Oil Price Rebound

The Washington Times

By Steve Chapman
August 24, 2005

Last weekend, I saw the trailer for "Deuce Bigalow: European Gigolo" and immediately concluded there was nothing in the world I would less rather see. Since then, though, I have found something even more painful to my eyes: gasoline selling for $3 a gallon. I immediately concluded I would watch Rob Schneider on the big screen every day if it would bring back $2-a-gallon gas.

Of course, if you're older than kindergarten age, you may be able to remember even better days. If you go back in history to March 2004, you can find charmingly antique news stories like the one that began, in a tone of grave alarm, "The average price of gasoline has hit a record high of $1.738 a regular self-serve gallon."

And you think things are bad now? One expert, Craig Smith, co-author of "Black Gold Stranglehold," predicts pump prices will reach $5 a gallon next year -- and could go as high as $10.

That prospect may have some Americans pondering which children they will have to sell into bondage to pay for transportation. It also has some politicians demanding that the federal government reduce prices by releasing oil from the government's Strategic Petroleum Reserve.

But neither of these drastic steps is necessary or wise. It turns out there is plenty of good news in the oil market, and it requires only a little patience.

Gas prices are high because crude oil has been selling for upwards of $60 a barrel. But that price fortunately looks as transient as a summer romance.

The going rate has been pushed up in the last couple of years by rising fuel consumption. But Michael Lynch, president of Strategic Energy and Economic Research Inc., says global demand has fallen short of predictions this year. Not only that, but crude oil inventories have been expanding in the U.S., which should help push prices down.

It turns out the law of supply and demand has not been repealed: When the price of oil rises, people consume less than they would otherwise. The longer oil remains expensive, the more people will look for ways to conserve it. Already, car buyers are flocking to gas-stingy hybrids, which were once regarded as the equivalent of living in a yurt.

Mr. Lynch expects prices to drop to $40 a barrel by the end of the year, if not sooner. He's not alone: The Russian government has drafted its 2006 budget assuming that's all it will get for its oil. That would bring gas prices down in the range of $2 a gallon.

Some alarmists, known as "peak oil" theorists, predict world output will hit its absolute limit soon -- in November, to be exact -- and then begin a steady, unstoppable decline. But pessimists have always been wrong before, and I'd bet a barrel of oil they'll be wrong again.

Why? Because aside from dampening demand, high prices have served the other useful function assigned to them by economics textbooks: boosting supply. Oil producers, spurred by the lure of big profits, have been investing like mad in new sources.

"Significant new capacity will be coming onstream -- much of it launched a few years ago on price assumptions much lower than today's market prices," according to Daniel Yergin, chairman of Cambridge Energy Research Associates. A recent study by his firm says that, based on investments already made, worldwide output could rise by as much as 20 percent in the next five years. CERA thinks the peak of global production is indeed on the horizon -- but not till after 2020.

Maybe the best news about the oil crisis is what the government is doing to solve it: very little. True, the president recently signed a major energy bill that may waste taxpayer funds on assorted subsidies, but it generally refrains from mucking around with the operations of the market. Unlike the 1970s, when prices last soared, no one is insisting that the federal government regulate the price of gas.

A few politicians, including Sen. Barbara Boxer of California and Illinois Gov. Rod Blagojevich, both Democrats, have called on President Bush to force down prices by selling oil from the Strategic Petroleum Reserve. That would be self-defeating, since it would discourage consumers and producers from doing what they need to do. Fortunately, Mr. Bush seems about as likely to heed them as he is to free Saddam Hussein.

Letting markets function naturally may have occasional regrettable results, like "Deuce Bigalow." But when it comes to energy policy, nobody has come up with anything better.

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