Tuesday, February 28, 2012

Free Markets Should Set Gasoline Prices

Gasoline prices are rapidly moving toward the $4 per gallon level. And perhaps much higher.

What should be done about it, if anything? The politicians are getting excited about all this, and want to do something to "help" the cause, so it's time to play the "we're from the government and here to help" game.

Here's my answer to any help which may be offered by the government. Stay out of the market's way.

Let's simply allow the marketplace to set gasoline and related pricing. That's always been the best way, and it will be this time as well. Even moreso in an election year.

What's Right With Gas Prices is subtitled 'History Lesson: The price mechanism will keep our fuel tanks from running dry.' The essence of the editorial's argument is as follows:

"Pundits, at times like these, insist America must finally get an energy policy. But we have one. It's called the price mechanism, and unless drastically interfered with, it has always given us a price at which we can buy all the gasoline we want.

Let's look at today's price. At $3.65 a gallon, gasoline has reached a price, in real, inflation-adjusted terms, it has reached only a few times in history. It reached a similar price in the last year of World War I, during the global trade breakdown of the '30s, after the Iranian Revolution in 1979, and amid the extended instabilities that began with the Arab Spring, continued with the U.S. withdrawal from Iraq, and are reaching a pitch with today's war talk over Iran's nukes. . . .

Reserves of fossil energy are distributed widely around the world; the Mideast today plays its central role (as we once did) only because its production costs are the lowest and thus, in a rough sense, determine what everyone else's oil is worth. Instead, the important question is what can we do?

Ironically, the best therapy is a higher oil price. It makes it profitable to bring into production more costly resources around the world. The rise in recent years to $100-plus a barrel is a godsend. Peak oil theorists are being refuted; so are greenies who imagined a towering oil price would usher in a carbon-free future. The opposite is seen to be true. Oil sands, shale hydrocarbons and even biofuels have been made profitable with existing technology, and of course technology can be counted on to advance.

A higher price not only elicits the new supplies to satisfy Indian and Chinese motorists; it helps to distribute production more broadly around the globe and lets the world be less dependent on cheap Mideast oil.

Mr. Obama this week mocked Republicans who say, "Drill, baby, drill." But it's only right that America should produce, not just consume, the world's energy. It would be foolish to deny ourselves a share of the jobs and profits that flow from producing what America, realistically, will continue to consume in great gobs for decades to come despite any Obama fantasies about alternative energy. . . .

One last thing: In the past 100 years, the real price of gasoline, in current dollars, has spent almost all its time between $2 and $4. So today's price is hardly the end of the world."

My Take is Straightforward and Simple

President Obama is wrong about many things, but his approach to America's energy is perhaps where he's most wrong. His stance seems to be nothing other than political gamesmanship, pure and simple. That said, my guess is that his energy "game" didn't contemplate the surprise of rapidly increasing gasoline prices in an election year. Game on.

The fact is this--we don't regulate or in any way control world energy prices. Neither are we energy independent. We import lots of oil and pay global prices for that oil.

Accordingly, every increase in petroleum that we produce can be sold, and it can be sold at the global market price. If that market price increases further, we'll get the added benefit of a physical volume increase at a higher price for each barrel sold.

That's a double whammy of the good kind for America in lots of ways. More barrels produced and sold at higher prices equate to higher revenues.

And we'll have more high paying jobs, higher tax receipts and the accompanying need to buy less oil from unfriendly nations. What's not to like about that?

Of course, we'd all like lower global prices, but we don't get to set them. They will be what they will be. In any event, we want to get as much of that revenue as possible for the good guys, meaning North American producers, distributors, pipeline builders, workers and American citizens.

With respect to bringing about lower gas prices, there's only one viable long term solution--increase the supply and reduce the amount consumed relative thereto.

Higher prices are the single best way to increase the world's oil supply and reduce our dependence on the bad guys. And that very much includes raising the U.S. supply.

It's all so simple.

Let's just get the government and vote seeking politicians out of the way and let supply and demand establish the price of gasoline.

And if global prices continue to increase, behaviors will change and there will be less oil consumption. This in turn will bring about lower prices.

So let's just start doing the right thing--domestically consuming less while supplying more of the world's petroleum needs. High prices can make both those good things happen.

Along the path to American energy independence, allowing more offshore, onshore and Alaska drilling while building the XL pipeline would be a good beginning. Doing those things would not only result in a much greater supply of U.S. energy, but making our intentions known to the rest of the world would cause energy prices to come down dramatically even before we increase our U.S. energy supply.

Of course, more American energy supplied would enhance our nation's overall security as well, as lots of unfriendly sovereigns with plentiful oil, including Iran and Venezuela, are hostile to American interests.

But maybe the worst thing President Obama could do would be to take oil from our Strategic Petroleum Reserve in order to achieve a temporary lower gasoline price.

Very simply, what we must do is allow the price mechanism to work. By so doing, we will opt to use less oil, produce more oil and move further along the path to energy independence.

And achieving that will result in our energy needs not being at the mercy of many dangerous and rogue nations in the future.

Thanks. Bob.

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