Oil Barrel by Yuan2003

Oil Barrel by Yuan2003

The news that Congress will debate the merits of off-shore drilling within a broader energy package highlights how disconnected our political discourse has become from what really matters to energy policy. The fact is, both oil and gasoline prices have fallen dramatically in the last month and it has nothing to do with calls for drilling or any other supply side policy.

In only two months, oil prices have fallen nearly $40 per barrel, while US gasoline prices have fallen from well above $4.00/gallon to nearly $3.50/gallon in many areas. And yet not a single new off-shore well was permitted, drilled or began producing in that period.

Short of massive releases from the Strategic Petroleum Reserve, there is no short-run supply-side approach under American control that can accomplish what just happened to oil and gasoline prices. Every supply-side approach will take years, probably a decade or more, to have any noticeable effect on supplies, let alone prices.

And that’s also true for non-oil supplies. For electricity supplies, it takes 6-8 years to permit and build a new coal plant, barring litigation and assuming no uncertainty about carbon limits; it will probably take 8 to 10 years to license and construct a nuclear facility (no new nuclear plant has not been licensed in the US for 30 years). Renewables take time too; for example, we can install lots of wind machines in a few years, but it will take more years to obtain the rights of way and construct the long distance transmission lines they need.

In the transportation sector, all the viable alternatives are a decade or more away, even if we knew today where to focus and had all the programs in place to encourage their development. There are simply no quick solutions of any significance on the supply side.

If you want economic solutions in the near term, they’re all on the demand side. And we’ve only begun to tap these energy "reserves."

[Update: There are arguments that much of the price movement is due to speculation.] But the driving public also forced gasoline prices down all by themselves, and they did it in quick fashion. They did it by reducing their demand for gasoline. They simply drove less; they took public transportation; they shared car pools and yes, they inflated their tires. And where they had a choice, they chose more fuel efficient vehicles and got rid of their gas guzzlers (or used them less).

Using less energy, using it wisely, using it efficiently — these are the quickest (and cheapest) ways to affect the demand/supply balance and keep costs under control. And the important thing is, demand-side actions are the things that Americans can do now, the things they can control themselves. They don’t have to wait for Congress to act nor rely on unaccountable corporations to save them, with or without tax-payer subsidies.

All the nonsense about how just talking about more drilling would reduce prices was just jibberish. It’s bad enough that the Republicans are fixated on their mindless "drill, baby, drill" mantra. It’s even more disappointing that neither the Democrats nor the media recognizes the lesson that consumers just taught them about what they can do when they have a strong incentive. On that point, even Tom Friedman is right about the need for a consistent price signal.