The price of crude oil recently reached a 10-year high of $37.20 per barrel. Oil prices have been rising steadily over the past two years, and the impact of this is beginning to be felt in many areas of the economy. Gasoline prices are on the rise, for example, which impacts both individual consumers as well as transportation industries. Other industries, such plastic manufacturers, who use oil in other ways are being similarly squeezed. There is an expectation that business profits will begin to suffer as individuals rein in spending to offset price increases throughout the economy.

Given the pride that has been taken in America's recent economic success, this has become a major political issue. It is all the more pressing as winter approaches and households (especially in the Northeast) gear up for expensive heating-oil bills. Add to this the November Presidential elections and you have something that is increasingly billed as a crisis. Some questions therefore arise:

Why are prices so high? Largely because OPEC, the Organization of Petroleum Exporting Countries, decided not long ago to limit the amount of oil they pump, thus causing prices to rise. It should be noted that the U.S. is a large oil producer, but we currently pump only about 5.85 million barrels per day, about one-quarter of the nation's daily consumption (and a 50-year low by this measure). Any move by OPEC, therefore, has important repercussions for US consumers.

Are we actually in a crisis? It depends on your point of view. Americans are used to cheap gas and generally consider it a fundamental right. This is clearly ridiculous. By the cheap gas measurement, the answer to the question is you betcha. However, other countries (such as Britain, where taxes account for some 72% of gas price, making it very expensive indeed) are suffering more. The home heating oil cost spike is most troubling, since everyone needs to heat their homes, rich and poor alike, and the poor are much less able to absorb the cost.

What is being done? President Clinton has urged OPEC to raise their production, and Saudi Arabia has championed this. It will, however, take some time for this to actually bring prices down for the consumer.

What can be done? The Presidential candidates have put several proposals forward:

  • Al Gore has suggested that the government release oil from the Strategic Petroleum Reserve. This, he hopes, will provide quick price relief. However, The US consumes 20 million barrels per day, and under Gore's plan oil from the SPR would be released in 5 million barrel increments—hardly enough to offset the recent price hikes. He has also proposed that the government issue tax credits to oil suppliers, hoping that some of this savings will be passed along to home-heating oil customers. Again, it seems unlikely that this will have much impact. He has also accused the oil industry of "profiteering," which makes for a good political speech but accomplishes nothing.
  • George W. Bush has suggested that America reduce its dependence on foreign oil by increasing exploration and production at home. Given that the US is at a 50-year low in domestic production, and that much of this decline has taken place during the Clinton administration, this makes some sense. But once again, this is more electioneering, and not a short-term solution.

I believe that the best course of action is to continue operations on the foreign-policy front, using our bargaining clout more forcefully than we have to date. Tapping the SPR, which I think is contrary to its stated policies, would likely be ineffective given the small size of the proposed injection. Another option would be to suspend the federal gas tax, which currently stands at 18.4 cents per gallon. In this regard, it is useful to note that the Omnibus Budget Reconciliation Act of 1993 raised the federal tax on both gasoline and diesel fuel by 4.3 cents/gallon, and while this money was originally to be used for deficit reduction, it has instead been used to fund highway programs.

But I also think that market forces alone can set things to rights. America needs to consume less oil if it wishes to gain some freedom from oil-price shocks. This can be accomplished in the short run by conservation—if you don't like the price of gas, drive less—and in the long run by developing promising alternative energy technologies such as fuel cells (for autos and homes) and microturbines. I'd also like to see a way for the average consumer to stock up on fuel when the prices are low (outside of the futures market). When I come up with a solution to this difficult problem I'll let you know.