An Oil Bank for Gas Price Stability?
Rising Gas Prices Prompt Calls For Release of Oil From SPR
Rising gas prices are back in the news again. Oil has gone back above $100 a barrel, and gasoline prices are about to push through the $4 a gallon price. This has led to President Obama sparring with Republican Congressional leaders and his potential opponents. It has also led to Congressional Democrats asking for a release of oil from the Strategic Petroleum Reserve (SPR) in an effort to dodge this issue any way they can. Fellow columnist, Robert Rapier, has often criticized the usage of the SPR as a political tool in an effort to lower gas prices.
Don’t count me as one who thinks that, if only we allowed drilling anywhere, we would suddenly have $2.00/gallon gas. I sat through Newt’s 30 minute speech on energy policy, and it drives me crazy that people actually expect that simply pushing more domestic drilling will fix the problem. I went on the record as supporting Jon Huntsman’s energy policy because it lived in the real world and acknowledged that there were no quick fixes.
Oil prices are a factor of global supply and demand, both currently, and in the future. Prices are being pushed up by increased demand for oil from developing countries, combined with prospects of renewed conflict in the Persian Gulf. I would suggest reading Dr. James Hamilton’s Econbrowser “Crude Oil and Gasoline Prices: Betting on Iranian Tensions” post about what’s driving prices.
How to Mitigate Against High Oil Prices
Ultimately, I actually don’t think that low gas prices should be the goal. Over the long term, low gas prices in America encouraged an auto-dependent lifestyle. And now, with oil prices going through the roof, American consumers are left without other options; they simply must drive, and our deliveries must be trucked across county. This acts as a drag on the economy. President Bush was correct when he said that “America is addicted to oil.” And that addiction has harmed us – but there’s no easy solution.
Increased efficiency of cars is important, as is encouraging alternative forms of transportation like mass transit. Those are ways to reduce our exposure to gasoline price spikes. But, the price of gasoline will remain very important to the economic well-being of the country for a long time, and we need a way to manage those prices better: I’m a free-marketeer, but the market is not delivering a stable, predictable price for oil.
Thought Experiment: A National Oil Bank
So how can we fix that market failure? The talk about releasing reserves from the Strategic Petroleum Reserves planted an idea: what about a national ‘oil bank’. This would function somewhat like the Federal Reserve does for money supply. The Fed’s duel mission is full employment and price stability, and it uses its control over the money supply to achieve these aims. The Oil Bank would have a similar mission.
The Fed was made independent of Congress because politicians are always going to want expansionary monetary policy, even though that’s not in our long-term best interest. Similarly, politicians always have to push for low gasoline prices, even though that is not in our our long-term best interest. So, the Oil Bank would have to be independent of political pressure, like the Fed. The Oil Bank’s board would track national oil and gasoline prices and buy oil when prices are low, and sell when prices are high (though I must admit, easier said than done).
With a dual mission to promote ‘gas price stability’ and economic growth, the bank would buy oil and put it in reserve when the price is low, and sell it when the price is high. This would dampen speculation in the market, because the board would smooth the wild price gyrations that Hedge Funds make so much money off. It would also act as a counterbalance to OPEC; giving the U.S. real negotiating power in global oil markets.
So – that’s my solution. I think it’s fairly novel: I have not read anyone else proposing it. Now, maybe that’s because it’s a dumb idea, but I think it could work. Does anyone else think this is workable?