High Oil Prices Are No Mystery

The Washington Post has an article on how high oil prices are “stumping” the experts. The massive rise in oil prices to $130+/barrel does represent an unprecedented rise in oil costs. However, it shouldn’t be a surprise. The world is facing a “perfect storm” of factors: China and the rest of Asia are still growing, OPEC is either unwilling or unable to pump more (and the good money is on the latter—the Saudis may have been overstating their own reserved for some time), and countries are subsidizing gas prices—and subsidies invariably distort markets and raise prices.

Of course, the Democrats have their own culprits. Of course, the Democrats are wrong. They blame the oil companies for raising prices. They do look suspicious, given their skyrocketing profits. The problems with that theory is that those profits are not out of line for the amount of oil they sell. The other problem is that they can’t invest in new projects. Normally they would reinvest those profits into expanding their new capacity. But bad public policy prevents them from doing that: most of America’s coastal waters are off-limits to new oil development, and domestic development in places like ANWR are also forbidden.

Congress is once again asking for the impossible, and behaving petulantly when they don’t hear what they want. On one hand, they want the U.S. to limit carbon emissions—but then they demand cheap gas.

The world doesn’t work that way. We’re running out of cheap gas, and it’s a question of whether we hit the peak in 2030, 2050, or some other point. If we want cheap gas, we have to drill in places like ANWR and off-shore, and we’d better accept that we’ll produce more carbon emissions. If we want to keep ANWR into the untouched pestilential wasteland that it is and keep carbon emissions down, then consumers better get ready to have an arm and a leg ready the next time they buy gas for their cars or pay their heating bills.

As always, Congress’ economic illiteracy is hurting American interests. The laws of supply and demand are just that—laws. There is a relatively stagnant supply of oil and more people are using it. That means the costs will go up, and they’ll go up not only to cover the current costs of oil, but also the future costs.

If the goal really is to reduce the price of oil, we can’t sit on our own reserves. A smart public policy would be to open ANWR and offshore sites to development instead of relying on dangerous and unstable places like the Middle East or Venezuela for our oil while simultaneously creating tax credits and awards for developing clean fuel technologies—because sooner or later we will enter a post-oil economy and the longer we can cushion the shocks the better positioned we’ll be.

Our current strategy, however, won’t work. We can’t keep messing around with the market through oil taxes, byzantine requirements for the blending of fuels, and a stubborn insistence on not allowing more infrastructure like refineries.

As they say, you can’t have your cake and eat it too. The problem is that lesson most of us learned in first grade seems to be forgotten the second a politician walks into the halls of Congress.