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The United States is now the world’s energy beggar

Effective problem solvers in any business have to be cautious optimists. While I generally have that mindset, today I would like to share with you some of my concerns about America’s energy and economic future.

As I write this, the price of a barrel of oil hovers around an all-time high of $145. Whatever politicians and the media want you to believe, an objective economic analysis would demonstrate that about 65 percent to 70 percent of today’s oil price is due to global demand exceeding the global supply. Another 20 percent to 25 percent is due to the decline in the purchasing power of the dollar relative to other currencies.

Since these two factors do not easily lend themselves to being designated scapegoats, there is an attempt by a certain group to blame it all on the remaining peripheral factors, such as speculation or politics.

Despite wishful thinking by some to the contrary, I believe that high oil and energy prices are here to stay. Even worse, they are likely to increase over time. At the risk of being considered a heretic, I also believe that we should be thankful to the much maligned U.S. oil companies. They managed for decades to take advantage of our position as the largest single oil customer in the world and squeeze the OPEC countries into selling their oil to us as cheaply as they did.

Now, guess what? With the emergence of other heavy oil consuming customers like China and India, OPEC can no longer be squeezed to increase production at our command in order to keep prices low.

This permanent change in the relative bargaining strength between us and OPEC has another profound effect. Any conservation effort on our part will have little, if any, effect on the global price of oil. That’s because any oil made available through our decreased demand will be readily absorbed by the rest of the energy-hungry world.

So, please, let’s toss this idea of converting all our light bulbs to fluorescent.

We should also keep this reality in mind before we pin our hopes on the popular notion of utilizing more alternative energy. While that might be a desirable objective, the numbers don’t work very well. Even if, and that is a big if, Americans were able to double the alternative energy supply today, we would only meet a very small percentage of our total energy needs.

Obviously, the most visible sign of high oil prices is now at the gas pump. As bad as that may be for the consumer, it’ll only get worse this winter with skyrocketing heating costs.

However, I am even more concerned about the insidious effect of these high prices on the American economy. Since oil is a raw material in myriad everyday products, as well as a significant production and transportation cost, what inflationary impact will those prices have on the producer level?

It’s an indisputable fact that while Americans represent 5 percent of the world’s population, they consume 25 percent of the world’s oil supplies. For at least the last 20 years, we have had the intellectual luxury to ignore this reality. We have also permitted a minority of Americans, with very different priorities from the rest of us, to block any increase in the domestic supply. Now, all of us are stuck for good.

For those who are opposed to developing more of our domestic oil resources because it won’t be a short- run fix, let’s remind them that if President Clinton had not vetoed in 1995 the drilling for oil in ANWR – in a tiny area that had been set aside for this specific purpose in 1980 – we would today have about 1 million barrels of oil a day, an amount which is roughly equal to what we import from Saudi Arabia.

The effect of the last oil shock that rocked our totally unprepared economy in 1973 lasted about 10 years. Given that we continue to permit our politicians to do what’s expedient instead of solving critical problems, I believe that it will take at least 10 years to address and deal with this situation.

How our economy will react to ever-increasing energy prices is not that difficult to predict. Despite my usual optimism, I, unfortunately, cannot see any silver linings in our energy future.

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Dieter Thurow, CPA, CFP, provides comprehensive wealth management services to affluent, local professionals. He is located in Healdsburg and welcomes your comments at dieter@dthurow.com.

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