How Our Government Could Lower the Price of Gas by Half in a Matter of Weeks.

Lower the price of gasoline by half in a matter of weeks? Most would say, “It can’t be done!” “Doesn’t it cost more than that to produce gas?” “Isn’t gas in short supply?”

Well, I’m here to tell you it can be done, and should be done. Here is how and why.

First, to understand the how and why, it will help to understand some simple concepts. You see, the price of gas is NOT set by oil companies marking up production costs. It is set in the open market by speculators in oil futures’ contracts. Don’t let your eyes glaze over now. This is important stuff. “A futures’ contract” might seem like mumbo jumbo beyond our ability to comprehend, but it’s really quite simple.

A futures’ contract  is simply a promise to buy X barrels of oil at a future time for a specific price. Oil companies insure profitable future production by pre-selling oil using such contracts to speculators. The speculators make money by reselling those contracts for even more than the oil companies originally charged to other speculators (or oil distributors), when the consensus is that oil prices will rise. If everyone believes worldwide demand will eventually outstrip supply, those contracts become worth more and more and more. That is what has happened over the course of the last two years. But look at the chart of Crude oil futures prices to the left. What do you suppose caused the price to plummet the way it did in late 2009? Then why did the price steadily rise thereafter?

For the past two years, nearly everyone HAS BELIEVED that worldwide demand will eventually outstrip supply. That is why the price of gas we pay at the pump has DOUBLED. It is NOT because oil production costs have doubled, or because there is a shortage of oil TODAY. The fact is it doesn’t cost much more to produce gas today than it did two years ago, and there is enough oil in already-developed fields to supply the world’s needs for more than a decade. In addition, huge known reserves of untapped oil and natural gas exist, and oil companies make fresh discoveries regularly.

The elephant in the room, the obvious question, is, “Why does everyone BELIEVE that worldwide demand will outstrip supply?” That question is at the heart of the matter, because if that BELIEF were to change, the price of oil, and gas at the pump would plummet, almost OVERNIGHT. Affecting that BELIEF is also where our government’s policies have the most impact.  

America consumes approximately 150 billion gallons of gasoline per year, far more than any other nation on the planet. During the last American presidential election, there was a lot of talk about America becoming “energy independent.” Rallies were chanting, "Drill, Baby, Drill!" There was real fear among speculators that the US would change its policy and and push for energy independence. Talk is cheap, but that talk, alone, caused the price of gas to plummet. Then, after the election, the imperative for “energy independence” dissolved like so much other campaign rhetoric.  

Does America even have the oil and gas to achieve energy independence? Absolutely! In fact America has proven oil and gas reserves sufficient to provide all its forecast energy needs for the next century. “So, how can anyone believe that worldwide demand will outstrip supply?” you might ask. It is America’s energy policy, (or lack thereof), that creates that impression. America shoots itself in the foot by not having a cohesive energy policy, and not actively pursuing “energy independence.” In fact, our current governmental policy stands in the way of extracting many known reserves right here in America.

If our government made “energy independence” a national priority, and showed real resolve by taking concrete first steps by removing roadblocks to extraction of reserves right here in America, the BELIEF that worldwide demand will outstrip supply would be crushed, and prices of oil futures would plummet immediately. It would only take a matter of weeks (just as it did in late 2009) for prices at filling stations to reflect the new paradigm (see graph of how quickly they fell leading up to the last election). My educated guess is they could go down by half.

A side benefit, so precious in today’s economy, would be a boom in oil and gas related employment. Please remember what you have read here and encourage your representatives in government, whether Democratic, Republican or Independent to make energy independence for America a high priority. Acting today will have an immediate beneficial effect on the cost of all goods and services shipped, and could save over $1000 per year at the pump for the average American family.

Finally, I want you to know I consider myself a conservationist. I lived in the bush for a year in South Africa, existing on solar power. I believe in the future of alternative energy, especially solar. However, I also believe that America must pursue energy independence in today’s oil economy, while continuing to pursue alternative energy sources. I also believe this is possible with minimal impact to the environment.

Cheers, Pete Grimm.