficiency and to produce renewable fuels.The swift, thorough implementation of these provisions should reduce oil demand and have a deflationary impact on oil prices.
Unfortunately, however, Big Oil and the Bush administration convinced 40 of 99 Senators to vote against shifting energy tax policy away from tax breaks for oil companies and toward incentives for investment in cellulosic ethanol and other cleaner renewable fuels that would reduce our oil consumption. Due to this opposition, these provisions were stripped from the Energy Independence bill at the eleventh hour.
Speaker of the House Nancy Pelosi and Senate Majority Leader Harry Reid vow to attempt to pass these tax measures again in 2008. That’s the right policy decision, as we detail in one of our Progressive Growth Series papers titled, Capturing the Energy Opportunity: Creating a Low-Carbon Economy.
As with any record, breaking the $100-per-barrel price barrier should generate significant attention. It is a harbinger of higher gasoline and heating oil prices this year. It is also a symbol of U.S. oil dependence, and increases the urgency to reduce demand via efficiency and renewable fuels. The new energy law is the first serious effort to do this in decades.
But more needs to be done. Congress must now shift tax incentives to investments in renewable fuels rather than provide tax breaks to profit swollen big oil companies. Congress should also invest in programs to increase the use of public transit and build a renewable fuels infrastructure. These steps should cut demand for gasoline and in turn oil prices so that yesterday’s $100-per-barrel record will eventually become nothing more than a historical reminder of the bygone oil age.
Daniel J. Weiss is a Senior Fellow and Director of Climate Strategy at the Center for American Progress.