Why Are Oil Prices So High?

POLITICAL POSTURING CAN’T REPEAL SUPPLY AND DEMAND

Good energy policy is easy to distinguish from bad energy policy: Good policy leads to more supplies of affordable energy and bad policy leads to less.

The left seems to believe that the laws of supply and demand no longer work. They blame high gasoline prices on the oil companies’ greed and favorable tax treatment. At least one member of Congress has even threatened a government takeover of the oil companies. But all of the investigations and speeches in the world won’t produce a drop more oil or lower the price of gasoline one penny.

Demand for oil is soaring worldwide. China and India are engaged in massive infrastructure and construction projects that generate a huge demand for energy. There is also increasing demand in the Persian Gulf and other countries.

At the same time, aging oil fields are producing less oil, and new oil fields are not coming on line fast enough to replace existing production capacity. This is as much a political problem as a technical one. Iran, Iraq, Nigeria, Mexico, and Venezuela are among the countries that are not producing what they could due to mismanagement and social unrest. Moreover, OPEC repeatedly refuses to increase production.

Oil-producing countries give preference to their inefficient national oil companies while denying equal access to international oil companies. ExonMobil, BP, Chevron, ConocoPhillips and Shell together hold only 3.8 percent of known reserves, while the OPEC nations control 76 percent and Russia 7 percent. This needs to change in order to prevent future shortages.

Given this situation, it is obvious that the United States must increase energy production. We are the only country in the world that refuses to use its own natural resources and expects that other countries will supply our needs. As our demand for oil has risen, the amount we have produced has dropped. Over the years Congress has thrown up numerous obstacles to exploring for, drilling for, and refining oil.

Further reading:
“What is Driving the High Oil Prices?” by Ariel Cohen, Ph.D. and Owen Graham. WebMemo #1951