Article Originally Published on blog.americansforenergy.us in September 2011.
During Spring, oil prices reached over $100 dollars per barrel ̶ the highest price since 2008. This summer, oil prices fell due to the global economic recession. In direct correlation to the volatile oil market that followed the Spring price hikes, the U.S. domestic economy has floundered. With minimal job growth, rises in food prices and debilitating effects on the housing market, it becomes apparent just how much high oil prices impact the U.S. economy.
Clemson University Professor David Bodde says, “What we are seeing in terms of the price [of oil] is more of a financial demand phenomenon more than a supply and demand phenomenon.” Bodde further explains that in order for the economy to recover, oil prices need to be consistent. However, there is little the U.S. government can do to influence the global price of oil since it is a fungible commodity and the U.S. only produces about 8% of the world’s total supply.
OPEC , the Organization of Petroleum Exporting Countries, sets the global price of oil since they are the largest petroleum producers; theoretically basing the price of oil on supply and demand. However, history suggests that supply and demand is not the determining factor of oil prices. Gal Luft, executive director of the Institute for the Analysis of Global Security (IAGS) argues that, among other factors, the recent inter-organizational politics of OPEC may further exacerbate the unpredictability of oil prices in the near future.
In late July, Islamic Revolutionary Guards veteran Rostam Ghasemi was appointed the new petroleum minister of Iran. Iranian President, Mahmoud Ahmadinejad explained that the nomination of Ghasemi will promote Iran’s objective to align the complex oil industry with its national interests. Iran currently holds OPEC’s rotating presidential seat. Therefore, Ghasemi will act as the de-facto president of OPEC in the coming months.
Ghasemi, a former Chief Commander of the Iranian Revolutionary Guard, will be sure to uphold Iranian national interests, which poses a threat to Saudi Arabia’s longstanding control of OPEC decision-making. Luft contends that, while there is the obvious historical Sunni-Shia rift between Saudi Arabia and Iran, as well as the ideological dispute over regional hegemonic power, there is another contentious issue at hand; instead of the member states of OPEC falling in line with Saudi Arabia’s decisions as they have in the past, they are now attempting to raise the price of oil to cover their own economic needs. Both Iran and Saudi Arabia are largely dependent on oil revenues. However, Iran would rather see the price of oil per barrel around $140 in order to balance its budget. Saudi Arabia, on the other hand, can maintain its budget with oil prices about $90 per barrel.
In June, OPEC members, for the first time in two decades, were unable to agree to an increase in output levels or establish the price of oil per barrel. The widespread civil unrest in many Middle Eastern countries has weakened their economies, causing OPEC members to make decisions individually rather than as an organization. These disparities, coupled with Iran and Venezuela’s insistence on higher oil prices, have divided OPEC’s members and reduced Saudi Arabia’s influence. With Rostem Ghasemi holding the reins of OPEC, the international community will likely see inflated oil prices for the remainder of the year.
2011 has illustrated that dependence on foreign oil makes the U.S. economy vulnerable- America can no longer afford to be at the whim of OPEC . With Middle Eastern civil turmoil, revolutions, and power politics, America needs to end its dependence on foreign oil. The government should be focusing on utilizing all available resources in order to become energy independent. On shore and offshore drilling should be permitted; natural gas expansion should be encouraged; clean coal production for the purpose of creating fuel via methanol should also be pursued, as well as the continuing production of biomass fuel. By acknowledging that capricious oil prices are the source of our economic problems, we can work to solve the problem by reducing our dependence on foreign oil, which will create long-term employment and help to balance the trade deficit.
As gas prices continue to range between $80-$100 dollars per barrel, Americans will pay $500 billion to OPEC and other foreign governments this year alone. While the President prepares to address Congress regarding job creation on Thursday, America should be demanding that he and Congress create an effective energy policy that will mobilize multiple sectors of the economy rather than simply promoting each party’s preferred energy sources. Until this occurs, we can be sure to see further unemployment, a depressed economy and higher prices at the pump.
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