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May 23, 2008

It's Supply and Demand, Stupid

Danny Huddleston
The price of oil is not a mystery borne of conspiracies,  it's simple supply and demand. In the late 70's we were in the same situation we are in now. What was the Democrat's solution then? The same as it is now: alternative energy and tax the oil companies.

Before we start down that path again why don't we take a look back and see how it all worked out.

When Jimmy Carter came into office the price of oil was around $14.00 per barrel. A lot happened during the Carter years, most of it bad. Investor's Business Daily has a good summary here. By the end of the Carter Administration we had: the Synthetic Fuels Corp., the Energy Department, price controls on domestic oil, oil import quotas, and the Windfall Profits Tax. And when he left office the price of a barrel of oil was $35.00; that was a 154% increase.

One of Reagan's first acts as president was to completely decontrol oil prices. Prices peaked briefly, then began to fall. For years prices steadily fell until they reached about $10.00 a barrel.

At the same time Reagan decontrolled prices, Americans were working overtime building drilling rigs and related equipment. This equipment was shipped all over the world. A drilling boom was in progress. It was a combination of deregulation and drilling that caused the price of oil to collapse.

The Democrats are now proposing more regulation, more taxes on oil companies and less drilling. What do you think will be the result of those policies? Just ask Jimmy Carter.

So why did the Saudis diss the president at their recent meeting by giving him a token 300,000 bbl increase? It's not because they wish to damage our economy. An autocratic royal has the luxury of looking at the long term, unlike our politicians. Saudis remember the nightmare of $10.00 oil. Looking at the price of oil now, it seems like a paradise. But for the Saudi royals the collapse of oil prices was a financial catastrophe. Speculative activity has been intense, and some see it as a house of cards that could collapse at any time. The UK's Telegraph looks at supply and demand here:

The perfect storm that has swept oil prices to $132 a barrel may subside over the coming months as rising crude supply from unexpected corners of the world finally comes on stream, just as the global economic downturn begins to bite.

The forces behind the meteoric price rise this spring are slowly receding. Nigeria has boosted output by 200,000 barrels a day (BPD) this month, making up most of the shortfall caused by rebel attacks on pipelines in April.

The Geneva consultancy PetroLogistics says Iraq has added 300,000 bpd to a total of 2.57m as security is beefed up in the northern Kirkuk region.

"There is a strong rebound in supply," said the group's president Conrad Gerber.

Saudi Arabia is adding 300,000 bpd to the market in response to a personal plea from President George Bush, and to placate angry Democrats on Capitol Hill - even though Riyadh insists that there are abundant supplies for sale.
Let's not follow the Democrats down the path of what Ronald Reagan called the "failed policies of the past."

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