Failed Risk Management

The renewed combat in Iraq has caused oil prices to increase, although modestly so far.  The prospect of a possible curtailment in Iraq’s production has oil markets rightfully nervous.  Some analysts see oil prices increasing another $30 if production was shut off or significantly reduced.  That would take prices back to the $140 level that had serious economic percussions the last time it was that high.

Iraq’s oil production has increased about 50% since 2007—2.1 million barrels a day to over 3 million.  This increase combined with increased production in North America has offset declining production in other OPEC nations and added to global reserve capacity.  The fact that those gains in Iraq production are now threatened should not come as a surprise to anyone.  The surprise is that we appear to have another intelligence failure and that the Obama Administration has done little in the way of insurance.  The all of the above campaign slogan would have resulted in even greater US production if it had been implemented but it wasn’t.

The US has achieved the highest level of oil production since 2007 has increased about 60%–5.1 million barrels a day to 8.1 million barrels currently.  Most of this production is coming from private lands.  If the Administration had been more aggressive with its leasing program on federal lands and offshore it is likely that our total production would be well above current levels.  And, if it had approved Keystone XL instead of slow walking it, Canadian production would be greater.  Beyond the loss of additional oil output and a more efficient means of transporting it, the protracted delay has damaged relations with what should be our closest trading partner.  Members of Canada’s cabinet describe the delay as “an affront in no uncertain terms” and “this isn’t right, this isn’t fair.”

Greater production puts downward pressure on world prices and adds further to spare capacity.  The Persian Gulf region is more volatile than it has been since the start of this century.  The diplomatic initiatives being pursued should have complemented with a sound risk management strategy to compensate for its failure or for some other unanticipated event that would have interrupted Persian Gulf oil production.  That strategy is nowhere to be seen and that is an indictment to the Obama national security apparatus.

The pursuit of alternatives to oil and gas and the uncertainty created by its flawed energy policy have made us more vulnerable than necessary.  Prices will be higher than necessary before we see an improvement in the region’s stability and those higher prices will have negative economic consequences.  People on fixed incomes and low incomes will be especially hard hit.  If higher prices persist beyond a short period of time, which is likely, our anemic recovery will be stifled.

Policy that is based on illusions and political rhetoric has consistently failed.  And, this Administration has shown a remarkable inability to learn from the past.  It unfortunately truly resembles the gang that couldn’t shot straight.