Let the demagoguery begin! Let it know no bounds, nor be the private purview of either major political party.
One the one hand, John Kerry makes several “proposals” for reducing gas and oil prices, which are of course President Bush’s fault, ably summarized in this Houston Chronicle article. Kerry’s suggestions are laughably unrealistic and unlikely to make a substantial difference in world petroleum markets. The two main suggestions are for the Administration to use moral suasion to persuade OPEC not to reduce output, and for the Administration to discontinue additions to the Strategic Petroleum Reserve. The former is guffaw-producing, the latter is quite literally demagoguing an activity that is a drop in the bucket. Note, though, this Forbes article lists one of his recommendations as reducing the number of fuel formulations to satisfy air quality regulations. So there is a soupcon of sense and substance here, but getting to it through the bluster, pandering and rhetoric is nigh-on impossible.
On the other hand, the Bush Administration argues that had Congress passed an energy bill three years ago, gas prices would be lower today. There is actually a glimmer of substance behind this particular demagoguery, for the reasons Barry Posner laid out last week: all of the energy bill proposals of the past three years would have reduced the number of fuel formulations required in the US to meet air quality regulations. That increase in fungibility of refined product supply would have re-introduced some flexibility into fuel supply. The main drivers of high prices today are crude oil prices and refinery capacit constraints, which are reinforced by the complex and ever-changing regulatory environment. But still, the shrill tone yesterday was one of “don’t blame us, it’s Congress’s fault!”
But in the end, I think Severin Borenstein is right in what he said in an article in the San Jose Mercury News:
“There’s really just not that much that the U.S. president can — or, in my opinion, should — do to pressure OPEC,” said Severin Borenstein, director of the University of California Energy Institute. “It is their oil. They have a right to sell it or not to sell it.”
Borenstein also said diverting oil from the strategic reserve would not have much of an effect, because the amount that goes into the reserve each day is too small to affect the U.S. market.
Gas prices may seem high to consumers now, but that is largely because they have been relatively low in recent years. Considered over 30 years — since the 1973 OPEC embargo — today’s pump prices are about average, Borenstein said.
According to the AAA, the average price of a gallon of regular gasoline Tuesday was $1.75, a record. In California, it was $2.13, a nickel less than the March 6 record.
If the price were adjusted for inflation, a gallon in California still would be cheaper than in 1980: $2.41 in today’s dollars.
And kudos to Laura Kurtzman for noting the real/nominal price distinction in her excellent article!
The SPR injections are a small and cheap insurance policy, an occasionally useful ballast against a cartel with occasional abilities to exercise its market power (that would be OPEC, right now). The SPR has been used in the past to political ends, most recently by President Clinton to reduce domestic gas prices before the 2000 election.
Recall that today is the day that OPEC decides whether or not it will reduce its output. Even after the application of some moral suasion from the US, OPEC has apparently agreed to a cut of 1 million barrels per day. The 800-pound gorilla in the neighborhood, Saudi Arabia, is pushing this because of its domestic budget needs.
If, as OPEC claims, speculative investment funds are driving the increase in world oil prices (I’m not convinced), then some are likely to cash out at these prices. That is one factor that could contribute to a reduction in oil prices.
Another is the extent to which high oil prices induces increased production from non-OPEC suppliers, particularly Russia, Mexico, Norway, and Canada. Most Americans do not realize that our largest oil supplier is Canada. No, not largest after Saudi Arabia — largest, full stop. As my friend Terry Barnich argued at an Illinois-Canada trade conference I attended last Friday, thinking of North America as an integrated energy market and improving oil and natural gas delivery infrastructure (such as pipelines) would enhance our energy trade from our closest neighbors, and reduce OPEC’s market power. That’s a more constructive and concrete recommendation than trying to persuade OPEC to stop; the most persuasive way to make OPEC stop is to stop buying from them. Vote with our dollars instead of whining.
One more potential means of reducing oil prices is the cheating that is inherent in OPEC. Small producers can piggyback on Saudi Arabia’s cut by saying they’ll reduce and then not reducing. That increases their profits with little impact on price. But as prices rise, the temptation to cheat rises too, and as more cheating occurs, it has a larger impact on price. That is the primary dynamic through which cartels are inherently unstable, and through which OPEC has given us boom and bust cycles of oil prices over the past three decades.