Any attempt to lower the price of fuel without relying upon fundamental supply and demand will fail and be more costly than anyone could anticipate.
Reducing the Strategic Petroleum Reserve (SPR) is one example. The amount discussed is less than three day's demand and will not reduce the price at the pump because it is temporary. In fact, it may even lead to an increase in the cost, since speculators will now expect that one source of supply has been used up. In addition, if we are supposed to use the SPR at a time of interrupted fuel supply, then we should use it for that purpose only.
Another popular idea, a tax holiday for an entire week, will put less than $5 in each motorist's pocket. That hardly appears to be significant in light of the $75 weekly fuel bill for those doing average driving at average fuel economy. It does, however, further reduce available funds to rebuild the infrastructure at a time when we are being told we are short of funding and need to raise fuel taxes.
Recently, we have seen the average pump price of regular gas rise from $3.10 the first week of January, to $4.11 the first week of July, and to $3.88 the first week of August. The first week of July was a peak period for prices. The question is, why did the prices come down? The average world price for a barrel of crude was $92.82 the first week of January, then $137.11 the first week of July, and $121.19 the first week of August.
We know that, historically, there has been a lag between the price change in crude and the price change at the pump. If that still holds true (and there's no reason to expect that it does not), then the pump price of regular gas should fall even further during the month of September. The current movement in the regular price of gasoline cannot be attributed to just the price of crude.
On the demand side, we have seen a steady decline in the total demand for regular grade gasoline (grade switching aside) that is unique to prior periods of price increases. With supply slower to adjust, the clearing price for gasoline has fallen.
Time and robust analyses will tell which factors were the dominant causes of the recent decline in fuel prices. It is clear to me, from the current evidence, that an imbalance in the supply and demand led to the decline. The bottom line for this point of view is to let the market establish the price.
Two other issues that are equally important are the notion that we can't act fast enough and that we can adjust to any seemingly rational alternative.
We are told there are a number of steps that can be taken but that it will take 10 to 20 years to see the full benefit. If we don't act, the resolution will remain 10 to 20 years away. If cars delivering 40 mpg were to sell at the rate of 1.5 million per year, it would take 20 years to replace the current population of automobiles. That represents the demand side and we should address the supply side for fuel at the same time.
The belief that we can alter our infrastructure for getting fuel of any type in sufficient quantity and availability to the end-user does not consider the delivery system we have in place today. We rely upon a significant number of small firms to provide fueling. Will they have the capital to invest in the required infrastructure? Probably not.
We should be very careful of the rush to judgment on any energy directive — the consequences can be more than economic.
