Tuesday, March 8, 2011

Five Ways the Government Could Make Oil Prices Fall



Oil's surge to more than $105 per barrel -- which has caused the average price of unleaded regular to jump more than 40 cents in less than a month to about $3.50 per gallon -- is rooted more in psychology than in fundamentals.

Globally, there's no shortage of oil, nor any lack of gasoline in the U.S., but traders' fears that the civil unrest in minor oil exporter Libya may spread to major oil exporters Saudi Arabia or Iran has led an oil price spike, led by market speculators and large end users of oil.

However, the U.S. government is not powerless: It can help take some pressure off oil's price -- if it addresses both market psychology and oil's fundamentals. Here's how:

1. Random Releases From the Strategic Petroleum Reserve

Previous draw-downs from the SPR, which currently holds 727 million barrels of oil, in 1990-91 (Desert Storm, 17 million barrels), 1996-97 (deficit reduction, 28 million barrels), and 2005 (Hurricane Katrina supply disruption, 11 million barrels) did cause prices to decline somewhat. Another sale in 2011 might do an even better job, if properly structured.

For example, if Washington announced that it plans to release, at random times, an unspecified amount of oil from the SPR, that would immediately create more downside price risk and scare some of the speculative net long positions -- for oil traders who don't take delivery of oil -- out of the market. This psychological component -- not the actual amount sold -- is the SPR's primary price weapon.

Next, on the day of SPR sales, the government could without prior notice announce that it's releasing 3 million, or 5 million, or even 20 million barrels of oil. This second "supply shock wave" would further depress oil prices, and trigger stop-loss sales by an additional speculative "net longs." After seeing their trades stopped-out due to unpredictable oil dumping from the SPR, which could cause oil to suddenly drop $3 or $4 in minutes, many more speculators would no doubt exit the market and likely lower prices even more. Subsequent surprise sales would enhance the impact.

Savings: About $15 per barrel, or about 37.5 cents per gallon of gasoline.

2. Double Margin Requirements for Oil Speculators

Oil speculators aren't the only factor in today's $100-plus-per-barrel prices, but they're playing a role, and DailyFinance's Peter Cohan has a idea that will complement random SPR sales: The New York Mercantile Exchange and Intercontinental Exchange (ICE) should double their margin requirements for oil contracts, currently $6,075 and $5,200, respectively. Cohan points out that if regulators did so, it would decrease speculators' ability to gamble with borrowed money -- something that would lower oil prices.

Savings: $15 per barrel of oil, or 37.5 cents per gallon of gasoline.

3. Temporary Moratorium on Federal and State Gas Taxes

The U.S. government and the states can also suspend their gasoline taxes for a specified period of time. The federal tax is 18.4 cents per gallon, and the states tack on an average tax of 48.1 cents per gallon (high: California, 64.2 cents; low: New Jersey, 32.9 cents). That would drop gas prices by an average of 64.5 cents per gallon.

If states can't afford a full, temporary suspension, perhaps they can opt to cut them in half -- still a significant price reduction for motorists.

Savings: An average of 64.5 cents per gallon for a full moratorium, about 32 cents for a 50% moratorium.

4. Temporarily Suspend Winter/Summer Gasoline Formula Laws

Every summer, the Environmental Protection Agency requires that many states, including California and New York, use a special summer gasoline formula that's less likely to evaporate during warmer weather, reducing harmful emissions.

However, the summer blend costs more to make, and it also raises refiners' costs by requiring them to tailor gasoline types for different states. So, a temporary suspension of the summer gasoline requirement would lower prices at the pump slightly.

True, the air wouldn't be as clean in those states in the summer, but if a temporary suspension could lower gasoline prices by 10 cents or 15 cents a gallon, the trade-off would be worth it, at least in the short term.

Savings: 10 to 15 cents per gallon of gasoline.

5. Strictly Enforce 55-MPH Speed Limit

Many motorists probably won't like this tactic, but it would lower gas prices. Most vehicles get much better gas mileage at 55 mph than at 65 or 70. If the U.S. government provided cash incentives for the states to strictly enforce the 55-mph speed limit, gas consumption would drop substantially, and it would lower prices, or at least limit increases.

The key is getting universal or near-universal compliance with the 55-mph limit to create the largest drop in gasoline demand possible.

First imposed during the 1973-74 energy crisis -- the world's first oil shock -- the 55-mph limit saved not only gas, but lives. The U.S. had an average of 4,000 fewer traffic-related deaths per year until the law was repealed.

Savings: About 10% of fuel consumed, or about 35 cents per gallon.

If All Five Steps Are Taken: Total savings of $1.52 to $1.89 per gallon.

Of course, most of these measures would face significant resistance. States with tight budgets would balk at any attempt to decrease their gas-tax revenue. Inducing nationwide compliance with a 55-mph speed limit would be even harder. But even if only a few of these steps were taken, and gas prices fell by a lower amount -- for example, 70 cents to 90 cents -- that would still represent a substantial savings for most motorists.

That price reduction would help propel the U.S. economic expansion forward by increasing consumers' disposable income and reducing businesses' transportation costs.

But these are just short-term measures. Long-term, the U.S. needs to increase vehicle efficiency in a big way and to wean itself first off imported oil, then off oil in general, with a national policy to increase energy efficiency across society. It's in the country's best interests not to be held hostage to the volatile and economically damaging effects of reliance on oil.

See full article from DailyFinance: http://www.dailyfinance.com/story/five-ways-the-government-could-make-oil-prices-fall/19872131/?icid=sphere_copyright

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