Tuesday, March 13, 2012

We Need More Oil .... That's the Only Viable Way to Bring Down High Oil Prices

An all-too commonly held view is that escalating oil prices create broad based inflation. That's not true. The truth is even worse than that.

If those higher prices don't result in inflation, they can help create deflation--something very different from but at least as bad as inflation. Or they can cause stagflation, a term referring to a period of slow economic growth coupled with high inflation.

In any event, inflation, deflation and stagflation are all bad. We don't want any of them. We want a steadily growing economy with stable money.

All of the above bad results can and should be avoided by policy makers. And it's simple to do just that.

Just let supply and demand through free market price discovery work their magic. In sum, government attempts to manipulate markets will always fail in the end.

Let's use an example. In simple terms, if there is $100 in the economy and no more goods or services are created, that $100 is all that's available to spend on the available supply of goods and services. $100 in money buys $100 worth of total goods and services. End of story.

But if oil prices double and go from $10 of total spending to $20 on the same amount of oil consumed, only $80 is left to spend on other things. There is therefore $10 less to spend on other items. Thus, we can only buy non-oil goods and services totaling $80 instead of the prior amount of $90. It's that simple. What used to be $10 of goods and services is simply gone.

If that happens, we will experience no overall inflation, but we will suffer the effects of a weaker economy. How weak the economy becomes is the only remaining question.

Accordingly, increases in the price of oil won't cause inflation in the broader sense. To repeat, a government's monetary policy over time creates inflation and not the price of any specific commodity, including oil.

So when gasoline moves from $2 to $4 per gallon and no additional money enters the system, people simply, albeit painfully, spend more of their money on gasoline and less on something else.

Of course, this creates an entirely new and different set of problems, especially for low earners. In other words, the price of oil has a regressive effect, meaning it's more harmful to low income people than high income earners. Now let's look at the oil picture in today's North American economy.

Oil is priced globally and responds to changes in global supply and demand. One cure for higher oil prices, therefore, is even higher oil prices. That's because when prices increase substantially, demand softens. And when the prices double or triple, demand really weakens.

Europe has long followed the high price policy. We haven't chosen to--yet--and don't need to do so--ever. Unless we choose not to increase our North American energy supply.

We have ample North American oil resources available if we want to achieve energy independence. What used to be uneconomical to bring onto the market at lower prices has now become affordable at today's prices. That's the way markets work.

Hence, we need to choose which path to follow. Higher prices or more supply. My bet is that We the People very much prefer higher supply.

When the politicians discover that the people know what's going on, they'll prefer higher supply, too. It's a matter of time. But why wait longer than we have already?

Obama's Politicized Energy Policy is a hard hitting editorial by Louisiana Governor Bobby Jindal. While making the case for energy independence, he's quite critical of the Obama administration:

"{President Obama} does have a national energy policy—it's just a subservient by-product of his radical environmental policy.

This administration willfully ignores rational choices that would lower energy prices and reduce U.S. reliance on foreign energy sources. . . .

To pursue national and economic security, the president's first obligations on energy should be to increase the quantity of domestic energy sources and to decrease the cost of that energy to consumers. That starts with implementing a clear strategy of increasing energy production in all sectors—including the hydrocarbon sources abhorred by the left—and by providing the kind of long-term regulatory certainty that private capital demands before investment."

Mr. Jindal summarizes his well reasoned argument for energy independence:

"Some estimates suggest that the U.S. could overtake Russia as the world's top producer of oil and gas by 2020, and we should not be singling out one industry for tax increases that would inevitably lead to higher prices for American consumers. Rather than punish one type of producer in favor of crony capitalism, we should adopt a flatter tax code with lower rates and no loopholes that allows different energy types to compete in the marketplace.

Finally, the president should announce today that he's going to reverse his decision on the Keystone XL pipeline. This pipeline would produce 20,000 construction jobs and 100,000 indirect jobs, and it would provide a much-needed transportation line between oil refineries along our Gulf Coast and production facilities in Canada, not to mention the booming Bakken oil fields of Montana and North Dakota. Our friends to the north have been reliable and steadfast trading partners, and the president should be making this pipeline decision on policy grounds instead of cheap political appeals to his liberal base.

President Obama claims to be focusing this election year on the American economy. To make that pledge true, he must make wholesale changes to his energy policy and put energy prices and energy independence ahead of zealous adherence to left-wing environmental theory."

Summing Up

Government policy clearly interferes with the free market in energy today. To be fair, it has for a long time. That's regrettable, and it's time to act decisively.

When political mandates take the place of markets, prices in the very short term can be heavily and favorably impacted by government officials. As a consequence, prices are then much lower than market forces would dictate. That makes voters--er consumers-- happy or at least placated for short periods of time.

However, the government actions affect the very short term only, solve nothing and always end up badly.

Government interference in a market based economy is ineffective because in the end, supply and demand factors will always dictate pricing.

Demand is on the rise and global pricing has increased as China and other countries have grown their economies. Since the supply of the world's oil has not kept pace, global oil prices have increased and will continue to increase absent increased supply.

In North America we can achieve energy independence but not without much time and effort. The time to begin in earnest is now, since we can't start earlier than now.

That in turn would do a great deal to help solve our country's unemployment, government debt and deficits and economic growth issues of today.

We'll keep talking about why an all-out effort to achieve energy independence needs to be job #1 in North America.

Our apparently ignorant or unconcerned politicians obviously don't want to deal with the problem of an inadequate supply of energy in relation to demand, so it's up to We the People to tell them we need more supply. Lots of it.

Unless we prefer higher prices, of course, and then another round of even higher prices. And so on.

And I know we don't want that. Neither do the politicians.

Therefore, additional supply is on the way. Let's hurry it along.

Thanks. Bob.

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