Mr. Obama: Burying U.S. Oil While Praising It

By Lee Lane

Mr. Obama, in his State of the Union speech, boasted about the dramatic surge in U.S. crude oil output—although it was achieved less by the President than in spite of him. Yet, the U.S. oil boom could well collapse as quickly as it emerged. In the second half of 2014, world crude oil prices plunged by 60 percent. Oil from U.S. onshore wells, the driver of the oil renaissance, is high-cost by world standards. If prices stay low for long enough, U.S. oil output growth will end or even slip into reverse.

However, since 2003, global crude prices have both spiked and plummeted without displaying a clear long-term trend. More of the same volatility seems quite possible in light of the conflicting forces affecting prices. In China and Europe, GDP growth (and hence oil demand) is flagging. Conversely, some oil exporters like Venezuela, Nigeria, and others are teetering on the brink of social chaos that could reduce supply and send world oil prices rocketing.

Fortunately, U.S. onshore drillers are strikingly nimble. U.S. wells using hydraulic fracking and horizontal drilling are quick to drill although their output also declines quickly. Producers are already slashing investments to bring costs down to match prices—albeit with some inevitable time lag. Most U.S. drillers, then, can probably weather a fair amount of price volatility, but their prospects become much dimmer if Washington adopts strongly anti-oil policies. Increasingly, Mr. Obama seems bent on doing just that.

He is, for instance, launching costly new abatement plans for ozone and methane. He also wants to put more of Alaska’s North Slope off limits to drilling, and do the same with some of the nearby sea—thus ‘preserving’ it as a frozen wasteland. He defies Congress and flouts his own agencies’ findings by blocking the Keystone XL pipeline. He even continues strict limits on crude oil exports, an idea opposed by economists from left and right alike.

The President does propose to open the South Atlantic to drilling. That is fine, but it hardly balances his broad array of punishing restrictions.

Why this hostile stance? The President’s inner thoughts are unknowable, but his anti-oil policies obey a clear political logic. As the ideological chasm between the two parties has widened, interest groups have aligned with one or the other. Today, the green movement is, in all but name, an adjunct of the Democratic Party. The oil and gas industry’s support is heavily weighted toward Republicans although the industry gives some money to Democrats.

By hobbling drilling for oil, Mr. Obama knows that he will elicit more campaign dollars from his green super-donors. At the same time, he narrows the geographic base of his (and his Party’s) political foes and shrinks their donors’ incomes. This is partisan warfare posing as energy policy.

For a while, events held these motives in check. Presidents’ political power depends on the public’s perception of the state of the economy. While employment was in the doldrums, and oil drilling was a rare bright spot, the President could afford to do only so much harm to the industry and its suppliers.

As GDP rebounds, he is freer to follow a longer-term strategy. Mr. Obama may not be running for office again, but he avidly craves relevance, and a stock of IOUs from green big money will be a prime asset for buying it.

In oil (or gas) producing states, incentives somewhat resemble those that constrained Mr. Obama’s first term. Thus, some Democratic governors resist their Party’s push for draconian anti-drilling measures. California and Colorado are recent examples.

Mostly, though, big oil producing states are already red. Indeed, the national Democratic Party’s transparent unconcern for oil state Democrats contributed to its 2014 Senate electoral route. Thus, in oil states, the Democratic Party pays a price for subservience to the greens’ anti-oil agenda. Elsewhere, though, as long as prices at the pump remain low, it does not.

A future Democratic president might be less willing than Mr. Obama to indulge the greens’ anti-oil demands. But Democratic aspirants to the White House will always need the support of green super-donors and, to a lesser extent, that of other green activists. An anti-oil stance will be part of the price demanded for green support.

Over time, low oil prices might kill the onshore U.S. oil boom, or they might not. But low prices and a relentlessly anti-oil White House surely will.

 

Lee Lane is a visiting fellow at the Hudson Institute. Before joining Hudson, he was a Resident Fellow at the American Enterprise Institute. He is the author of Strategic Choices for Bush Administration Climate Policy, published by AEI Press.

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