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Why are Gas Prices Increasing Again?

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Once again, we’re living through volatile price swings with gasoline prices. Despite the most recent decline, the price of oil has risen 55% since the beginning of the year. 

Now, we’ll no doubt go through the inevitable routine of “rounding up the usual suspects,” as Claude Raines regularly did in Casablanca. We’ll blame SUV drivers for their profligacy, and foreign oil producers, financial speculators and domestic oil companies for being too greedy. And per usual, we’ll give short shrift to the underlying economic reality -- gasoline prices are set by market forces. They adhere to the basic economic laws of supply and demand.

Let’s go through this year’s lineup of suspects.

OPEC: The Organization of Petroleum Exporting Countries, made up mostly of large government-run oil companies, did reduce its production quotas in the midst of the financial market collapse that led to oil prices plummeting from $140 a barrel to $35 a barrel. Only, with the price now about double that low, OPEC is no longer cutting supplies.  Indeed, some OPEC countries may be cheating on their quotas to take advantage of the current prices, thus moderating them. 

Speculators, including some big financial houses on Wall Street: There are reports that some have placed large financial bets on oil price increases, going so far as holding oil in tankers offshore to await a price increase. Imagine the cost per day just to keep those ships circling. The basis for their bets is a combination of factors. One is that economic recovery will spur demand for oil. A second is the notion that the huge financial stimulus will give a boost to inflation, which pushes up prices for commodities such as oil. There is a limit, though, even to how much speculators can push prices and hold back supplies. Eventually they need buyers – integrated oil companies or refineries in the U.S. or abroad. 

American and European oil companies: Are they the culprits? Hardly. Contrary to the misguided complaints of the past, Western oil companies lack the resources to manipulate supplies, controlling less than 6% of world oil reserves. They are dependent on consumer demand to make their combined oil and gas development, refining, distribution and retail operations profitable. They also are under more scrutiny than other players.

So if OPEC isn’t cutting supply, speculators are limited in their ability to push up prices and Western oil companies can’t manipulate prices even if they wanted to, what has been causing gas prices to fluctuate so dramatically? Two things: a weak dollar (oil prices go up when the value of the dollar falls), and demand from Asia. China, for example, which has built up huge foreign currency reserves and is home to three of the world’s largest oil companies, is reportedly stockpiling oil to meet its future needs.

Sadly, instead of fully grasping why gas prices are seesawing, the Obama Administration and Congress have chosen to include the wrong suspects in their lineup. They should be focused on providing answers, not assigning blame. Americans shouldn’t be left relying upon the kindness, nor even the enlightened self interest, of strangers, be it OPEC to increase oil supplies or lenders from China and elsewhere to finance our massive debt.

The Administration might start by lifting the self-imposed embargo on our own offshore oil and natural gas resources. An amendment by Sen. Byron Dorgan, D-N.D., in a Senate energy bill is a good start. It would open up the eastern Gulf of Mexico to exploration.

The Interior Department’s Minerals Management Service estimates there is 18 billion barrels of recoverable oil in the Gulf and other areas where the government has restricted development, along with 76 trillion cubic feet of natural gas. That’s enough to provide gasoline for 60 million cars and fuel oil to heat 3.2 million homes for a decade.

Development of those assets would not only moderate gasoline prices and reduce volatility, but it would support more than a million high-paying domestic jobs. And the royalties and tax revenue from its development would raise more than a trillion dollars over the next 30 years -- money that could help pay off the stimulus debt without tapping future taxpayers.

For once, rather than rounding up the usual suspects for another go at political posturing, America’s leaders need to start doing the unusual – developing America’s energy assets to sustain economic growth.


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