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Forbes.com

 

Presidents CAN Lower Gasoline Prices

October 17, 2012

By Mark P. Mills

PRINTER FRIENDLY

Presidents may not be able to keep the seas from rising, or persuade Congress to go along with their favorite policies. But presidents can lower the cost of gasoline. Whoever becomes president after November 6th can, with the stroke of a pen, drive the price of oil down.

For proof we have two facts that epitomize a deeper reality. We can look to Saudi Arabia, and Texas and Louisiana.

It is a common, if sad tale, that when oil prices get unpleasantly high, presidents of both political parties have on occasion (and perhaps more often than we know), appealed to Saudi Arabia to increase production. The principle is simple. If such a major oil producer announces plans to increase production, markets respond and prices promptly sag. And they sag not because production is suddenly greater. It takes time to turn the spigot up and for more oil to reach markets. Prices decline in a competitive global market because of the credible expectation that supply will grow, soon, and sustainably. This is not complicated.

Presidents have also on occasion performed the same act of modest market manipulation using the U.S. Strategic Petroleum Reserve with its 700 million barrels of oil stored on the Gulf coast of Texas and Louisiana. If an executive order is issued to open the spigot to add oil to world markets, presto, prices relax. But in this case, prices typically rebound quickly because markets aren’t entirely stupid. It’s not credible that the reserve can make a long-term difference to world supply. Aside from the fact that it is limited, no president is going to squander all the reserve for short-term price pressure, since it was built for serious strategic security purposes.

The lesson is uncomplicated. If markets believe supply will increase significantly, credibly, for a sustained time, even if the actual physical supply will take a while to materialize, today’s prices start to soften. This is how it works with every commodity. Of course there are complexities and nuances, but at the core, it’s about credible supply and demand.

We have seen this principle in play with natural gas, the second in the hydrocarbon triad. No post-graduate degree in economics is needed to understand why U.S. natural gas prices have plunged over 50% in the past few years. Supply has dramatically increased, and is expected to stay high for a long time. (The supply increase, it bears noting, came entirely from private and state lands using new drilling technologies.)

So what would happen to the world oil price if a U.S. president announced a radically new domestic production policy? What if the U.S. announced it intended to implement policies to encourage, facilitate and accelerate domestic production, and reach out to collaborate on the same with our North American friends in Canada and Mexico? And to increase it so much that North America would, within the decade, become a major exporter. If the plan were credible, near-term prices would sag.

A plan is just a piece of paper that a chief executive can sign. There is a lot that a White House can do in this regard without Congressional approval. There’s even more that can be done in collaboration with Congress. The reason that such a plan would matter, and move prices, is that the markets know two things: North America has the resources, and we have the technology and infrastructure to unleash those resources.

Most people don’t know that the world’s fastest growing oil & gas producing region in recent years has been the U.S. – and without any help from the White House or federal government. This has happened despite regulatory and political headwinds. And, as of this year, the U.S. is now the world’s second largest oil producing region, second only to Saudi Arabia, moving past Russia. All this has happened in the last few years.

Even if we were to leave well enough alone, on the current trajectory we will approach Saudi Arabia soon. Why not make well enough better, and encourage radical increases in domestic production? In fact, why not increase production enough so that we can export billions of tons of all three of the triad of fuels that supply 85% of the world’s energy – oil, natural gas and coal?

North America has over 13,000 billion barrels of hydrocarbon resources in oil-equivalent terms. We consume just over 20 billion barrels of oil equivalent in all forms of energy. Our resources are vast and six-times more than the entire Middle East. Our growth in demand is very modest. We’re a mature economy. We have the technological capability to increase production without destroying our environment. And we know that the world wants to buy these fuels. (For a deeper dive on all this, see Unleashing the North American Energy Colossus.)

Over the coming two decades, global demand will increase outside of the U.S. by an amount equal to adding two United States’ worth of energy demand. And every credible forecast sees the vast majority of that demand being supplied by oil, gas and coal. If North America launches a plan to supply an ever-larger share of that demand, it would immediately soften and moderate global energy prices. This is something that is entirely feasible in engineering terms. It would require an eminently achievable roughly 70 percent increase over the decade from current levels of oil, gas and coal production. We can do that. We’ve already started down that path. (And for more details on what it would take to unleash such production, see Liberating the Energy Economy.)

Were we to build out such a plan, we would gain three benefits. The jobs from producing and exporting. Millions of jobs. The revenues from the exports, royalties and overall economic growth. Trillions of dollars. And the geopolitical benefits of radically reducing the influence of the current two major suppliers of energy to the world; the Middle East, and Russia.

By the way, if you think something like this might happen, and you have a yen to invest in this domain, quite aside from the obvious oil companies, small and large, you might look to where Bill Gates has made his bet (see Following Bill Gates into Digital Barrels), or play the purveyors of the enabling technologies, the likes of Baker Hughes [NYSE:BHI], Schlumberger [NYSE:SLB], and Halliburton [NYSE:HAL].

The president’s pen is mightier than a drill bit, because it can inspire and unleash the drillers. And if that pen is put to a plan that is credible – credible in terms of the products the markets buy — it will move markets, and prices will fall. The only fear would be that prices might fall too much. That’s a market risk for the industries in the game to be sure. But for consumers? It’s all good.

Original Source: http://www.forbes.com/sites/markpmills/2012/10/17/presidents-can-lower-gasoline-prices/

 

 
 
 

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