By Martin Cantor
BridgeTower Media Newswires
Adam Smith, founder of the classical school of economics, could have been talking about current domestic oil production when he introduced the concept of competition in an economy. Smith theorized that an invisible hand channels self-interest of businesses to seek the highest price for their goods and services while consumers conversely seek the lowest price.
The result is a free-market economy where businesses generate and accumulate capital internally and then invest that capital to its highest intended use. The result is economic growth.
However, today’s energy consumers are struggling with the highest gasoline prices since 2008 and $110 per barrel of oil is contributing to the highest inflation in 40 years. With oil prices so high, U.S. oil production down 2 million barrels from the 13 million barrels produced just two years ago, and with profits there for the taking, why aren’t oil companies drilling more?
The answer lies in another Smith construct where he concluded that the harmony of interests in the free-market economy works best without wasteful and inefficient government intrusion into the process. Certainly, the actions of the president and his regulatory intrusion into the domestic oil industry, including effectively halting new oil and natural gas leases from federal lands and waters, would prove Smith correct.
While it is true that the Biden administration has approved nearly 4,000 new drilling permits on federal lands, bringing the total to over 9,000 permits, resulting in over 24 million acres under lease to oil and gas companies, half of that acreage is not producing oil. This compares to the 90% of onshore oil production that is not on federal land.
It was just two years ago that domestic oil producers could break even at $27 per barrel even after making big investments in infrastructure, pipelines and drilling rigs and negotiating rights of way with state and local governments. There is the understanding that not every well dug produces oil, with many wells coming up dry and costing reinvested profits and internally generate capital. Comparatively, today’s barrel of oil costs $110.
The profits are there, so what’s the problem?
The obstacles to producing more oil are a combination of factors, led by uncertainty about President Biden’s commitment to oil production (think Keystone pipeline) and the progressives in Congress who are committed to eliminating fossil fuels. Next is the shortage of workers who left the oil industry during the pandemic when production was reduced due to the dramatic decrease in demand for oil, followed by limited capital and leveraged financing available to invest in drilling. Lastly is that the oil industry has changed its business model to using internally generated capital, shying away from borrowing to finance exploration and production because they can’t trust our government not to pull the rug out from under them after making huge investments. Clearly leveraging debt against future production is what makes the oil industry grow and confidence in the government to be consistent in regulating the extraction industries is crucial to more production.
With oil and gasoline costs a significant part of the highest inflation in 40 years caused by increased demand for oil over supply, it’s time for the president to stop begging Saudi Arabia to produce more oil, stop overregulating America’s oil industry, and begin unleashing America’s oil potential. It’s time for energy independence again.
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Martin Cantor is director of the Long Island Center for Socio-Economic Policy and a former Suffolk County economic development commissioner. He can be reached at EcoDev1@aol.com.
