There’s probably no worse place to be than between an angry mob and the object of their ire, but with that in mind, we wade into the debate on oil prices that is now gripping the country. In fact, it has become so compelling that it has distracted the Senate’s attention from the object of their ire only a fortnight ago, immigration. Ah, the short attention span of Washington.
We took the trouble to read two very concise and clear explanations of oil price fluctuations: This one is from the Energy Information Administration (EIA), an arm of the US Department of Energy. For those of you who don’t trust government to provide the true facts, here’s a link to an Edmunds.com article on the same topic. Some clear factors emerge that drive gas prices:
1.) Supply and demand — This is an issue we’ve written about frequently in this space. It is one of nature’s immutable laws. There are two sides to this coin: first and foremost, global demand has soared with the explosive growth in China and India, among other places. However, global supply has not kept up. Here at home, we remain the only country in the world that limits access to its own natural resources. We could tap oil reserves in ANWR and in the Outer Continental Shelf if Members of Congress were really that concerned about gas prices. But apparently they’d rather make speeches.
2.) Uncertainty – In a meeting with NAM officials last year (on an unrelated topic) Treasury Secretary Snow — a PhD economist — made the observation that “the market builds in a premium for uncertainty.” Think about that in the context of the world oil market. One of the biggest sources of oil is the unstable Middle East. Another is Venezuela, with Castro-centric leader Hugo Chavez at the controls. His recent moves have made the already-jittery markets even moreso. This uncertainty is reflected in the world price per barrel of oil. And, however bad it is here, European drivers are still paying more for gasoline than we are.
3.) Refinery capacity – If oil can’t be refined, gasoline can’t be manufactured. Supply shrinks, demand grows, price rises. According to the EIA report, there were three refineries shut down by Hurricane Katrina, and they are only now coming on line. Others deferred maintenance in order to stay operational post-hurricane, but they are now closing in order to perform the necessary maintenance. Most important, we also have not built a refinery in this country in 28 years. Incidentally, the refinery bill that passed the House last year — to increase the number of refineries — garnered not a single Democrat vote.
For all the theatrical political venom directed at the oil companies, the US-based companies represent only 13% of the world’s output, a mere drop in the bucket. The real powerhouses are the state-owned operations in Russia, China, Venezuela, etc. All the finger pointing, all the speeches about price-gouging and windfall profits won’t change that simple fact. And it won’t alter the law of supply and demand.
At the end of the day, there are only so many solutions: drive down global demand or drive up domestic supply. If we could only harness the hot air being generated by the politicians and the media these days, we might solve the problem once and for good. In the meantime, we must conserve (manufacturers are leading the way in doing it and in inventing the newest technology) and we must search for new sources of fuel. Manufacturers there, too, are the ones who will invent and perfect it. But we also must continue to tap domestic supplies of oil, both on shore and off.
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