May 19, 2011
Mike Hashimoto/ Assistant Editorial Page Editor
The Dallas Morning News
You might not know the price of crude oil, but we’ll bet you know, to the penny, how much a gallon of gasoline costs today and how that compares with yesterday. The gas price volatility has crimped the nation’s economic recovery, along with families’ budgets. What can be done? Points asked local energy expert Bruce Bullock, director of the Maguire Energy Institute at SMU’s Cox School of Business.
What can a president (or other politicians) do to affect gasoline pump prices?
The president and Congress’ options are very limited in the short run. The price of gasoline is driven primarily by crude oil prices, which are set on the world market. The current high price of crude oil is driven by political instability in the Middle East (or fears of it), the low value of the U.S. dollar and the perception that global demand growth will outstrip global supply growth in future years. Measures that could address these factors, such as raising interest rates to strengthen the dollar, ending the war quickly in Libya or shoring up Persian Gulf regimes are either very difficult or have profoundly negative secondary effects on the economy.
In the longer run, the administration can do a couple of things to at least stem the increase. The drilling moratorium in the Gulf of Mexico and subsequent slowdown in permit approvals has taken approximately 300,000 barrels of oil per day off the market. That loss of production will nearly double by next summer unless activity ramps up very quickly, placing further pressure on the market. Second, Congress and the administration could get serious about expanding the infrastructure and availability of natural-gas-fueled vehicles. Natural gas is domestically available, abundant and clean and would cost consumers about $2.25 per gallon equivalent at the pump. Third, the administration can open additional areas for drilling, such as the eastern Gulf of Mexico, the Atlantic Coast and Alaska.
While none of these would impact pump prices immediately, they would impact the psychology of the market that we are serious about producing more energy domestically and developing alternative fuel sources, such as natural gas.
So who are these “speculators” we hear about driving up the price of oil, and how true is that assumption?
It’s true there are speculators, but there are few, if any, who can manipulate the market. Speculators are companies, investors and others who believe the demand for oil will continue to grow with limited supply growth. This “hedging” activity allows airlines, chemical, trucking and other energy-intensive industries to buy now and protect themselves against higher future prices. The result is volatility; it makes for higher highs and lower lows. Right now, it probably accounts for $15 per barrel.
Read the full story (A Dallas Morning News subscription may be required).
Also see more of Hashimoto's questions to Bullock.
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