Last week, Michele Bachmann said her administration would drop the price of gasoline to $2 per gallon. "That will happen," she guaranteed.
Rather than join in the general round of blogosphere guffaws and catcalling that greeted her remark, let's stick to the facts and see what a President Bachmann would be up against in trying to fulfill such a promise.
Like any other commodity, the price of oil is influenced by supply and demand. Oil is a special case, however, in that the market for the stuff is global and has been for decades. The price of gasoline in Peoria, Pittsburgh, and Pismo Beach is influenced by supply and demand variables that can occur anywhere in the world... rising demand to fill up all those shiny new cars in Shanghai puts upward pressure on prices. A hand on the knob in Riyadh to boost the flow of Saudi crude exerts downward pressure.
There's not much that a president can do about those variables. Shanghai drivers would pay no heed to any Bachmann exhortations to lighten up on their guzzling. Saudi Arabia's oil minister might be willing to open the valves, but not enough to drive prices down dramatically, because that would not be in the kingdom's interest. Saudi Arabia, which has outsize influence on the world oil market as a result of its large reserves and ability to dial production up and down, adheres to the Goldilocks strategy for manipulating oil prices - not so high that customers like us get uppity ideas about energy alternatives, not so low that the royal treasury can't earn a satisfactory return and have enough cash on hand for King Abdullah to shush local malcontents who liked what they saw this year in Cairo's Tahrir Square.
There is nothing that presidents can do about unpredictable events that rattle the oil market - hurricanes knocking out platforms in the Gulf of Mexico, militants sabotaging oil facilities in the Niger River Delta, Putin and company hatching murky political intrigues in the Kremlin.
Another big influence on the market are traders OK, speculators who buy and sell commodity derivatives and can bid the price of oil up depending on market and currency movements. Bachmann could no more control volatile global financial markets than she could command the winds to blow.
What Bachmann has in mind is boosting domestic oil production on public lands and in federal offshore waters. Drill, baby, drill. Catchy slogan, but as a plan to slash oil prices, it doesn't take into account market realities. A 2009 Energy Information Administration study estimated that opening up the Outer Continental Shelf to oil production might raise domestic production by half a million barrels per day, but it would take years for the extra product to hit the market. Even if the extra half a million barrels a day could be magically produced in less than a year, it would enter a global market that this summer supplied some 89 million barrels per day.
The extra U.S. production wouldn't be big enough to make a significant difference in the world market. And OPEC, the cartel run by Saudi Arabia and 11 other oil exporters, could dial back production to offset the U.S. production increase and keep upward pressure on prices. It's the same reason why the Obama administration's and congressional Democrats' call to release oil from the Strategic Petroleum Reserve was a gimmicky ploy. It's a headline grabber with little long-term effect on the world market.
What would drive prices down hard would be highly undesirable an economic contraction that dries up demand. Tom Kloza, chief oil analyst for the Oil Price Information Service, told CNNMoney, "We're going to have to recognize the rest of the world has this increasing appetite for oil. If we go below $2 a gallon, it probably means there has been a lot of wealth loss and we are in a deflationary period."
Put another way, Kloza said we must be careful what we wish for.
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