Gas Should Fuel Main Midterm Issue

Posted: May 08, 2006 9:12 AM

WASHINGTON -- The awesome power of supply and demand was at work last week as gasoline use fell and inventories rose -- producing a double-whammy that eased market prices for gas and oil.

Americans learned about supply and demand in high school economics (or at least they should have), but that lesson gets lost in all the anger and political demagoguery that usually follow higher fuel prices.

When prices reach levels that cut into consumer incomes, people tend to use less of it. The result is less demand, supplies rise and prices come down. This is true of just about every commodity, from oil to coffee beans.

Several weeks ago, I reported that if oil prices continued to climb, gas prices would keep rising until consumers began cutting back, which, in turn, would result in lower prices -- proving the free market works.

Last week, the government reported that gasoline demand has been flat for a month, while fuel refineries had been scrambling to boost production to catch up with higher gasoline use.

The Energy Department reported that over the past four weeks, average daily gasoline demand in the United States was little higher than a year ago.

Word that U.S. demand was flat sent a signal to the oil markets last week that told them, "Wait a minute, gas isn't being consumed in the U.S. as fast as we projected." That signaled lower demand for oil, and that sent oil prices down by more than $2 a barrel by midweek, and lower in the days that followed.

"The decline in crude (oil) followed a sharp drop in gasoline futures, which sank more than 9 cents to $2.08 a gallon," the Associated Press reported. This is not the pump price, which, when taxes and other costs are added on, averaged $2.92 a gallon last week.

What few consumers know is that oil and gas commodities are traded just like stocks on the open market. Prices are bid on the basis of demand that include long-term forecasts for worldwide demand for oil.

But prices bid are based on other factors, like fear, and lately fear has ruled the oil-trading business. Fear that Iran, a major exporter, will cut its supply, unrest in Nigeria, or even fears of the coming hurricane season shutting down oil rigs in the Gulf of Mexico.

All of this has stirred fears here about what impact all of this will have on our own economy. Last year, we watched the price of crude climb to $40 a barrel, then to $50 and then $60 and over, as economic forecasters predicted that oil would drive up inflation, sandbag the U.S. economy's growth and send gas prices on a never-ending spiral.

But last year, you might recall, the core inflation rate was tame, the economy's growth rate was a robust 3.5 percent for the year, and it roared to 4.8 percent in the first quarter of this year. Higher oil and gas prices no doubt had an impact on costs and on consumer behavior, but America's $12 trillion economy absorbed them and kept growing.

It will also be recalled that we went through a similar period last year, as gas prices rose to new heights, where demand fell and gas prices fell with it, only to rise again as lower prices boosted demand.

The question, of course, is what are we going to do about it? Consumers for now are responding the way you would expect them to by using less gas -- car pooling, using mass transit, driving more efficiently. Last week, it was reported that consumers weren't buying the big SUVs, but Toyota plants couldn't produce the gas-stingy hybrids fast enough.

Beyond that, we need to boost oil production in our own country and build more refineries. The Republican-run House took up a bill last week to make it easier to build refineries in the United States, but the Democrats voted to block its approval.

We have a lot of oil that can be drilled safely in the Outer Continental Shelf and in the Arctic National Wildlife Refuge to help make us more energy independent. But that legislation was blocked, too.

The Democrats' agenda for the energy problem seems to be no drilling in Alaska, no new oil refineries and no nuclear energy plants. Instead, let's raise taxes on the oil companies -- a proposal that would not produce a drop of new oil nor an additional gallon of gas. In fact, it would lead to less because oil companies would have less to spend for new oil exploration and refineries.

There's a great campaign issue in all this for the GOP. The only solution is to boost oil and gas supplies, and clearly the Democrats are unalterably opposed to doing that. Make that the issue this November.

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