Should we offer thanks to the big oil companies for $1.85-a-gallon gas this holiday season? No, but the sharp drop at the pump since summer offers important lessons that need to be learned if we are to prevent a return to $4-a-gallon gas.
Last summer, Congress held several hearings that gave politicians the chance to tee off on the invited oil company executives. Republicans and Democrats alike took turns in front of the TV cameras berating these CEOs for the sky-high pump prices -- as if these executives were free to set them wherever they wanted to.
But by that logic, the CEOs should now be invited back by Congress and praised for cutting the price by more than half in only three months.
The reality is that these executives aren’t responsible for the high prices of June through August, nor the much lower ones holiday travelers are now enjoying. After all, if Big Oil really could pull strings and create $4 gas whenever they wanted, then prices would stay there forever, wouldn’t they? The dramatic price plummet should discredit those price-manipulating conspiracy theories, as well as the counterproductive policies they inspire -- crackdowns on price gouging, government price controls, and punitive taxes on oil producers.
By the same token, the lower prices didn’t come about because of a surge in corporate kindness. The energy companies are doing the same thing today that they did last summer -- meeting their profit-maximizing obligation to shareholders by charging as much for their product as the market will bear. The only difference is that the supply and demand fundamentals are very different now than they were a few short months ago.
Last summer’s record prices were caused by strong global demand for fuel at a time when supplies were barely adequate to keep up. However, a rapidly weakening economy has slackened demand, both in the U.S and around the world.
Recessions do have the silver lining of creating a few bargains, and the relief at the pump is one of them. However, nobody expects (or wants) the economic slump to last forever. Absent energy policy changes, pump prices will rise as soon as the economy starts to turn around.
The best idea for preventing a return to $4 gasoline (and above) is to boost energy supplies. The U.S is the only oil-producing nation on earth that has placed a significant amount of its reserves off limits. This policy needs to change.
President Bush and Congress recently took a step in the right direction by allowing the federal restrictions on oil leasing in 85 percent of America’s territorial waters to lapse. But we should be doing more, including making additional onshore oil available, as well as streamlining the red tape that can add many years to the time it takes to bring new energy online.
Overall, the problem is not Big Oil, but big government and its constraints on domestic supplies. If we want this cheaper gas to be around in future holiday seasons, we need to start the process of making more domestic energy available.
Ben Lieberman is Senior Policy Analyst for Energy and Environment in the Roe Institute for Economic Policy Studies at The Heritage Foundation.