Looking for the quick fix

Charles Reichley
Published: May 21, 2008

Last week I discussed the absurdity of the Democrats saying we need to end our dependence on foreign oil, but prohibiting new drilling to accomplish that goal.  But the problem isn’t just Democrats — sometimes there’s a bipartisan rush to enact meaningless legislation.

Tuesday the House of Representatives voted to sue OPEC for high gas prices, subjecting OPEC nations to U.S. anti-trust laws. Even accepting the dubious idea that we can sue another country in our courts, there is an obvious problem.  OPEC could simply stop selling oil in the United States. They could also cut off investments in U.S. refineries and other businesses to retaliate, which would hurt us more than it hurts them.

Rather than increasing supply and lowering the price of oil, this measure would likely decrease supply and raise the price. This is a perfect example of the “quick-fix” mentality which gives birth to feel-good legislation rather than do-good legislation.

Congress is correct that we “are at the mercy” of OPEC for oil prices. The oil market is not a purely free market. OPEC sets national production quotas, which helps manipulate prices. It would be great if we could wave a magic wand and make OPEC’s collusion disappear. But there is no magic here.

The way to break a cartel is to outproduce them. OPEC controls the market because they control the supply of exportable oil, producing about 35 percent of the total oil output. Other producers have little spare capacity, meaning they can’t increase output to counter limits by the OPEC nations.

Worse, OPEC does have spare capacity. So when other countries suggest making new investments to increase output, OPEC can increase their own output to drive down the cost of oil and make investment elsewhere uneconomical. But with oil at record prices, we can bring new fields online, make money, and reduce the stranglehold of OPEC on the world’s oil supply. 

Unfortunately, a lawsuit won’t produce a single drop of oil. High oil prices are largely fueled by demand that is close to outstripping the current supply. OPEC can control the supply, but the price of oil is based on the various exchange markets, where companies bid for contracts for the delivery of future oil. 

And with the current supply problems, those contracts continue to get bid higher.

On the day this legislation passed, oil prices jumped to a new record high. Nobody thinks lawsuits will help — because economists know the only way to lower oil prices is to increase supply or decrease demand.

But even if we miraculously reduced U.S. demand overnight, it would do little to ease the long-term supply problem. China and other developing nations willingly buy up all the excess capacity, in anticipation of further increases later.

So the short-term answer to OPEC collusion is to increase oil supplies from non-OPEC nations.  This will add to the spare capacity, ease concerns of future shortages that are helping to drive up prices and reduce demand for OPEC oil. 

New drilling in the United States will reduce our dependence on foreign oil, improve our trade deficit, strengthen the dollar, and put us in control of our own destiny instead of having to beg Saudi Arabia for oil while making idle threats about suing OPEC for not playing fair. 

When oil was cheap and plentiful, the nation could afford to put dubious environmental concerns over the rational production of our supplies. But it was clear that wouldn’t last and now we are reaping the “rewards” of that self-indulgence, with gas approaching four bucks a gallon and new production literally years off.

In 1995 we passed a bill authorizing drilling in ANWR, only to have it vetoed by Bill Clinton. If he had signed it, we’d have an extra million barrels or more today.  But because the price of oil is driven by speculators who are looking into the future, drilling now could have an immediate impact lowering the price of oil, even if it takes years to get to production.

Increasing supply is not a final solution. But it is a vital near-term part of a comprehensive plan that, unlike anything passed in Congress today, could actually achieve the goal of energy independence. 

I will present other parts of the plan in future columns.  It’s not a quick fix. 

It is however a plan that will actually work. And that’s what we need, not some feel-good do-nothing law. 

Charles Reichley has been a Prince William County resident since 1981. He can be reached at critically .