Solving the High Gas Price Problem.

High gas prices are undoubtedly and not surprisingly shooting to the top of the list of concerns for most people. Indeed, if you recall the NPR Poll cited in my previous blog entry, a look on pages 12-14 shows the polling data to back up what we all sense. On a personal and pertinent note, just this past Sunday, my GF (liberal democrat) and I were out to breakfast and she was reading this column by Thomas Friedman (syndicated into our local paper) as she sipped her coffee. And she asked me, in a thinking-out-loud sorta way, what anyone can do about this...eyes fixed on the paper. I said "nothing"...at least not in the next few months...or maybe even the next year at least. This is a supply/demand problem for the most part....plain and simple. Supply tightens, prices go up, demand starts to go down...at some point. "Well then why are oil companies making such huge profits?", she asks. Because demand is more inelastic with gas. Since alternatives for gas are not easily substituted or available...ie "inelastic"...prices continue to shoot up until demand starts to soften...and it's just starting to soften now, finally, as we approach $4 per gallon. "So basically we're F-ed..." my dearest concluded. I said "No". Things can resolve it, I said. It's just a matter of how quickly and under what form...depending on priorities.

Why are we at this point?...I asked rhetorically...because of a combination of increased demand from emerging economies coupled with supplies that have not kept up..for a variety of reasons. Why haven't supplies kept up? Many reasons: Lack of new refining capacity (bureaucratic red tape, prohibitive regulation, NIMBY etc.). Incidentally, the first new refinery was recently approved after 10 years of application process and approval and millions in fees. New legislation was passed recently to shorten this to about two years and cost a lot less. Perhaps the cheapest drilling is ending and new harder-to-reach reserves that were previously not worth the cost are now becoming viable. That's another possibility. The war and instability in the Middle East is also contributing. Supplies in Iraq are still not back up to par and further instability in other countries adds to speculative pressure.

Bottom line though is that the damage has already been done. Previous obstacles to increased supply are now coming home to roost...coupled with rapidly escalating demand.

What to do now?, I concluded. Well, if we're keeping Green House Gases at the top of the priority list, this is all a good thing. It means emissions will start dropping or slowing from lower usage. But if that doesn't give comfort and it didn't comfort my liberal Dem GF (funny how that works! ;)), then we need to plant the seeds now for future supply increases in energy resources and wait...wait for the results to take effect....just as we unknowingly "waited" for the results of anti-supply measures to take effect. One way we can do this is by our politicians taking a serious look at our policies and see where government can ease the path toward increasing supply...IOW, as unsatisfying and unpleasant as it sounds....we need to make things easier on energy companies by making it less costly and easier for them to do what they do. YUCK, I know. But it's either that or we allow the fuel prices to continue upward and speed up the innovation and initiative toward alternatives for a VERY RECEPTIVE and EAGER public.

One thing is for sure, I concluded and assured her: None of our candidates have the answer to "fixing" anything when elected. They are not bigger, greater or stronger than the forces at play. And it irks me to no end that many people believe we live in a world or reality where any of them can "fix it" once in office. And our weak dollar isn't helping (Thank you, Greenspan/Bernanke!) as it makes oil imports even more expensive.

So what CAN be done?

Well, Jerry Taylor of Cato has some ideas on the supply side of solutions which amount to "getting out of the way" type solutions. But first, says Taylor, on the conservation side of things:

The only thing government should do on this front is ensure that prices are "right" - that is, that they reflect total costs. That's mainly an issue for electricity, where retail power prices typically bear little relation to wholesale prices. State governments need to encourage real-time pricing of electricity - so that consumers will get the signal to, for example, run the clothes dryer at night, when power is cheaper.

But on the "supply-side", he suggests 4 positive steps:

1. Open up key areas for oil and gas exploration and development. Yes, that means ANWR. Taylor says the increased supply could lower crude prices by 3%. Is that worth it? I don't know. But it is an idea nonetheless. Another is large natural gas deposits which could have a serious impact on electricity prices. Much of this is actually underway already in the Northeast where enormous deposits have been discovered and are starting to be tapped.

2. Open up the West to oil-shale development. We have 3 times the petroleum in shale reserves as Saudi Arabia has in proven oil reserves. The problem is that it's costly to extract and barrel prices need to be about $95 for the production of it to be worth it for producers. We are there now....but will we stay there? Another issue is that most of it is on federal land and so far has had a "hands off/keep out" policy.

Environmentalists are an obstacle to both of these measures claiming that preserving the unspoiled and pristine wilderness and wild life is worth more than the energy to be had. Taylor doesn't agree. I don't really agree either. I'm sure a non-cost prohibitive and responsible method can be had to make them a reality.

On the more short term side, Taylor suggests:

3. Empty out the Strategic Petroleum Reserve. 700 million barrels could be drained at a clip of 4.3 million barrels were today for over 5 months adding a lot barrels to daily supply and bringing down prices. He also adds that if speculation is dramatically adding to oil prices, it would pop the bubble and prices would tumble rapidly. National security issues are a myth he says and I agree. Oil is business and suppliers will always get oil to customers...especially a large customer like the US. It would also give a $70 windfall to the US treasury.

4. Suspend (or end) federal rules that force refiners to use only low-sulfur oil to make gasoline and diesel. He says this is the easiest and best short term fix. This would allow refiners to use heavy crude...whose supply is looser right now. Due to these regulations, using heavy crude is too costly and avoided. Light crude supply, the easy way around the regulation, is very tight and driving prices higher faster. The assertion is that heavy crude supplies being redirected into transportation fuel refining would fatten supply in a hurry and send prices tumbling.

This last one may be tougher. I'm not very astute with environmental implications and cannot speak to the effects it would have on emissions.

Well, there are some supply side ideas....some of which I have never heard of before being spoken about or pushed publicly. Are they good ideas? some? all? none? I suppose that's a matter of opinion. But one thing that can be taken from this is that solutions DO exist to help ease pain at the pump. How long would the effects take to show themselves in lower prices? I do not know. But, IF lower prices are a top concern and we are willing to do what is necessary to bring them down, these ideas are part of a basic plan to get us there. Otherwise, we can only allow higher prices to push us faster toward alternatives as consumers demand alternative solutions.

__________________________