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Forget Energy Independence: Producers Have America Over a Barrel

12:00 AM, Jan 21, 2012 • By IRWIN M. STELZER
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On Monday, the European Union is expected to decide to boycott Iranian oil. If it does—nothing is ever certain when EU policymakers gather, least of all a firm decision—Iran says it will close the Strait of Hormuz, through which 20 percent of the world’s oil moves to market. That country’s navy commander, Habibollah Sayari, says Iran has the ability to “control” the waterway, and unnamed military sources in Iran are saying a boycott would be an act of war. General Martin Dempsey, chairman of the Joint Chiefs of Staff, says that “we can defeat that,” an effort Iran would be compelled to resist with force. All of this, calmer observers argue, is mere sabre rattling. But sabre rattling by a mullah-led nation dedicated to the destruction of Israel, willing to allow thugs to gut the British embassy, and providing Iraqi terrorists with weapons with which to kill American servicemen cannot be ignored. Little wonder that there is something like a 20 percent risk premium built into the current price of crude oil.

Not to worry. American officials say—more precisely, hint—that instead of calling for still another U.N. resolution the U.S. will use force if necessary to keep the Strait of Hormuz open. And Saudi Arabia, no friend of the Iranians, says it will increase its production to make up for any shortfall resulting from the boycott of Iranian supplies. Unfortunately, neither country is a rock on which to build a reaction to Iran. The world no longer considers America a reliable partner in arms—it is difficult to follow a nation whose president has decided to take Nelson Mandela’s advice and lead from behind. And there is some question about the ability of the Saudis to ramp up production or to win an intra-OPEC battle to have quotas raised since Iraq now chairs OPEC, and is not noted for its willingness to defy Iran, which has warned that it will retaliate against any country that increases production to make up for supplies lost as a result of a boycott.

Add two more developments this week. Saudi oil minister Ali Naimi announced that his country now has a target price of $100 per barrel, up from the $75 announced by King Abdullah in 2008. “If we were able as producers and consumers to average $100 I think the world economy would be in better shape.” Or at least oil producers would. The “Arab Spring” has forced nervous regimes to step up public spending on benefits—free food, higher pay for civil servants, more money to Saudi religious institutions to extend the reach of Wahhabi terrorist preachings. OPEC members say they really need the $1 trillion they will earn from oil sales so that they can be what Auda abu Tayi, chief of the Howeitat, described himself as in Lawrence of Arabia, “a river to my people.” Like Auda, the current rulers of Saudi Arabia manage to turn the river of money they receive into a rivulet when passing it on to their people, but still, the portion of the kingdom’s incremental oil revenues that now sticks to princely fingers has been reduced, although not sufficiently to be lifestyle-threatening.

It probably is more than mere coincidence that the Saudis decided to raise their benchmark price on the same day as President Obama decided not to approve the Keystone XL oil pipeline that would have brought oil from the oil sands of landlocked Alberta, Canada, 1,700 miles to refineries in Texas. After three years of intensive study by the State Department, which has jurisdiction over this international project, the president says further study is required, study that will make a final decision impossible before the November elections. Green groups say the production of tar sands oil pollutes the environment, but that oil will be produced and sold elsewhere if the U.S. won’t take it. They also contend that Keystone XL would endanger the giant Ogallala Aquifer, which supplies the ten states of the Great Plains. Never mind that 25,000 miles of pipeline already traverse that aquifer, with no harm to water supplies.

The pipeline’s promoters say they will file a new application to traverse a less sensitive route, but that will trigger a new review that former State Department officials reckon could take up to two years. Meanwhile, Canadian prime minister Stephen Harper will visit China next month with energy deals top of the agenda. China wants oil, Harper wants to “diversify Canada’s exports,” Joe Oliver (his natural resources minister) wants to reduce Canada’s reliance on the U.S. in order to strengthen its “financial security,” and Enbridge Inc. wants to build a pipeline to tanker terminals on the west coast, for shipment to Asian markets is under consideration. All part of an increasing energy interdependence: Canada has reserves, China has the capital needed to develop them, and the markets are eager for more and more oil. Earlier this month, PetroChina bought out its partner and took control of the MacKay River oil sands project.

All of this makes one thing clear: Talk of energy independence for America is just that—talk. At least for the foreseeable future. Yes, shale gas will provide an enormous increase in U.S. energy resources, assuming the environmentalists’ efforts to block development fail, but the infrastructure for making it usable in automobiles is in its infancy. And yes, America is “the Saudi Arabia of coal,” but coal is dirty, methods for cleaning it economically have yet to be developed, and it is too lumpy to put in a gasoline tank.

Although it is now clear that the “peak oil” theory has been mugged by reality, the fact of the abundance of crude oil in nature is of little significance to energy policy. Much of that oil lies under the sands of hostile nations; some of it is in Mexico, where mismanagement of the industry is producing a decline in production; some is in unstable countries such as Nigeria; and a good deal is in Venezuela, where production is also declining and anyhow is under the control of a volatile leader.

Nothing much can be done about that. But Canada, a friendly neighbor, is rich in oil, and has told U.S. environmental groups—“narrow minded and parochial,” according to Wenran Jiang, an energy expert specializing in Sino-Canadian relations at the University of Alberta—to stay south of the border while it develops plans to expand production from its huge oil sands reserves. The U.S. offshore has yet to be fully tapped. The resources of Alaska and many of the states in mainland America have not been developed to the fullest. All because of government policy that is sending Canadian oil to China, and making it difficult to obtain drilling permits in America.

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