Wednesday saw New York oil futures hit an all-time high of more than $43 a barrel, and a report that US crude oil imports reached a record daily average of 11.3bn barrels last week. The two developments are, of course, connected, though the price rise was also triggered by supply concerns surrounding Yukos of Russia. It is therefore particularly apposite that John Kerry, the US Democratic presidential candidate, is said to be planning to call for the US to reduce its dependence on foreign oil, especially Arab oil, in his nomination acceptance speech tonight, and the more so when the western oil majors are awash with cash. So why cannot they solve America’s problem by using the money to find more oil outside the Middle East, maybe even inside the US?
Unfortunately, it could never be so simple. If the oil majors could discover enough new oil to marginalise Middle Eastern producers, this might solve America’s perceived foreign policy problem of having to kowtow to regimes it so dislikes for the fuel it so cherishes. But even that would not remove America’s oil security problem. This arises out of the US’s extreme reliance on a fuel whose price, in a vast interconnected market, is subject to the vagaries of every twist and turn in supply and demand, just as every twist and turn of an Amazonian butterfly is said to shape world weather.
In fact, the oil majors are struggling just to maintain output, as their reporting of second quarter results this week makes clear. Profits are way up. But this is not reflected in capital expenditure on the future. Indeed, the oil majors are quietly panicking because they cannot find sufficient new projects or fields big enough to make a material difference to companies of their size. So they are spending whatever they can on getting access to assets in countries such as Russia and Libya that have largely been explored already, and returning the rest to shareholders. That is not a bad solution for shareholders, but it hardly fits in with any hopes on the part of Mr Kerry, or President George W. Bush, that the relative market power of Arab Opec producers can again be curbed, as they were by past discoveries in the North Sea and Alaska.
Reviving a call for oil independence might be a neat way for Mr Kerry to tie together in voters’ minds such issues as Iraq and administration links to Halliburton and other energy companies. But if it focuses only on supply, such a call will prove as much a mirage as Richard Nixon’s Project Independence, Jimmy Carter’s “synfuels” programme and indeed the recent Bush plan to drill in the Arctic.
It is important to remember the US is a price-taker on oil. Even it could pump any more at home, the price of that extra oil would also be dictated by the world market. The only way to reduce that exposure is to reduce oil consumption or increase conservation. That is the benchmark by which any Kerry plan should be judged.
