Don’t blame Big Oil or Arabs for high gas prices

posted at 10:00 am on May 29, 2008 by Ed Morrissey
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If any one entity should take the blame for high gas prices in the US, Mackubin Thomas Owens writes in today’s Wall Street Journal, it should be Congress. Instead of loosening restrictions on domestic supplies when increased future demand from Asia was easily predicted, Congress tightened them instead. They also increased the tax burden on producers at a time when prices had already begun to rise, amplifying the increase and adding to its inflationary effect:

Gasoline prices are through the roof and Americans are angry. Someone must be to blame and the obvious villain is “Big Oil” with its alleged ability to gouge consumers and achieve unconscionable, “windfall” profits. Congress is in a vile mood, and has dragged oil industry executives before its committees for show trials, issuing predictable threats of punishment, e.g. a “windfall profits tax.”

But if there is a villain in all of this, it is Congress itself. That venerable body has made it impossible for U.S. producers of crude oil to tap significant domestic reserves of oil and gas, and it has foreclosed economically viable alternative sources of energy in favor of unfeasible alternatives such as wind and solar. In addition, Congress has slapped substantial taxes on gasoline. Indeed, as oil industry executives reiterated in their appearance before the Senate Judiciary Committee on May 21, 15% of the cost of gasoline at the pump goes for taxes, while only 4% represents oil company profits.

To understand the depth of congressional complicity in the high price of gasoline, one must understand that crude oil prices explain 97% of the variation in the pretax price of gasoline. That price, which has risen to record levels, is set by the intersection of supply and demand. On the one hand, world-wide demand has accelerated mainly due to the rapid growth of China and India.

On the other hand, supply has been curtailed by the cartel-like behavior of foreign national oil companies, which control nearly 80% of world petroleum reserves. Faced with little competition in the production of crude oil, the members of this cartel benefit from keeping the commodity in the ground, confident that increasing demand will make it more valuable in the future. Despite its pious denunciations of the behavior of U.S. investor-owned oil companies (IOCs), Congress by its actions over the years has ensured the economic viability of the national oil company cartel.

We’ve talked about this many times at Hot Air, but basic economics applies. If demand increases and supply doesn’t, then prices go up. In this case, demand has increased tremendously over the last few years as India and China accelerate their industrialization. The Bush administration’s treaty with India on nuclear power wasn’t a coincidence; the White House wants India more reliant on non-petroleum energy to both cut emissions and to relieve pressure on crude markets worldwide.

Congress can act in several ways to alleviate the price increases, but not by blaming everyone else but themselves. The shameful performance by Maxine Waters last week may have momentarily taken the steam out of Congress’ blameshifting, but that won’t last long. Voter outrage over fuel prices and inflation will eventually force Congress to take some kind of action. The question will be what policies they will enact, and whether they will solve the problem or increase the damage.

If Congress follows Barack Obama and Hillary Clinton, get ready for more damage. The Jimmy Carter policy of windfall-profits taxation will only pass along the burden to consumers while forcing domestic oil producers to cut investments in new production. Instead, just as in the Carter era, oil companies will grow even more reliant on imports, and we can all await the next round of rationing at the pump.

Instead, Owens urges Congress to learn from history and follow the example of Ronald Reagan. Deregulation led to an economic boom and low energy prices for a generation. But we need to go farther than that. Congress needs to promote a shift to nuclear power for domestic electricity, along with a boost for coal solutions. We need to stop being hypocrites and demanding that foreign nations pump more of their oil while we sit on ours to suit our tender sensitivities on the environment. This nation needs to grow up and take responsibility for its energy needs. Congress needs to lead the way.

Drill now. Build nuclear plants. Invest in alternatives for the future, but start taking care of the needs of the present. It’s really not brain surgery or rocket science. Even Maxine Waters should be able to understand it, even if she willfully ignores the reality.

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