Turning Iran's Threat to Our Advantage by Redoubling Efforts to Drive Down Oil Dependence

With demand for oil increasing in Latin America and elsewhere in the world and Iran threatening to close the Straits of Hormuz, it is not inconceivable that the price of oil could reach an all-time high and stay there some time in the coming year.

Although demand for gasoline is down in the United States, it is up elsewhere in the world and U.S. fuel exports are rising. As a result, oil prices have been heading higher. Then, putting a point on how precarious our dependence on oil is, Iran last week issued its threat in retaliation for tightened sanctions to deter its nuclear program. If Iran were to stop the passage of oil through the straits, through which one-fifth of the world’s oil passes, the price of a barrel of crude oil, now at about $102, could rise 50 percent, or to about $150, some analysts have predicted. 

There are several reasons to believe that oil reaching $150/barrel is not likely next year. Many believe it is highly unlikely that Iran would take the dangerous step of trying to close the straits. Another important reason, although one not to be wished for, is continuing economic weakness in many parts of the world and the threat of recession, especially in Europe, which suppresses energy use.

But, the fact that we live in such a volatile world in which a sudden threat from one country could make $150 oil seem highly possible, should rivet attention, again, on our need to reduce our dependence on oil.

As I have said many times, producing more oil ourselves is not the solution. Even if we were to drill for more oil, that would do nothing to diminish domestic oil prices. The price of oil is set on the world market and increasing domestic drilling would have little to no effect on that price. The world oil market is like a great big bathtub with multiple spigots flowing into it. As a result, no matter how wide we open our spigots in North America, we can’t drive down a globally determined oil price.

As Ken Green of the American Enterprise Institute astutely noted last January,  "The world price is the world price...Even if we were producing 100 percent of our oil...[if prices increase because of a shortage in China or India]...our price would go up to the same thing...We probably couldn't produce enough to affect the world price of oil...People don't understand that."

The best thing to do then is to get off the crazy ride we’ve been on by increasing fuel-efficiency and by developing more fuel and transportation choices for businesses and consumers.

Our vulnerability to threats and other events around the world accentuates the need for such measures as President Obama’s higher fuel economy standards for cars and trucks that take effect in 2025. These standards are already benefiting consumers because they are producing new energy efficiency options, in anticipation of the implementation of the standards.

Another way to reduce our use of oil is to create more transportation options, especially public transportation. As is well known, spending on infrastructure has been plummeting. Just how bad that decline has been is starkly highlighted by some statistics from the Federal Reserve Bank of St. Louis that show that public construction spending fell from a peak of $320 billion in 2009 to $280 billion in 2011.  The highway trust fund balance, once kept healthy by gas taxes, has been declining for years as the levy has been stuck at old levels because of political resistance to bring it up to date and in line with current needs. The model is broken and desperately needs repair.

As we start a new year, and head into the Presidential election, let’s seize the opportunity to reset our priorities, focus on reducing our dependence on oil and other fossil fuels and develop alternative forms of energy and transportation that are good for international relations, good for our economy and our pocketbooks, and good for our environment.