The Corner

Getting it Right

While I don’t think for a minute that offshore drilling in and of itself is the answer to the current oil price crunch, I do believe that an announcement that these resources are available for development could have a helpful impact on the oil price. And do so fairly rapidly. The same is true of removing some of the obstacles to the development of oil sands, shale oil and the like. Here, much more elegantly than I could, Martin Feldstein explains why:

Any policy that causes the expected future oil price to fall can cause the current price to fall, or to rise less than it would otherwise do. In other words, it is possible to bring down today’s price of oil with policies that will have their physical impact on oil demand or supply only in the future. For example, increases in government subsidies to develop technology that will make future cars more efficient, or tighter standards that gradually improve the gas mileage of the stock of cars, would lower the future demand for oil and therefore the price of oil today. Similarly, increasing the expected future supply of oil would also reduce today’s price. That fall in the current price would induce an immediate rise in oil consumption that would be matched by an increase in supply from the OPEC producers and others with some current excess capacity or available inventories.

Any steps that can be taken now to increase the future supply of oil, or reduce the future demand for oil in the U.S. or elsewhere, can therefore lead both to lower prices and increased consumption today.

It’s essential to note that Professor Feldstein is not only talking about increasing future supply (although that is, of course, important). Restricting demand is also part of the equation (something that may also have environmentally benign consequences). That, in turn, must include conservation (including, I’d argue, tougher mandates on Detroit), and (where needed) regulatory and other support for alternatives to oil – solar, wind, nuclear and so on.

Bottom line: the benefit to the U.S. from showing that it is serious about solving its oil problem may come much more quickly than is often claimed. Being “serious” does not, of course, include the pork barrel, big government buffoonery of cap-and-trade, and nor does it include gas tax ‘holidays’.

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