What we can do about energy prices

What a difference a few months can make. In January, gasoline hit $3.37 per gallon on average nationwide — its highest-ever price in that month. Fast-forward to March and the average is $3.86 per gallon, an increase of 49 cents over two months. A 25-cent increase in the price of gasoline translates to a $35 billion price tag for the broader economy. It’s important to note this figure only accounts for direct costs and doesn’t take into account increased costs facing U.S. businesses and consumers due to higher prices for transportation and other goods. It’s clear that when gas prices rise, consumers cut back in other areas and the whole economy suffers.

For example, a one-cent increase in the average price of diesel fuel costs the trucking industry an additional $370 million. Every dollar per barrel increase in the cost of oil raises the airline industry’s fuel bill by $420 million. In the agricultural sector, last year farmers paid almost 85 percent more than they paid in 2000. To put this into perspective, the average tractor holds 270 gallons of fuel. At today’s prices, one fill-up costs the American farmer almost $1,000.

Yet while the problem is clear, the blame and solution are much less so. Liberals, seemingly in a race to insulate the president from blame, are eager to throw their hands in the air claiming we are helpless and are at the whims of speculators and other nations. At the same time, Republicans are rallying behind the idea that we can solve the problem by increasing drilling. The truth is somewhere in the middle.

A recent Associated Press review stated that no matter how much oil we produce, none of it will affect gasoline prices. This idea has been echoed by the president during his energy tour this week. However, the review contained many flaws, not the least of which was that it focused on the past, specifically when the United States was facing declining oil reserves with no relief on the horizon (thanks, in part, to the perpetual obstruction of most of America’s offshore resources and oil shale in the American West).

Today, however, we are facing a much different set of circumstances. New technologies have allowed us to gain access to resources that could fundamentally reshape the world oil market. For example, according to a recent report by the Institute for Energy Research (which cites data from the Energy Information Administration, the U.S. Geological Survey and the Department of Energy), the United States holds more than 1.4 trillion barrels of technically recoverable oil (more than five times the amount of oil in Saudi Arabia) and 2.7 quadrillion cubic feet of recoverable natural gas. Additional studies show that the expansion of certain energy-extraction technologies, including hydraulic fracturing, has made it possible for North America to achieve self-sufficiency by 2030. Removing the world’s largest consumer of oil as a major purchaser from the global marketplace would, without a doubt, significantly affect global markets, and by extension prices at the pump.

In the short term, the president can and should do more. Speculators have a hard time speculating if the actions policymakers are pursuing don’t match their narrative. This is a fact noted by Larry Kudlow and other well-known economists.