Gas Prices are Rising – Let’s not Do Anything Stupid

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-Cross Posted from Andrew Holland’s Energy, Security, Policy Blog

Rising Gas Prices Prompt Calls For Release of Oil From SPR

Rising gas prices are back in the news again. Oil has gone back above $100 a barrel, and gasoline prices are about to push through the $4 a gallon price. This has led to President Obama sparring with Republican Congressional leaders and his potential opponents. It has also led to Congressional Democrats asking for a release of oil from the Strategic Petroleum Reserve (SPR) in an effort to dodge this issue any way they can. Fellow columnist, Robert Rapier, has often criticized the usage of the SPR as a political tool in an effort to lower gas prices.

Don’t count me as one who thinks that, if only we allowed drilling anywhere, we would suddenly have $2.00/gallon gas. I sat through Newt Gingrich’s 30 minute speech on energy policy, and it drives me crazy that people actually expect that simply pushing more domestic drilling will fix the problem. I went on the record as supporting Jon Huntsman’s energy policy because it lived in the real world and acknowledged that there were no quick fixes.

Oil prices are a factor of global supply and demand, both currently, and in the future. Prices are being pushed up by increased demand for oil from developing countries, combined with prospects of renewed conflict in the Persian Gulf. I would suggest reading Dr. James Hamilton’s Econbrowser “Crude Oil and Gasoline Prices: Betting on Iranian Tensions” post about what’s driving prices. Also, take a look at my previous two blog posts on what might happen if the Iranian military decides to attempt to close the straits of Hormuz.

How to Mitigate Against High Oil Prices

Ultimately, I actually don’t think that low gas prices should be the goal. Over the long term, low gas prices in America encouraged an auto-dependent lifestyle. And now, with oil prices going through the roof, American consumers are left without other options; they simply must drive, and our deliveries must be trucked across county. This acts as a drag on the economy. President Bush was correct when he said that “America is addicted to oil.” And that addiction has harmed us – but there’s no easy solution.

Increased efficiency of cars is important, as is encouraging alternative forms of transportation like mass transit. Those are ways to reduce our exposure to gasoline price spikes. But, the price of gasoline will remain very important to the economic well-being of the country for a long time, and we need a way to manage those prices better: I’m a free-marketeer, but the market is not delivering a stable, predictable price for oil. These ways must include greater fuel efficiency of our cars, as ASP has argued. They must also

Ultimately, though, we have to make sure that the most recent price spike doesn’t push our politicians into a “Do Something – Anything!” mode. There are good responses, and bad responses. I think getting rid of the gas tax is a bad response, as would price controls or investigations into price fixing. An export ban on oil or refined petroleum products would also be counterproductive. These are short-term responses that mess with markets, and they will have counterproductive effects. What we need are long-term responses that ween American consumers away from our dependence on oil.

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