Drill Baby Drill – Why? Part I: Putting the Safety on the Trigger

As of this writing gas prices are quite high and appear to be on their way to record highs. Everyone is concerned and they seem to not know what to do – especially our elected leaders. For decades going back to the early 1970’s when the OPEC oil embargo started up one of the deepest recessions and more important one of the longest downturns in recent history we have searched for an energy plan. And yet we have never had a comprehensive nor a practical policy on how to protect the country for the harmful impacts of oil prices.

Why are oil prices so important? Not just because they are high, but since 1973 they have been the trigger to every recession in the United States. Look to the following graphs. They are broken in two since gasoline prices have risen so much in the last several years that the early years are lost in the analysis (as can happen with graphs). Can you tell when the recessions were? They are listed below the graphs. 

November 1973, January 1980, July 1981, March 2001

 

  

December 2007

In every case, the recession parallels the sharp increase in gas prices (excepting late 2011/early 2012, but economic data is still coming in and frequently “corrected”)

While we blame our recessions for many reasons, they have all been started with rising gas prices. The most recent one is blamed on poor decisions on subprime mortgages and the housing bubble. And while these issues would have eventually damaged the economy, their ugly heads were revealed only when gas prices began rising in late 2005 and early 2006 causing food prices and other products costs to go up and lay offs started leading to those on the fence with debt, especially mortgages, to begin to get behind on payments; ultimately defaulting.

Gas prices surged before every recession as follows: 1970 – 1974 up 47%, 1978 – 1980 up 97%, 1981-1982 up 21%, 1987 – 1990 up 64%, 1998 – 2001 up 63%, 2006 – 2008 up 37%.

Since 1973 we have allowed foreign influences to create chaos in our economy. I heard a story one time, whether it is true or not I cannot verify, but it goes like this: the Saudi Oil minister was asked what should gas prices be? He responded: year one – $3, year two – $3, year 3 – $3, year 4 – $1. And why the drop to $1? He indicated that it takes Americans a far shorted period of time to forget higher oil prices and bad habits if prices are dropped temporarily. True or not, this does reflect American sentiment in their vehicle choices and spending habits.

So how do we finally relieve ourselves of outside influence especially in face of the newly added players in the market that impact pricing – namely China, India and other emerging economies?

For years OPEC has had our number, dictating the prices as noted in the story above. But the addition of others needing oil have changed the landscape. These new economic powers are now demanding the resources to fuel their economy and the United States does not always have the ability to sway pricing simply by reducing demand as we did in previous economic downturns leading to lower prices. On the contrary, lately the prices have been going up since demand worldwide is up and supply has not changed – a perfect economic model for high prices and high profits to oil producers. The ironic part of this story is that these new economic powers are using American dollars, created from trade surpluses with the U.S. to bid up the oil we thought was either ours or at least ours to control even a little bit.

Couple this with the fact the oil and gasoline markets are no longer free trading markets and you have the recipe for economic disaster for the United States. Not free trading markets? Ever since we have allowed the speculative part of oil pricing to come to play, the markets are no longer free. Basic economics dictate that absent natural disasters or political risks, prices of anything will go up and down in similar fashions. How often does a gallon of gas go up 20, 30 or even 40 cents in one day? Correspondingly how often has a gallon of gas gone down by the same amount in one day? I think never is the answer from just about everyone! A free market operates in such a fashion. The oil speculators and those other profit motives of producers have removed this free market pricing. In essence our entire country is dealing with gamblers since futures’ trading is just that, educated gambling.

Something so important to our country and its security cannot be at the mercy of gamblers, nor foreigners (users or producers). Don’t get me wrong. I am a firm capitalist and believer in free markets. If one wants to make bets though, let them do it at their own gambling hall, not at the pump where our families are most at risk.

So how do we control the trigger to our economic downturns? We do it with a domestic oil policy that will soften the ability of others to dictate the entire price of our gasoline and will remove the “oil gamblers” from the equation.

How can this be done? Stay tuned to part II of Drill Baby Drill – Why?

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