Opinion

THE PATH TO PAIN AT THE PUMP

THE jump in oil prices to near- record levels may seem strange, even suspicious, given that there are no major geopolitical blowups or other big news to explain it. But in a tight market, it doesn’t take much to cause a barrel boost – and a lot of little things have added up to do just that.

First, realize that the tight market is itself a sign of good news – that is, of unprecedented global prosperity: More countries are using more oil than ever before. Indeed, virtually every major oil-consuming nation, including the United States, has a fast-growing economy right now – which means extraordinarily strong demand for energy.

In other words, the surest cure for expensive gasoline is a global recession, which would dampen demand. But nobody wants that. After all, $3-a-gallon gas is more affordable when you have a job than even $1-a-gallon if you don’t. (Many economists are surprised that high energy prices haven’t dragged the economy down, but our overall resilience has been one pleasant surprise in the face of unpleasant prices.)

With such strong demand, even a minor supply squeeze can make a difference. Indeed, even the fear of disruptions in a major oil-producing nation can push prices up. And considering who controls much of the world’s oil, those petro-worries are easy to come by.

Right now, we’ve recently had: tensions between Turkey and the Kurds of Iraq, production problems in Mexico, rebel activity in Nigeria, Iranian saber rattling and an intemperate outburst from Venezuelan strongman Hugo Chavez.

None of that has had a major impact on actual production. But even under the best of circumstances, oil supplies can barely meet demand – and this isn’t exactly the best of circumstances.

Are shenanigans from Wall Street or Big Oil also at work? Probably not – underlying market forces can explain the price spike. Besides, allegations of oil speculation and market manipulation have been investigated – and found wanting – many times before. It doesn’t hurt for the Federal Trade Commission and others to monitor such things, but speculation and manipulation aren’t likely the cause.

What can Washington do? Stay out of the way, for one thing. But a look at the pending energy bill shows that Congress is more likely to make things worse: This bill resurrects almost every one of the bad ideas that prompted energy shortages and gas lines in the 1970s.

Another dumb Washington solution to expensive gasoline is even more expensive ethanol. Yes, ethanol is cheaper per gallon than gas right now – but it has a lousy fuel economy, and the costs of mixing it into the fuel supply are significant. Take everything into account, and ethanol adds to the pain at the pump. Yet Congress is thinking about requiring dramatically more ethanol be mixed into the fuel supply.

One useful step in the right direction would be to open up new sources of oil here in the United States. This includes the estimated 10 billion barrels of crude located on a small part of Alaska’s Arctic National Wildlife Refuge, as well as billions more in the 85 percent of our offshore areas where oil production is restricted.

Adding that supply wouldn’t be enough oil to ever cause the world price to plummet – and in any event it would take years to bring online. But making the most of domestic supplies would certainly help and should be a no-brainer. Too bad Congress is dead set against it.

Ironically, China is working with Cuba on offshore projects in the waters between Cuba and Florida. This is oil that could also be tapped from U.S. territorial waters – if only our laws allowed it. But when it comes to drilling, even the communists have a more sensible energy policy than us.

In other words, help from Washington isn’t on the way.

For what it’s worth, the federal Energy Information Administration projects that oil prices should head down soon. But there are no guarantees – prices could go even higher. Any of the above-mentioned problems in the oil-producing world could get worse. And with Washington lawmakers offering nothing but more ethanol and a barrier to increased domestic production, we’re in for a bumpy ride.

Ben Lieberman is a senior policy analyst with the Roe Institute for Economic Policy Studies at The Heritage Foundation.