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September 30, 2006

Gas Prices Are Down, But Energy Policy Still Needs Reform

By

What goes up can go down. That's certainly proved true with gasoline prices.

Prices had moved in only one direction -- up -- since January, from $2.20 per gallon to more than $3 by July. But since mid-August, they have been falling by more than a penny per day, and the fast decline is likely to continue.

While this is great news for the driving public and the American economy overall, the drop at the pump does raise questions about whether Congress will take still-needed steps to strengthen America's energy future.

Several factors affect the price of gasoline, and until recently most have been working in the direction of higher costs. Rising oil prices, boosted by strong demand and geopolitical uncertainty over imports, have been the biggest factor. Concerns about hurricane damage and the new federal ethanol mandate also have added to the upward pressure.

But by the middle of August, the worst was over. Oil prices started to soften as fears of Iran-related supply disruptions eased. The market also benefited from the absence of any serious hurricanes like last year's Katrina, which devastated oil production in the Gulf of Mexico. And ethanol, which experienced a massive price spike after the law requiring the use of this fuel additive took effect early this year, has finally come down in price.

Now that summer is over, demand slackens and the tough seasonal environmental specifications for fuel are no longer in effect. Thus, barring a major geopolitical event, further declines are likely in the weeks ahead.

This is good news not only for car owners, but also for incumbent office holders facing an angry electorate in November. Gas prices will still hurt them, but not nearly as much, thanks to the decline, and especially so if prices dip well below $2.50 before election day, which looks increasingly likely.

The only dark cloud to all of this is what it may mean for congressional efforts to expand domestic oil production. This includes measures to open up a small portion of Alaska's Arctic National Wildlife Refuge (ANWR), America's largest untapped onshore oil deposit.

The U.S. Geological Survey estimates that ANWR contains 10 billion barrels of oil, enough to increase known domestic reserves by 50 percent. And there is even more energy potential in America's territorial waters, 85 percent of which, like ANWR, is currently off limits to oil and natural-gas production. Bills to allow at least some additional offshore energy production (the House version is much stronger than the Senate version) are currently pending.

The temporary drop in prices is nice, but fundamentally little has changed and the underlying problems that created $3 gas can and probably will return unless we do something about it. Specifically, the tightness of world supplies and ongoing political instability among many oil-exporting nations underscores the need for America to make fuller use of the oil it has here at home. But it remains to be seen whether the prospects for energy legislation will decline along with pump prices.

Falling gas prices are a source of savings for hard-pressed consumers, and a source of relief for politicians facing reelection. But let's hope they don't feed complacency about the need to address the nation's future energy needs.

Ben Lieberman is a senior policy analyst at The Heritage Foundation (heritage.org), a Washington-based public policy research institute.

First appeared in FOXNews.com

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