The silver lining in $3.00 Gasoline!

The steady climb of gasoline to $3.00 per gallon represents a burden for all but the richest Americans.  I saw a self-employed contractor the other day at the gas pump.  He had one of those large pickup trucks with dual gas tanks.  He told me that his last fill cost him $100!  For him there is no other alternative.  He needs that truck to make a living.  Many of his countrymen are also struggling with the increased cost of gasoline.  This represents a “tax” on American consumers, limiting the money they have for other expenditures.  While $3.00 gasoline won’t necessarily bring about a recession, this “tax” will slow our rate of economic growth.

There is, however, a bright side to $3.00 gasoline; namely that more costly methods of recovering oil are now economically viable.   This will reduce our dependence on oil from Saudi Arabia and other gulf producers.

The United States has large quantities of oil shale, especially in Colorado.  In Alberta they have “oil sands” which are also rich in petroleum.  The problem is that recovery of the oil in both cases involves costly processes, making oil from these sources much more expensive than drilling for conventional sources of oil.  Nevertheless, oil sands now represent 50% of Canada’s oil production.  The amount of oil sand reserve in Alberta alone, that is deemed to be technologically retrievable, is 280-300 billion barrels.  This is larger than the estimated reserves of Saudi Arabia, which are estimated at 240 billion barrels.  Some geologists estimate that the oil shale reserve in the United States is also roughly as large as the reserve in Saudi Arabia.

In the final analysis, we need Saudi Arabia and other gulf producers not because they have oil, but because they have cheap oil.  Now that the barrel price of oil is above $50 the production of oil shale and oil sands is even more viable and will drastically increase.  China will continue to demand a lot of oil from the Persian Gulf.  The United States will demand less from Gulf producers as our oil sands replace what we currently get from them.

The silver lining of $3.00 gasoline is that Saudi Arabia and other oil-rich governments will no longer be able to blackmail the United States.  The Saudi’s won’t be able to talk out of both sides of their mouths by supporting terrorists and radical Muslim schools while at the same time pretending to be our friends.  Higher oil prices will change the geo-political landscape forever, and to our advantage.

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