When the price of oil on the New York Mercantile Exchange touched $100 momentarily yesterday, it sent ripples through the markets, media and politics. The reactions of the presidential candidates were as interesting as the event itself, since they almost uniformly reflected a sense of national victimization that seems out of place for a country that is still the world's third-largest oil producer, however much we must import to satisfy our appetite for the stuff. While OPEC and the broader global resource nationalism movement share responsibility for today's high prices, oil's long climb to $100 has been led at least as much by our insatiable demand for energy and the low priority we've attached to efficiency. The candidates missed a golden opportunity to remind Americans that we have largely made our own problem, when it comes to oil.
I must admit to a classic expert's failure to anticipate how the $100 price event would play out. As a former commodities trader, I had assumed that only a market close above $100.00 would trigger the flurry of reactions we saw yesterday, rather than what appears to have been a single, nearly meaningless trade executed at the magic level. Stepping back from the details, however, it's clear that whether oil closed at $100.01 or yesterday's actual $99.62/bbl, for all practical purposes we have reached a major threshold in our perception of the cost of the world's key commodity.
But while comments blaming oil companies for a price they don't control--in a market in which they hold a small and shrinking claim on the basic resource--reflect a worrying strain of populism, there's a lot of truth to Mr. Romney's suggestion that the situation reflects "lack of progress" on energy in Washington, DC. In fact, we are now paying for more than a decade of dysfunctional national energy policy, in which consumption was encouraged through fuel taxes well below the average of other large oil importing countries (and via the "SUV loophole"), while we simultaneously made it increasingly harder for companies to extract the significant quantities of oil that remain untapped under our lands and waters.
The good news is that although we still don't have anything that resembles a coherent national strategy for energy, we now have a number of useful components upon which we could build one, if we can give up all the tired, blame-shifting rhetoric and tackle the basics of supply demand: setting higher energy efficiency standards for vehicles and buildings, to ensure that we extract more value from the energy we use, while higher prices drive the technology and turnover of vehicle fleets and other capital stock to implement them; combining wind and solar power with resurgent nuclear power, to supply the necessary mix of baseload and peak power for a smarter, greener electricity grid that doesn't need imported fossil fuels; and deploying the amazing technology that US companies have created to tap arctic and offshore oil with the lowest environmental impact possible, fueling our existing fleet, while we convert it to electricity and more sustainable fuels.
$100 oil is telling us something, though we must be astute enough to interpret the message. Sensible responses to the first energy crisis, in the form of deregulation, diversification, and improved energy efficiency paved the way for an extended period of low energy prices and strong economic growth. Unfortunately, we clung to them too long, and we are reaping the harvest. We now have an opportunity to build the structure that will eventually wean us off fossil fuels entirely, while importantly providing a stable transition to that distant point. In the weeks ahead, I'll be reviewing the energy platforms of all the leading presidential candidates to see how they measure up to that standard.