DEPENDENCY PARADOX - August 22, 2005

DEPENDENCY PARADOX - August 22, 2005

This is an op-ed in Fortune magazine by Austin Goolsbee - Obama's senior economist:

"In the world of oil, we're the proud sellers of some very high-priced soda. Most oil that was cheap to produce from the U.S. was used up long ago. Today the largest potential sources of oil in North America, be they the shale deposits in Utah and Wyoming, the oil sands of Alberta, or the deep-water offshore pools in the Gulf of Mexico, are all much more expensive than the cheap oil coming out of the Middle East. Our average production costs in some places are as high as $15 per barrel. Cost estimates for places like Iran and Saudi Arabia go as low as $1.50 per barrel.

If U.S. demand (which is the largest of any country in the world) falls substantially, it will drive down oil prices. When prices are low, many U.S. oilfields become too expensive to keep open. That is why our lowest share of foreign oil imports in the past three decades came in the early 1980s--when oil shocks drove prices to record highs and encouraged development of the higher-cost U.S. sources.

Without question, driving down oil prices by reducing our demand could reduce the total amount of money going to the Middle East. We should be aware, though, that this reduction will cause far greater damage to the world's high-cost producers of oil, such as those in the U.S. than it does to OPEC, and there is little chance it will reduce the share of our oil that comes from abroad. If we are to seriously contemplate lowering our dependence on foreign oil, we must find a way to reduce the cost of producing alternative energy sources. Hopefully, sources like wind, solar power, or hydrogen fuel cells will eventually get to a point where they become cheaper than fossil fuels. But the sad reality is that while we might be able to cut greenhouse gas emissions by reducing our demand for oil, Bush's "foreign tax on the American dream" is not getting cut anytime soon."

Basic economics.