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Reducing the Risk of Oil Price Spikes

June 16, 2014 in Economics

By Richard W. Rahn

Richard W. Rahn

You may have noticed gasoline prices are rising. If the Middle East situation gets much worse, gasoline prices will rise even more. The good news is that we are likely to avoid long gas lines as we had in the late 1970s under President Carter, because fracking and other new technologies have lessened our dependence on foreign oil and gas. The bad news is that a major rise in oil prices could easily tilt Europe and other places back into a recession, which could kill the little growth the United States is now experiencing.

The tragedy is all of this was unnecessary, but brought about by the Obama administration, letting short-term political considerations and ideology override good economics and global security.

A few basics: As a result of the revolution in oil- and gas-production technology, the United States is just about self-sufficient in natural-gas production and is in a position to be a net exporter of liquefied natural gas (LNG) by 2016, provided the administration gives the necessary permits. The nation has more than sufficient oil and gas reserves to be the world’s largest producer and even a net exporter of crude oil. Oil production has grown very rapidly but not nearly as rapidly as it could because the administration has put so many restrictions on oil production on federal lands and made the permitting process so slow. The United States is already a net exporter of petroleum products.

Oil and gas production in the United States is increasing more rapidly than the existing infrastructure can handle it, leading to transportation bottlenecks and, hence, higher prices. There is a shortage of pipeline capacity and new-generation rail cars. The administration has been very slow to provide the necessary permits for new pipeline construction of which the Keystone XL pipeline is the best known.

Why has the administration slowed or in some cases stopped the permitting processes? There is a combination of reasons. One is that it has an ideological prejudice against fossil fuels, even though so-called renewables make no economic sense in many cases and are not sufficient to provide more than a very small portion of our energy needs. Another reason is the Democrats prefer to cater to some of the big donors who are either environmental extremists or have a vested interest in the status quo. Warren Buffett controls major railroads and hence, benefits from shipping crude oil by railroad rather than by pipeline even though rail is more expensive, …read more

Source: OP-EDS

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