Saturday, July 5, 2008

How to Lower Oil Prices Now

Can We Get Lower Oil Prices
Raymond L. Richman

Prof. Martin Feldstein in an op-ed piece in the Wall Street Journal, “We Can Lower Oil Prices Now” (7-1-08) argues that policy changes that are expected to decrease the future demand for oil or increase its supply could quickly lower the current price of oil. Producers of oil can lower the current price of oil by increasing output. What output they choose depends on their expectation of future oil prices. If the future price is expected to rise faster as a result of rapidly growing demand from emerging market economies like China and India, they will choose to reduce current output causing current prices to rise. But if they expect that current consumers will take action to reduce their future consumption, prices would not be expected to rise as fast. And if high current prices induce oil importing countries to produce more fuel from unexploited reserves reducing their demand for oil imports, again prices would be expected to increase at a lower rate. If the reduction in the demand were credible, current prices would fall. The fact that they continue to rise means that oil exporters do not expect reduced demand. OPEC pretends otherwise.

Chakib Khelil, the president of OPEC, whose members produce about 40 percent of the world’s oil, said this week that the oil cartel had concerns that future demand for oil might not be strong enough to justify investment to boost oil production, that further investment by OPEC to produce energy has been clouded by the uncertainty about future demand which arises from increased investment in alternative sources of energy, the impact of energy conservation, falling economic growth and the stepped-up search for non-OPEC oil reserves. Each of these factors could reduce future demand for oil and the cartel needs to see "a credibility of future demand.” If he meant that, such uncertainty should have induced a decline in the price of oil. It must be judged as sophistry.

The world’s largest producer, consumer, and importer of oil, the U.S., has no plans to increase its output of oil significantly in the short and medium term although it has sufficient oil reserves to provide all our needs for a century or more. True, the U.S. is subsidizing the search and use of alternative fuels, encouraging fuel-economizing vehicles, etc Judging by the reaction of OPEC members, these are not expected to reduce the demand for oil significantly. Indeed, the U.S. is spending as much to divert electrical energy from coal to alternative sources as it is to find petroleum substitutes. But there is no shortage of electricity, no crisis, not even high prices. Coal is abundant, nuclear energy available, etc. We do not have to import any of the inputs required to produce electricity. The billions we are spending so foolishly is not likely to change estimates of the future price of oil!

We are in a position to announce policies to make us self-sufficient, reducing our imports to zero. The mere announcement of these policies, were they to be credible, would cause a very substantial fall in the current and future price of oil. To be credible, the Congress of the U.S. must, at a minimum, permit off-shore drilling in the Atlantic and Pacific, drilling in the ANWR and on other public lands, and if we are really serious go all out to produce oil from our vast deposits of shale. As of now, OPEC is right on betting on little or no supply from the U.S. To convince them otherwise, cutting our imports from the two OPEC countries supplying us, Saudi Arabia and Venezuela, should convince them. Even more convincing would be to institute gasoline rationing!

However, with both Obama and McCain declaring themselves opposed to drilling in the ANWR and opposed to opening up public lands to drilling, it is no wonder that the price of oil keeps rising. The OPEC countries plus China and Japan are the real imperialist nations, the latter two because of their mercantilist practices that perpetuate huge trade surpluses. The U.S. is fast becoming a has-been imperial power. The enviriputians have nailed us to the ground.

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