The New York Times, in an editorial published today characterized President Bush's request for more oil from Saudi Arabia as unseemly special pleading.
"The next president is going to have to do a lot more to reduce America's consumption of fossil fuels and its dependence on the Saudis" the Times said.
Fair enough. But the paper also said that the modest increase in Saudi production "will do nothing to lower prices at American gas pumps or America's dependence on imported oil."
Actually, it would be very difficult to accomplish both goals simultaneously. It's true that the modest Saudi production increase of 300,000 barrels/day did nothing to lower prices. However, if the goal is to reduce US fuel use and dependence on imported oil, lowering prices by significantly increasing production would presumably encourage consumption at the pump and, in turn, increase US reliance on imported oil.
So, perhaps the Saudis are doing the US a favor because tight supplies and high prices may help the US curb its oil addiction. Of course, the next US president (and Congress) will have to do more -- a lot more. But no more hat-in-hand visits to the Saudi royals.
There are primarily three things that determine the cost of oil. Supply, Demand and Speculation.
Right now, as much as 50% of the price of oil is determined by speculation. There are those who wish to curtail speculation; however, we must be careful to avoid the down side of the "law of negative consequences." This is one of those laws that usually kicks in when someone or a group of people decide that they are smart enough to manipulate the economy. Sometimes it works for a while and sometimes there are unintended and drastically negative consequences. While I am in favor of getting rid of tax breaks for oil, a windfall tax would result in obvious but hopefully unintended negative consequences paid for by all of the middle class and poor of the country.
The price of gas on the other hand is determined by supply, demand, speculation, taxes, and regulation (which often amounts to additional taxes.)
In order to reduce the price of oil and consequently have an impact on one of the variables for the price of gas, we need to increase supply. Those who say that opening up additional oil fields in Alaska, Utah, Colorado, and off shore will not have an immediate and positive impact on the price of oil are either ignorant of economics or simply lying to you. Because as much as 50% of the cost of oil is speculation at this time, opening up the additional 30 to 200 year supply of oil available to the US, even though it would not come available for as much as ten years, the price of oil would drop immediately on the futures market. This would impact the price of gas within just a few short weeks.
In addition, thousands of high paying jobs would be created, boosting our economy and raising the value of the dollar, which would also drop the price of oil.
Now we all know that we need alternative energy and vehicles which will run on alternative energy as well as alternative sources of oil.
If congress would allow extraction of our own oil and at the same time provide a $10,000 tax credit for every hybrid that gets better than 40 miles to a gallon and every vehicle using alternative fuel such as hydrogen or electricity (of course we’ll need more electricity) and where at least 90% of the vehicle is manufactured in the US and with at least 90% of the material coming from the US, our economic downturn would be over. There would be a gigantic ripple effect throughout our economy creating hundreds of thousands of jobs.
One last thing, we need more refineries. It needs to be easier to build new refineries.
If these few simple things were done, we would see gas down below $3.00 a gallon again.