Let's make it even harder to obtain oil in the US

Yesterday, a US federal judge struck down a six-month moratorium on all drilling for oil at depths greater than 500 feet (and industry participants note that drilling permits in shallower waters were being delayed as well). While it is nice to see the rule of law being upheld against government restrictions of legal business activity, the fact is that the heavy-handed intrusion of the US government into the oil business has been going on for decades, with grave and wide-ranging consequences.

As professor emeritus of economics at Pepperdine University George Reisman noted in his 1996 tome entitled Capitalism: a treatise on economics, the US government has restricted the supply of US oil in the following ways:
  • Preventing exploration and development in "wildlife preserves" and "wilderness refuges."
  • Preventing the development of offshore wells on much of the continental shelf.
  • Preventing the construction of oil and gas pipelines, refineries, storage facilities, and facilities for handling supertankers, and when not banning them outright, greatly increasing the difficulty of obtaining permission to build them -- in one instance, plans to build a pipeline were abandoned due to the cost and difficulty of obtaining the necessary permissions from over 750 federal, state, and local government agencies.
  • Imposing price controls on oil (leading to the oil crisis of the 1970s).
  • Imposing punitive taxes on energy companies, particularly through the removal of the depletion allowance for crude oil reserves.
  • Discouraging business growth and capital investment through the threat of antitrust lawsuits against large oil firms and mergers.
  • Imposing price controls on natural gas, thus limiting the growth of an important alternative fuel, and thus increasing the demand for oil.
  • Preventing the construction of nuclear power plants (and preventing the use of nuclear power plants already constructed), thus reducing an alternative and again artificially increasing the demand for oil. Similarly restricting coal exploration and use, with the effect of again artificially increasing the demand for oil.
  • Forcing power plants to burn oil instead of coal, which also artificially increases the demand for oil (234-235).
All the government policies which make oil more difficult to obtain, more expensive to transport, and more in demand (by the removal of major viable alternatives including coal, natural gas and nuclear) have made oil-derived products far more expensive for American consumers than they otherwise needed to be. The impact is most noticed in the price of gasoline, but it goes far beyond that.

In fact, the fallout from this government interference includes the enrichment of Middle Eastern states which sponsor terrorism. The policies of the US government over the past several decades (stretching back to the 1960s) have made demand for Middle Eastern oil higher than it would have been if it were easier to obtain oil here, and higher than it would have been if alternatives such as coal, natural gas and nuclear had been allowed to relieve some of the demand for oil. Not only has demand been higher than it otherwise would have been, but the prices those states could charge for that oil has been higher as well.

George Gilder points out in the Israel Test Benjamin Netanyahu's argument that terrorists rarely if ever can act on their own, but are sustained by sovereign states. "Sustaining this terrorist network of states," Gilder says, "is largely foreign aid to governments, together with environmental bars to energy production in the West that endow despots with economic power. Terrorism will continue as long as these suicidal Western policies continue" (218).

We believe investors should understand these connections between economics and global issues. Further, as the recent events in the Gulf have shown, investors should be very wary of investing in industries with excessive government intrusion, and should be ready to move their investment capital elsewhere when that intrusion appears likely to increase.

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