America’s Gas Price Follies

Add high energy prices to a sagging economy in an election year and American politicians will inevitably come up with bad policies, like converting the corn crop into ethanol or John McCain’s proposal to suspend the federal gas tax – neither will provide real relief at the pump while both are guaranteed to create other problems.

The good news is that Congress failed last week to cut a deal on two more bad ideas: Republicans’ misguided push for offshore drilling and Democrats’ misbegotten plan to curb speculation in oil futures.

Republicans should know that allowing more offshore drilling might marginally trim oil prices – in about a decade – while sacrificing important environmental protections. Democrats should know that financial speculation is not what’s driving oil prices, and that curbing futures trading could hamper the ability of companies like airlines and oil refineries to manage their risks by locking in the price of oil.

Of course, there is plenty of evidence that markets can be manipulated by fraudulent speculation. Yet all evidence suggests that speculation has little to do with the rising price of crude. From rice to iron, commodity prices are all rising due to a many factors, including a weak dollar and growing demand from China and India.

A report by government agencies – including the Commodity Futures Trading Commission, the Federal Reserve and the Treasury and Energy Departments – found that speculative trades in oil contracts had little to no effect on the rise in prices over the last five years.

Oil futures are financial contracts for future delivery of oil. Their price has been responding to the same factors: growing world demand in the face of stagnant supply and the expectation that this dynamic will continue.

Offering to solve American energy woes by drilling or slapping Wall Street around merely feeds the myth that there is an easy solution. There isn’t. Expensive oil is likely here to stay. Americans must burn less oil and find alternative sources of energy – ones that do far less damage to the environment.

Originally published by The New York Times Media Group.

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