Trump’s Market-Based Energy Policy Opens Gates to Production, Innovation

COMMENTARY Climate

Trump’s Market-Based Energy Policy Opens Gates to Production, Innovation

May 23, 2018 2 min read
COMMENTARY BY
Nicolas Loris

Former Deputy Director, Thomas A. Roe Institute

Nick is an economist who focused on energy, environmental, and regulatory issues as the Herbert and Joyce Morgan fellow.
Opening areas to exploration now will help businesses be more responsive to changes in consumer demand. ssuaphoto/Getty Images

Key Takeaways

Gas prices nationally now averaging $2.84 a gallon — up 40 cents from a year ago.

Crude oil costs are the largest component in gasoline pricing, and because oil is a globally traded commodity, foreign actions and events that affect oil supply.

A strong economy has boosted demand for oil and gasoline in the U.S. and elsewhere.

Gas station signs are showing some discouragingly high numbers these days, with gas prices nationally now averaging $2.84 a gallon — up 40 cents from a year ago and the highest mark since 2014. Meanwhile, U.S. producers are pumping out more crude oil than they have in nearly 50 years. What gives?

A number of factors contribute to increased economic pain at the pump. Crude oil costs are the largest component in gasoline pricing, and because oil is a globally traded commodity, foreign actions and events that affect oil supply and demand also affect American drivers.

On the supply side, OPEC and Russia have intentionally reduced their production as a way to boost oil prices. And government incompetence has led to the virtual collapse of oil production in Venezuela.

Domestically, refineries in some regions of the country have temporarily closed for maintenance because environmental regulations require summer blends that evaporate fewer emissions into the atmosphere under warmer temperatures.

Meanwhile, a strong economy has boosted demand for oil and gasoline in the U.S. and elsewhere.

Predicting how high prices will go is a dicey game, one that often makes analysts look silly. In July 2008, The Wall Street Journal asked more than two dozen energy analysts, journalists and economists where the price of oil would be by the end of the year (keep in mind, that’s only a six-month window). The answers varied significantly, ranging from $70 per barrel to $167.50 per barrel. The actual year-end price was $44.60 per barrel. Whoops.

More recently, a prominent oil hedge fund manager caused a stir when he said, “$300 oil in a few years is not impossible.” The projection was not based on the tired claim that the world is running out of oil. Rather, it reflected the manager’s belief that electrification of the transportation market will lead oil producers to invest less in future production, causing a significant supply shortage.

Color me skeptical. Nevertheless, the market will sort that out. Price signals are wonderful because they communicate information in ways that no central planner ever could — higher oil prices incentivize companies to find and produce more oil; higher prices also incentivize entrepreneurs to invest in innovative alternatives to gasoline, be they batteries, natural gas vehicles or biofuels.

Washington’s role is to get out of the way. Policymakers should focus solely on eliminating any barriers that prevent energy companies from doing what they do best: supplying affordable, dependable power.

The current administration is taking steps to do just that. At present, 94 percent of America’s offshore acreage — vast tracts thought to harbor nearly 100 billion barrels of oil — are off limits to oil exploration. The Department of Interior has drafted a proposal to open access to large swaths of these offshore resources, a move that would reverse a regulatory parting shot from the Obama administration aimed at stifling natural resource extraction.

Proponents of domestic energy extraction caught their white whale with last year’s Tax Cuts and Jobs Act. Among its many provisions is one requiring that the federal government hold lease sales in Alaska’s Arctic National Wildlife Refuge (ANWR), opening up the area to energy development.

The energy potential of the area is enormous, with the U.S. Geological Survey estimating that ANWR contains 4.3 billion to 11.8 billion barrels of recoverable oil. Once companies drill exploratory wells, we’ll get a better sense of just how much oil is there.

To opponents of American energy production, it seems there is never a good time to produce oil. If prices are too low, they say there’s no private-sector interest. If prices are high, they argue that exploration won’t get fuel to the market in time to reduce prices.

Too often, energy policy is formulated on what analysts or politicians think will happen. Opening areas to exploration now will help businesses be more responsive to changes in consumer demand. That beats waiting for Congress to react after prices become politically uncomfortable.

This piece originally appeared in The Washington Times