What Government Can Actually Do About Gas Prices

Over the longer term, well past this November's elections, there are some policy options would bring gasoline prices down.

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David Shulman is a retired Wall Street executive who is now a senior economist at the UCLA Anderson Forecast. He is also affiliated with Baruch College (CUNY) and the University of Wisconsin.

With the national average price for regular grade gasoline hitting $3.83 a gallon last week and well on the road to over $4.00 a gallon, the public and politicians of all stripes are screaming to do something. However, the grim reality is that government policy can't do all that much in the short run. Of course oil can be released from the strategic petroleum reserve, a step that would offer minimal short term relief. However, with tensions rising over Iran's nuclear ambitions, it hardly seems sensible to unilaterally disarm ourselves in the face of a threatened supply shock.

Simply put, the reason why government policy can do very little to bring down gasoline prices is that the price of crude oil is set on the global market. As a result, oil wherever it is produced, domestically or internationally, will find its way to the highest bidder. Moreover our domestic situation is exacerbated by the closing down of unprofitable domestic refineries. For example the giant Sunoco refinery in Philadelphia is scheduled to close this summer. As hard as it is for the public to believe, the oil refining business is unprofitable and has been for years.

[See a collection of political cartoons on gas prices.]

Nevertheless over the longer term, well past this November's elections, there are some policy options would bring gasoline prices down. While a policy of "drill baby drill" won't bring down oil prices today, over time increased production would certainly dampen future price increases. Therefore opening more public lands onshore and offshore for drilling makes sense. For example in 1996 President Clinton vetoed a bill that would have opened up a small portion of the Arctic National Wildlife Refuge for oil exploration. He argued at the time that it would take 10 years before any oil would be produced and it would have no short term effect on gasoline prices. Well, it is now 17 years later and had he signed the bill, we would be benefiting from that oil today.

Another way to bring down oil prices would be to encourage a greater integration with the vast oil sands reserves in Canada. Remember that Canada's oil reserves are roughly equal to that of Iran's! It is for this reason that President Obama's decision to hold up the Keystone XL Pipeline was a bad one.

A more creative way to relieve the pressure on gasoline prices would be to encourage heavy duty trucks to switch from diesel fuel to cleaner burning natural gas. Indeed a fuel conversion program would free up both crude oil and refining capacity to make more gasoline and it would make natural gas a bridge fuel to more alternative sources of energy in future.

[Read the U.S. News debate: Is Fracking a Good Idea?]

It goes without saying a natural gas conversion program would require an expensive new infrastructure, but with natural gas prices at a 10 year low such a proposal requires thoughtful consideration. Moreover natural gas prices are likely to remain low because the United States is awash in the fuel as result of the new hydraulic fracturing technology that is once again making Pennsylvania and Ohio large hydrocarbon producing states. The crucial distinction between natural gas and oil is that because of high transportation costs, the price of natural is set locally rather than globally.

What about alternative fuels and conservation as parts of a long run solution? They do have a role to play. Increased fuel economy standards have worked over the past 40 years to reduce gasoline demand and will continue to do so. Also alternative fuels in the very long run will have a role to play, but to believe that you can turn a switch and bring into being, for example, the widespread use of algae-based automobile fuels you would have to be captured by the siren calls of faith-based environmentalism. What about electric cars? Progress is being made, but we still have a long way to go and note that although electric vehicles would reduce the demand for gasoline, the electricity needed to recharge the batteries is not immaculately conceived.

[See a collection of political cartoons on energy policy.]

Having taken part in the first Earth Day in 1970 and waited in two hour gas lines in 1973 and 1979, I have seen politicians make all kinds of promises to reduce our dependence on foreign oil in particular and fossil fuels in general. We know that most politicians do not believe in reducing our dependence on foreign oil because they have worked to restrict domestic production and have refused to increase gasoline taxes to discourage consumption.  As to our dependence on high carbon fossil fuels, I am still waiting for solar and wind power to become economic. I have been waiting 40 years and probably will continue wait.