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In our opinion: Oil price nuttiness

Published: Saturday, April 30 2011 12:00 a.m. MDT

The last time gasoline hit $4 a gallon in the United States, Utah Congressman Rob Bishop said it was a moment similar to the attack on Pearl Harbor, in that it united lawmakers on both sides of the aisle in a common cause.

Unfortunately, while his comments were true to some extent, high gas prices tend instead to lead to nutty suggestions, indicating that many in Washington believe average Americans have little understanding of either market economics or the root causes of price increases. What's worse is that many of the nation's leaders themselves seem to lack a basic understanding of these issues.

The result is a series of demands for things that either would provide a minimal short-term solution, or that merely would flail away at easy targets, making many people feel good while actually forcing prices even higher.

Chief among these is President Barack Obama's demand that Congress remove the tax breaks available to oil companies, which he said would provide $4 billion a year for the nation's treasury. The flip side of this demand, of course, is that such a thing would cost the oil industry $4 billion, which would be passed on as higher prices at the pump. Oil companies may be enjoying huge profits at the moment, but the industry is volatile and profit margins gyrate from year to year.

The president's figures, however, are suspect. The Tax Foundation has studied the true impact of oil subsidies and found only about $2.2 billion "in tax expenditures that were specific to the oil and gas industry in 2010." On the other hand, in 2008 (the most recent year for which figures are available) the U.S. oil industry paid more than $91.5 billion in taxes domestically and $72 billion in foreign taxes. A comprehensive overhaul of all corporate tax breaks makes more sense than singling out one industry.

Stock market "speculators" also make convenient scapegoats. This, also, is a position based on ignorance. Speculators perform a vital market function in that they discover the price of a commodity. They make educated guesses as to future supply and demand, inflation and other factors. Sometimes they bet the price will go up, and sometimes they bet it will go down. If they are wrong, they lose. In the process, however, they also provide much-needed liquidity to markets.

Some are calling on the nation to tap its strategic oil reserves, a limited short-term fix that would disrupt markets, putting a damper on investment and production.

Even Republican calls for more drilling permits would not solve the short-term problem of rising oil prices. This is a long-term strategy, albeit a necessary one. But its effect would take years to develop.

The truth is much more difficult for politicians to swallow because it doesn't lend itself to quick political solutions. The war in Libya has cut OPEC supplies and made it difficult for other OPEC nations to produce enough high grade oil to fill the void.

The Federal Reserve's policy of weakening the dollar has added to the problem. Not only has this led investors away from the dollar and toward riskier commodities, such as oil, which artificially inflates the market, it has given OPEC nations, which receive dollars for their oil, incentives to raise prices. This is one problem over which the government has some control.

Ultimately, as in 2008, the best cure for high prices may just be high prices. Somewhere around $4 a gallon, Americans begin to drive less. That's bad for the economy, but good for prices at the pump. Unfortunately, it doesn't fit well into a stump speech.

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