Dropping the Price of Gas to $2.50 a Gallon in a Week
If speculation can raise the price of oil, why can't it drop it?
That's the question that's been taking up a big chunk of the conversation between my friends, and I have to admit, it seems very possible.
President Obama announced recently that he plans to withdraw the $4 billion in oil subsidies because the companies are making too much money. They don't need them, they don't deserve them, and that money could go to much better use.
You have no arguments from me on that one. Oil companies need tax breaks like millipedes need more legs. And when Republicans start agreeing with repealing the tax breaks, well, you know this is a non-partisan issue if ever there was one.
But while I applaud President Obama's intentions and motives, I don't see this being the answer. In fact, I think it could make matters worse. And the reason comes down to one word — speculation.
Speculation Drives the Market
Right now, oil prices are being driven up by speculation, not by sudden demand or lack of resources. Yes, the wars are certainly not helping, but they do not account for the price rising by almost $2/gallon since the election of 2008. That's double the price in just two years. Has your salary doubled in two years?
You may recall that a few years ago, the average price of a gallon of regular gasoline climbed well over $4. That was down to oil speculation, pure and simple. The oil companies made astonishing profits, and then the price fell again, below $2/gallon. (See also: Gas Efficient Driving)
What happened? Did we find a massive reserve of oil bubbling below the surface of an easily accessible stretch of land? Nope. It was speculation, too.
Why Can't the President Use Speculation to Lower Oil Prices Right Now?
Is that a very naive outlook? Or could it actually work?
For instance, what if he gave a huge speech tomorrow stating that America is...
- ...putting billions of dollars into exploratory drilling.
- ...opening up Anwar for oil extraction.
- ...cutting major deals with Saudi Arabia and other oil-producing nations.
- ...opening up access to our massive oil reserve.
- ...siphoning oil from the Iraqi oil fields.
- ...demanding a minimum 60 mpg in vehicles by 2018.
- ...expanding wind, solar, and nuclear power programs, reducing the need for oil.
What would happen? Oil prices would drop sharply, and quickly.
It's a simple concept. More oil means less demand for what's out there right now, and prices fall. Gold continues to rise in value, but imagine what would happen to the price if an enormous gold mine, abundant in the stuff, was discovered.
Rare Is Valuable; Plentiful Isn't
Similarly, President Obama's intentions to cut the tax breaks mean one thing to me — higher prices. Sure, we get to stick it to the oil companies and save $4 billion, but that's money we aren't going to see any time soon. Remember, the country has quite the debt to pay off. But if oil companies are getting less money, that will only make the price of oil go up. If they aren't getting help to do more drilling, oil is even more valuable.
Now, I'm not saying we do any of the things I suggest President Obama should say. The stock market runs on rumor and, yes, speculation. If there's the merest hint that oil is about to become a lot more plentiful, traders will dump oil in favor of something else. Probably gold. And that's fine by me. I don't need gold to drive to work. Gold does not play a major role in every single thing we use, from the computer in front of you to the food you'll eat today. Gold, silver, diamonds, platinum, and frozen orange juice, they can all hit record highs. But oil, it's one of life's necessities, and it should not be traded in the same way. So, why not use speculation in our favor for once?
I believe gasoline will hit $5/gallon this year. It may even reach $6/gallon. I also believe that some well-chosen words by our government, regardless of actual intention, could help avert that eventuality. Many of my friends agree. But what about you?