Seeker Blog

In the long term, there are only two ways to reduce prices: boost supplies or reduce demand. The country’s energy policy does exactly the opposite: it encourages consumption by keeping energy taxes low and discourages exploiting new supplies because of environmental concerns and not-in-my-backyard political objections.

…“Politicians talk a strong game on energy policy,” said David G. Victor, the director of the program on energy and sustainable development at Stanford University. But, “they focus on bromides like ‘energy independence’ that poll well yet are meaningless or harmful in practice. And then the political system dithers on action that would yield real leverage on oil consumption.”

Jad Mouawad at NYT has a better-than-typical big media article on oil prices. At least his lead paragraphs state the market realities correctly — these points are virtually invisible in most media coverage:

But what can the White House, Congress or competing presidential candidates do to reduce gas prices in the near term? The short answer, alas, is not much.

No industrialized economy is as reliant on oil, or as obsessed with gasoline prices, as the United States, the world’s biggest consumer of oil. But the oil market is largely immune to Washington’s machinations, and prices have more than quadrupled over the last six years for reasons that are increasingly disconnected from what happens in the United States.

The reality is that oil is a globally traded commodity, and Americans must pay international prices to get their share. And those prices reflect the fact that global supplies are stretched and struggling to meet a booming demand that is being driven by growth in developing countries, notably China and India. This has left the world with a very slim cushion of extra production.

And he closes with a note that the weak dollar is a big factor in high commodity prices:

Another factor in the steep rise in prices has been the slump in the value of the dollar, which recently plummeted to $1.60 against the euro.

“Oil has become a financial asset,” Mr. Yergin said. “People are hedging against a falling dollar by buying oil and that hits the price. The most important thing that could be done would be for the dollar to rebound. But that is not something you can legislate.”

I also give Mouawad points for quoting two of SeekerBlog’s reliable sources: Stanford’s David Victor and CEA’s Daniel Yergin. I”ve cut his grade from A to a B for implying that Iraq is a big factor in high oil prices; similarly for implying that a security premium is a big issue [using a Yergin quote out of context]. The bottom line is that oil prices are very near the intersection of the global supply and demand curves.