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Oil Prices in Steep Decline: Be Afraid, Be Very Afraid!

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The following piece was originally published on July 21, 2008:

Here we go again. Oil prices tumbling "in the steepest four day decline in history."

The sense of relief throughout the land is palpable. For a moment the fact that we are still at levels over 160% above prices of only a year and a half ago -- prices unheard of before -- seems lost in the ebullient moment. And silenced for the moment is the inane commentary of President Bush, of our stalwart Secretary of Energy Sam Bodman, not to speak of our Chairman of the Federal Reserve Ben Bernanke, of myriad oil company poobahs, and of course our ex-Wall Streeter, Secretary of the Treasury Henry Paulson who understands that when his cronies on Wall Street are bleeding it's because of the manipulation of the "short sellers", but when it's you and I paying through the nose at the pump "it's all about supply and demand". All this while our regulatory commission, the CFTC, has become more of a casino huckster than vigilant overseer, forever whitewashing the commodity exchanges, proclaiming "We see no evidence of manipulation or undue speculation" -- as if an eighteen dollar plunge in four trading days had everything to do with "supply and demand" -- thereby shamelessly providing this administration, especially our Energy Secretary, talking points to rationalize doing nothing.

But something far more sinister is afoot in the steep descent in oil prices. Our national sense of outrage at the egregious actions of the oil industry, of oil producers, risks being mollified. Just when we become deadly serious about alternative fuels suddenly, magically, the price of oil retreats and we go back to the gluttonous consumption habits that were such a major contributing factor to the dilemma in which we find ourselves. Just think of the post-Carter years whereby administration after administration did nothing of consequence to mitigate our binging on fossil fuels. Even the one policy initiative set in place, the national 55MPH speed limit, was laid to rest.

In those years, and before 9/11, we were not nearly as conscious of the deep downside of our fossil fuel addiction. Issues of global warming and environmental destruction were hardly on peoples minds. The economic (such as the erosion of the value of the dollar) and the social consequences of the transfer of billions upon billions of our national wealth to the oil producers and oil producing countries was not an issue much in focus. Nor were we as aware then as we are since 9/11 of how this transfer of wealth not only risks our economy but our national security as well.

Will the price of oil continue to recede? I don't know, nor by how much or when. Certainly a fair return on the production cost of installed capacity could and should reflect a price of less than $50 a barrel. At that level the Saudis, as one example, would still be making some 33 times their production costs per barrel of crude oil sold.

But that is not altogether the point. We have learned something of deep importance from this run-up in crude oil prices: unlike the neighborhood grocery store, selling our families a container of milk at what might be an albeit recently higher but fair price, the oil producers are voracious and shameless in their drive to gouge each and every one of us here and across the world. The higher they can push the price of their fossil fuel poison, the more they will. They are dangerously unreliable and we can no longer permit ourselves and our economies to be held hostage to their excess of greed, spite and arrogance. Just consider the metaphorical and humiliating "poke in the eye " our president received when he went to Saudi Arabia to ask King Abdullah to significantly increase production and availability of oil on world markets. After all, like him or loathe him, he is still our president. And this with oil relentlessly clambering to levels in excess of $130/bbl, levels never seen before.

Humiliating our president was not enough. Shortly thereafter the Saudis called their OPEC brethren and major consumers to a hastily organized producer/consumer summit in Jeddah. Such luminaries as U.K.'s Prime Minister Gordon Brown and our Secretary of Energy Sam Bodman dropped everything to be in attendance. One could say that the summit was inspired and themed by King Abdullah's ruminations and profound ponderings -- "We are very concerned for consumers in all countries" -- given the miasma descending on the world's economies.

What was the result of this professed concern? The summit came and went and other than listening to lectures and background commentary by the Saudis and OPEC President Chakis Khelil on their version of markets and economics, the only thing that was achieved was a realization that the Saudi-led OPEC was not even going reinstate the full 1.7 million barrels a day production cut of late 2006 and early 2007 of which less than half will have been reconstituted by the end of this month. This, even though the price of oil has skyrocketed. With no meaningful effort on the part of the oil producers to abate the runaway price of oil, the price continued to shoot up from the low $130's a barrel to over $147 in the fortnight after the much heralded meeting. So much for the concern of kings, and oil producer economic babble.

What to do? There are many possible solutions, from keeping prices at current or higher levels ("the cure is not cheaper crack") as espoused by Tom Friedman in his current column, "9/11 and 4/11", to reining in demand through a voucher-type program calling for an absolute national ceiling on fossil fuel consumption (please see "A Forceful and Immediate Antidote to Our Oil Dependence"). Each have their pros and cons: Friedman's could be viewed as regressive, while the voucher program smacks of rationing, anathema to many (though from cursory personal observation I am amazed how many people would be willing to sign on if the system is fair.) The important thing is that we must begin to have national leadership and a serious national debate on an issue that is of existential importance to the future of the nation. We can not let lower oil prices in any way deter us from the initiatives undertaken to get this oil monkey off our back once and for all.