Diary

How Obama Can Lower Gas Prices Overnight

 

President Obama’s “solution” to rising oil and gas prices is to vilify oil companies for making profits and to take away tax subsidies that encourage exploration.

Neither of these measures, of course, will slow down the rapidly rising cost of crude and gas at the pump. It’s merely playing to the populist anger over skyrocketing gas prices.

Crude oil prices, like everything else, is set by the law of supply and demand. It’s not speculators and its not price gouging by oil companies as Bill O’Reilly asserts.

Like most commodities, oil is traded on futures markets where oil producers and oil buyers can lock in a fixed price for delivery of a known quantity of crude out in the future. The buyers include transportation companies, airlines, refiners, and energy companies.

The law of supply & demand drives futures prices no different than any other commodity or good sold on the open market. But in the case of oil futures, it is the buyers and sellers’ perception of future supply and demand that sets prices.

When the oil market looks out into the future, it sees a recovering global economy pushing up demand – but the supply not keeping pace with that rising demand. Hence the rising market price of oil and ultimately gasoline.

President Obama says there’s very little he can do about rising oil prices. He’s wrong. Dead wrong. The President of the United States has the power to change the outlook for the future supply & demand equation that drives oil futures.

Here’s how:

Simply announce a major shift in energy policy that includes an aggressive initiative to expand exploration and drilling here at home. Lift all restrictions on exploration and drilling (including ANWR and offshore) and cut through the bureaucratic red tape that keeps drilling permits stuck in never-never land for years.

Instead of eliminating subsidies for oil exploration, expand them – especially for the smaller companies who depend on those breaks to offset the huge cost of finding oil.

If Obama would take this course of action, oil futures would plunge overnight as oil traders see a dramatic shift in future supply. Not only would such a plan lower gas prices at the pump, it would be a smart thing to do on many levels.

The U.S. imports about 12 million barrels of oil per day, or 4.4 billion barrels per year. At today’s cost of $113/bbl, we are sending nearly half-trillion dollars each year out of the country. And more importantly, we are creating hundreds of thousands of jobs in such places as Venezuela, Saudi Arabia, and Canada – but not here. And we are giving up huge tax revenues that would come with higher employment and corporate profits on oil production.

Obama still can’t come to grips with the cold reality that the development of alternative energy is a 15-20 year proposition. The need for oil will be with us a long time.

Rising oil and gas prices is one problem Obama can’t solve by reading from his teleprompter. This time, he will actually have to do something completely foreign to him: govern.