Can Congress help with oil prices?

[Dave Justus]

Originally posted here

This Los Angeles Times op-ed presents some good arguments on how stupid congress is being in dealing with the rise in oil prices. It concludes with the following paragraphs.

It won't be Congress that pops the oil price bubble; conservation, new technologies and market cycles should take care of that. The danger, though, is that lawmakers may make things worse before these forces get a chance to make them better.

I don't disagree with anything specific there, but I do think that there are indeed some things that the U.S. Government could do. There are of course pluses and minus to many of these choices, but I'll mention a few of them.

Strengthen the Dollar: This is probably the quickest route to reducing oil prices. Oil is traded in dollars and a weak dollar means more expensive oil. Government policy is directly related to the strength of the dollar, in particular taxation and spending. Of course we do still have a trade deficit, and a weak dollar policy is a way to correct that imbalance. Also since Chinese currency is also tied to the dollar, a weak dollar allows us to get goods from China even cheaper. I am agnostic on whether a weak dollar policy is appropriate to our current situation or not, I am not enough of an economist to make that determination but it is clear that this choice does effect the cost of oil.

Stabilize Iraq: We know that Iraq has large proven reserves. As it becomes more stable, that supply will make a difference in the world market. Under a democratic free market system, those resources will be most effectively utilized, lowering the price of oil.

Encourage Domestic Oil Production: The linked op-ed correctly points out that ANWR is not a big enough oil field to have a large effect on the price of oil, and also that it will take years to bring it online. ANWR though is emblematic of many stumbling blocks to domestic oil production, ranging from offshore drilling to oil shake in the Rockies. Our Government could indeed make a difference by facilitating the use of these resources. Republicans probably have made a big political mistake in making ANWR the hill to die on over this issue. I happen to support drilling in ANWR, I am convinced that environmental damage would be so small as to be meaningless, but there are better places to begin this battle. It is certainly also true that any efforts in this regard will take years to make any difference, but that is a reason they should have been started years ago, not a reason to not begin now.

Develop a Sensible Alternative Fuel Strategy: Corn based Ethanol is just dumb. The science has shown that for years and everyday people are starting to realize it. Sadly, this may limit the development of technologies that can actually make a real difference (like this one I blogged on a couple of weeks ago.) Congress can allocate money to encourage research, remove distorting subsidies to allow the market to evaluate true costs, and work to ensure that existing regulations don't get in the way of innovation. Once again, this isn't a quick fix, but better sooner then later.

The biggest factors in rising oil costs are beyond our control. Rising economies in developing nations, poor government policies in many oil producing countries and what is probably a speculative bubble on oil prices are all things we can't easily have an impact on. There are steps we can take however, or at the very least we can hold our Government accountable for the counter productive silliness they are currently engaging in.

[Justin]

Great article, Dave! It does seem as though the actions and motivations of congress betray the short-term, election cycle perspective of politicians. And this outlook has most likely contributed to the current spike in oil prices and many other problems.

In contrast, the possible approaches that you list would require relatively long term investment and the results would not be immediately apparent. And this might be part of their appeal for me, as the short term mentality hasn't worked very well so far.

Bush did sign a bill, however, that will halt purchases to the Strategic Petroleum Reserve, but as CPD posted in a previous article, this may not have any effect whatsoever.

You final point, that this might actually be out of our complete control, is excellent. Too often we approach issues with a can-do spirit and wind up either accomplishing little or possibly exacerbating problems for the future.

Excellent article, can't wait to read more.

[Ben Nardolilli]

This isn't speculation. We really can't boost the supply of cheap oil. Will we start drilling in loss profitable areas, yes, will we start using more in the way of oil sands, of course. And we will use less overall. But this has nothing to do with governments, the companies, or anything like that, but rather the earth itself. There simply isn't enough cheap, (and by that I mean easily accesable oil), to go around.

The one thing the government can do is rethink urban design practices and the public transportation grid. We're in this mess because we decided to go with energy hoarding suburbs and subsidized the boom in housing as well as the inter-state highway system.

[Justin]

While Congress might not be able to get it together, Saudi Arabia's increase in oil production will probably do the trick...for now.

[Dave Justus]

Ben,

While it is true that eventually we will run out of oil, we are no where near there right now. The Canadian Oil Sands and the U.S. Oil Shale deposits are huge, and certainly economically viable at cheaper prices then we are currently buying oil for. We have decades of oil, should we chose to pursue those opportunities.

Razorwire,

There isn't a lot of ways we can lean on China or India. They are more concerned (and probably correctly) in increasing their overall economic situation then in conserving oil. However, doing what we can to help them apply economically efficient conservation efforts is clearly in our own best interest.

Justin,

The big question everyone has about the world oil situation is how much production capability and how much reserves Saudi has. This announcement will certainly stabilize the price of oil, and we should see at least a modest drop. How long they can maintain that level is an open question though. Some say they can go for decades, others that they don't have all that much left at all. For obvious reasons, they keep that a pretty tight secret.

[Justin]

Very interesting point about the projections and realities of the Saudi oil supply. Again, this brings us back to the point that we have to begin implementing long term solutions that won't be so affected by foreign supplies.

[Phill Senters]

It looks like everyone has good points on the subject. The original question "Can Congress help with oil prices?" can be answered with one simple 3 letter word, "YES"!
I may sound optimistic, but I believe it will be a tremendous help just on the announcement that the US will open up all those resources which are now off limits.