Retired economics professor Dennis Johnson and current finance professor Kumoli Ramakrishnan spoke Wednesday at USD on "Will The Oil Crisis Ever End?"
The answer to the question is, not in the short term, Johnson said.
"The U.S. consumer is going to have to bite the bullet. In the short run, we're just stuck," he said. "We are better off if we just let things take its course."
The Hyperion Energy Center and the Keystone pipeline, which would involve
southeast South Dakota, have thrust the state into the national spotlight. However, both USD professors think the projects' impact would be more mid- to long-term.
Union County residents will vote June 3 on the Hyperion Energy Center, a $10
billion oil refinery. The facility would be built just east of Interstate 29, between state highways 48 and 50 north of Elk Point. The refinery would
process 400,000 barrels of Canadian crude oil daily.
The 2,148-mile Keystone
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pipeline, operated by Trans-Canada, would eventuallytransport up to 590,000 barrels of crude oil daily from Alberta, Canada, to Illinois and Oklahoma. The pipeline would travel through several states, with its route running through Hutchinson and Yankton counties in South Dakota and Cedar County in Nebraska.
While the refinery would benefit the nation's energy supply, Johnson said environmental questions remain. He also doesn't see it as a quick fix for high energy prices.
"I don't think the increased refinery capacity will have anything to do with the price we pay," he said. "We haven't built a refinery since 1976. The building of refineries will increase capacity but not enough to satisfy the
U.S. demand. We import more than we produce."
That's a sharp turnaround from a quarter-century ago, Johnson said. He showed a historical chart of fluctuating prices over the decades, with crude oil at one time as low as $10 a barrel – or one-tenth the current price.
In 1992, the United States began importing more crude oil than it produced domestically, Johnson said. Now, the U.S. produces about 5 million barrels a day but imports about 10 million barrels, he said. Canada is the top foreign supplier, followed by Saudi Arabia, Mexico and Venezuela.
Johnson showed a chart of the world's proven oil reserves, with the Middle East accounting for 739 billion barrels and North America 213 billion barrels out of a worldwide 1,317 billion barrels.
"As long as we use oil, we are going to be involved with the Middle East," he said.
The Keystone pipeline would help relieve some of the heavy reliance on the Middle East and other nations, Ramakrishnan said in separate comments.
"The pipeline makes a lot of sense. You get fuel more efficiently into the country," he said. "Canada is our largest supplier of crude oil. If we have increased reliance on Canada, there is less (reliance) on Venezuela."
"The pipeline could help in the medium to long term," he added.
The rising price of oil has made it more profitable to pursue oil in places that were once unattractive, Johnson said.
"It has become economically feasible to retrieve that oil – it's not any new large discoveries being made," he said.
However, soaring worldwide demand has outstripped new production, Johnson said.
The U.S., with its massive economy, consumes 20 million barrels of oil a day, or about one-fourth of the 85 million barrels used daily worldwide, he said. However, China and India have accounted for most of the increased usage during the past four years, he said. The Chinese and Indian economies are growing at a respective 9 and 5 percent annually, compared to the United States' 1 to 2 percent, he said.
"But we are not suggesting that China and India not grow," he added.
The weakened U.S. dollar has made oil cheaper for Europeans, which has increased fuel demand on that continent, Johnson said.
Foreign nations are turning to oil and other commodities as speculation against the weakened U.S. dollar and the American economy, "which is a mess," Ramakrishnan said.
Both private industry and governments are showing interest in other energy sources, Ramakrishnan said.
"The alternative fuels are still too far off to be substantial," he said. "We are looking at solar, wind and biofuels for the long term."
However, ethanol has shown increased success, Johnson said, noting the differences in production between Brazil, which uses sugar cane, and the United States, which uses corn.
Currently, the U.S. provides American ethanol with a tax exemption of 51 cents a gallon while placing a tariff of 54 cents a gallon on imported
ethanol, Johnson said.
Johnson proposed eliminating the 54-cent tariff as a way to increase imports and reduce fuel prices.
"I submit, it's not the ruination of the ethanol industry domestically, and you would not have the upwards pressure on food," he said. "Food in raw form is such a small part of the price paid at the grocery store or restaurant."
The long-term energy forecasts vary greatly, Ramakrishnan said. Guy Caruso, administrator of the Energy Information Administration (EIA), predicted Tuesday that the crude oil prices would fall to $57 per barrel by 2016, the
USD professor said. Meanwhile, Saudi oil minister Ali al-Naimi doubted there would be a production price lower than $60 or $70 a barrel, the professor added.
The United States has to think globally when looking at the future of oil prices, Johnson said. The current high energy prices will affect the South Dakota economy through its impact on tourism and agriculture, he said.
"There is a lot of uncertainty," he said.
The soaring energy prices will have a harmful effect if they are sustained, Johnson said.
"This can't do anyone any good – except the ones with the oil wells," he said.