Whenever the price of gasoline takes a sharp rise, I get a flood of emails that have some scheme to beat those wascally waiders of our pocket-book–the usual suspect is Exxon/Mobile. The scheme calls for us to not buy from Exxon or who ever the scheme writer doesn’t like. Then this narrative says that to get back into the market the target company will have to lower prices thus start a price war. This scheme might lower prices a few cents per gallon over time but it would not be significant. A more effective scheme would be for automotive community to drive 10% fewer miles each month. The recent recession did affect supply and demand enough to make a significant change in price. But now that we seem to be climbing slowly out of this really bad economy, we are driving more and the gasoline prices are moving up.
Along with more miles being driven, the crude oil traders, fearing loss of producing fields resulting from the turmoil in the Middle-East, are trying to secure their supply. Thus bidding up of the price of a barrel of crude is underway. Couple those two issues with the declining value of the dollar, the price of crude is now in the vicinity of $100 per barrel. (Remember, oil trades are denominated in dollars US.)
If the citizens of the US really want to bring crude oil prices down (and thus pump pricing) then it will be necessary to implement a program that will be at odds with the current administrations policies. The Heritage Foundation has a proposal for doing just that: “THREE POLICY CHANGES TO HELP WITH GASOLINE PRICES” on their WebMemo blog site. The thrust of these three policy changes is summarized here:
A Familiar Pattern. When petroleum and gasoline prices shot up during the energy crisis of 1970, the experts and pundits predicted imminent resource exhaustion, skyrocketing prices, and energy poverty. Instead, markets responded by searching for, discovering, and producing enough oil to provide over two decades of low prices. For instance, in the U.S. alone, the number of drilling rigs more than tripled between September 1973 (before the Yom Kippur War and the subsequent Arab oil embargo) and December 1981. Now, imminent oil depletion and the futility of drilling are again supposedly on the horizon. However, increased drilling activity follows increased petroleum prices. Blunting this natural market response will drive up energy prices and reduce national income. This, plus the Keystone XL pipeline and scaling back EPA expansion of the Clean Air Act, would do much to stabilize gas prices and energy costs in general.
The three policy changes necessary according to the Heritage Foundation are:
1 INCREASE DRILLING
- Relatively small changes in supply can have large impacts on price, especially when markets are tight. And tight markets are what caused the petroleum price spikes of 2008 and will cause them again if production is shut down while demand from a growing world economy squeezes the spare capacity the world has enjoyed for the past couple of years.
- The first and most obvious place to drill is where there are already drilling rigs and proven reserves— such as the Gulf of Mexico. Despite the majority recommendation of its own scientific panel, the Obama Administration stopped virtually all new drilling in the Gulf of Mexico. There have been recent signs that this policy might change. “Might” needs to be “will,” and soon.
2 SHELVE “LOW-CARBON FUEL STANDARDS”
- The concept of “low-carbon fuel standards” is driving opposition to a petroleum pipeline from Canada. With its oil sands, Canada has more proven petroleum reserves than any country other than Saudi Arabia. A consistent ally and long-time friendly neighbor, Canada is exactly the sort of supplier the U.S. should want to fill the gap in the petroleum it cannot produce on its own. But some policymakers want to put these vast reserves off limits to American consumers.
- The Keystone XL pipeline would bring the U.S. over a million barrels of petroleum each day—more than it imports from either Saudi Arabia or Venezuela (the U.S.’s two largest suppliers after Canada and Mexico). Secretary of State Hillary Clinton should be applauded for her statements in support of the pipeline. However, other components of the Administration, notably the Environmental Protection Agency (EPA), have taken steps to slow or stop the pipeline.
3 STOP EPA ABUSE OF THE CLEAN AIR ACT
- The EPA’s abuse of the Clean Air Act will drive up refining costs and, therefore, gasoline prices. Though the use of the act to regulate carbon dioxide (CO2) would create large problems in many places, the EPA recently started the process to regulate CO2 emissions from refineries. This regulation goes beyond the gasoline reformulation mandates that balkanize gasoline markets with higher-cost boutique fuels.
- The new CO2 regulation puts an additional burden on refiners’ costs and subsequently raises prices of gasoline, diesel fuel, and home heating oil. Further, it will increase the amount of refined product the U.S. imports and reduce employment in an industry with wages that are more than 40 percent higher than the national average.
To read the Heritage blog in full click