Apply Political Pressure to Oil Prices

As surely as the wind follows the rain, political posturing and bickering follow spikes in gasoline prices. And the proposed solutions to high energy costs are all too often driven by politics rather than objective realities.

With gas prices nationally topping $4 a gallon this week, U.S. leaders — true to form — are ramping up their partisan energy rhetoric. It brings to mind an observation by an unlikely source, Groucho Marx, who observed that “politics is the art of looking for trouble, finding everywhere, diagnosing it incorrectly and applying the wrong remedies.”

Since factors such as supply, demand, and uncertainty drive oil and gas prices, there’s little politicians can do to directly “control oil markets.” When reflecting over the history of government attempts to do so, it’s apparent such efforts make a bad situation worse. Yet, while there is no single action that the President can take to lower oil prices immediately, there are actions that he and Congress can take to impose downward pressure on them.

In the last two days, the market has initiated a large correction in crude oil prices that should soon show up at the pump. What led to that correction? A few factors seem to be responsible: no terrorist reaction to Bin Laden’s death, a stronger dollar, an unexpected increase in supply, and further evidence that a weak economy is constraining demand.

Crude oil prices are set on the world market. While effects of the global recession constrain demand in the U.S. and Western Europe, strong demand in China, India, and other parts of Asia has put upward pressure on prices. Yet, federal actions to increase our domestic supplies would have the opposite effect.

Although the U.S. could not add a great deal to global supplies, in the near term any increase is positive and would help change expectations about the future. America is still rich in oil resources, but political roadblocks constrain our firms from producing our full potential. This bureaucratic red tape takes, perhaps, several million barrels a day off of the world market.

Our current leaders cannot undo all of the wrong headed decisions of the past, but they certainly don’t have to make more.

Beyond increasing supplies, positive actions to address our debt and deficit problems would strengthen the U.S. dollar and, therefore, help lower crude oil prices. Moreover, a stronger economy incentivizes investors to shift capital from commodities like crude oil to companies that produce goods and services. Creating a more rational, less punitive regulatory system would also make investing in domestic energy production more attractive than investing in other countries.

It’s true that Washington can do little about instability in the Middle East and North Africa which imposes a risk premium on crude prices; yet our legislators’ hands are hardly tied.

As Charlie Brown was noted for saying, we have met the enemy and it is us!

Originally published by the National Journal athttp://energy.nationaljournal.com/2011/05/what-sways-global-oil-prices.php#1981262

Partner & Fellow Blogs