Oil market making Washington crazy

Marketplace Staff May 10, 2006

KAI RYSSDAL:The government said today we have more oil and gas on the shelves than we thought. Given a rational market, prices ought to fall, right? Not in what passes for reality today. Crude oil rose almost a buck and a half. It’s making Congress and the White House crazy. As they do what they can to ease the pain. Commentator and economist Glenn Hubbard’s trying to make sense of it all.

GLENN HUBBARD: Now, I know policymakers and economists don’t always speak the same language. But Washington’s recent rhetoric on oil is enough to make an economist’s head spin.

Consider Congress’ pandering offer of $100 tax rebates to help cover the cost of gas. Or President Bush’s recent call to investigate “price gouging” while simultaneously pressing for greater investment in the oil industry.

These statements are sufficiently over the top to bring forth an involuntary Econ 101 reaction. You know what I mean — supply and demand.

Tightening supply reflects continued low production in Iraq, supply disruptions in Nigeria, and investment-unfriendly politics in Venezuela and Bolivia.

At home, regional variations in environmental standards and recent mandates for blended ethanol that exceed production squeeze gasoline supply and raise prices.

On the demand side, we in our SUVs make too little effort to encourage energy efficiency. And abroad, China has leapt past Japan as the world’s number two oil consumer.

Politicians’ rhetoric notwithstanding, we repeal the laws of supply and demand only at our peril.

Think of the disastrous program of federal crude oil price regulation in the 1970s or Hawaii’s recent repeal of its scheme to cap fuel prices that led to shrinking supply.

But there is an antidote to high prices. The answer is: high prices. High prices encourage conservation on the demand side. They also encourage the development of new oil reserves — and, importantly, alternative energy sources — on the supply side.

And some policy activism would help.

We need to support basic research for new technologies and export energy-efficient techniques to emerging economies.

We need to clear out harmful domestic barriers to production and refining.

And at the broadest level, we need to coordinate the domestic and foreign policy sides of the nation’s energy policy.

At the very least, ideas like “price gouging” and “$100 rebates” need to be, well, more refined.

RYSSDAL: Glenn Hubbard is Dean of the Columbia Business School. He used to run the Council of Economic Advisors for President Bush.

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