December 01, 2008
The Oil Market
Posted by Gordon Smith

Going to the gas station is such a pleasure these days, which is exactly the wrong way to think about low gasoline prices, according to Allan Sloan, who wants us to  "jack them up, sharply, by adopting a big honking tax on gasoline." This part of his argument is highly entertaining:

Unless we can summon the political will to slap a big tax on gasoline, we'll be setting ourselves up for the next spike in oil prices. History shows that there will be a spike, whether it comes from a world economic recovery or a terrorist strike against oil facilities or something else that we can't predict.

So ... unless we jack up gas prices, we will be setting ourselves up for a big increase in gas prices!

I realize that there is more to the idea than just this silly argument, but the other arguments seem pretty silly to me, too. Like the one where Sloan suggests that he would "let the market ... guided by a high gas tax ... rule." The market Sloan has in mind is the one that produces  high-mileage vehicles and lots of customers to buy them. Even if the federal government has to create that market with a "big honking tax on gasoline."

In fairness, nothing about oil and gasoline seems to resemble a functioning market. Remember when we were speculating about $200/barrel oil earlier this year? Oil is now selling for $54/barrel. Of course, Saudi Arabia thinks that's too low because it would rather get a higher price. Here is how we arrive at the new "fair price" of $75/barrel:

Saudi oil minister, Ali Naimi, argued [in Cairo this weekend] that oil prices should be around $20 a barrel higher than they are now. Mr. Naimi's remarks represented an unusual departure for Saudi Arabia, which has long avoided the appearance of trying to set the price of oil. Saudi King Abdullah also used the $75-a-barrel price tag in an interview on Saturday with a Kuwaiti newspaper. Other OPEC ministers quickly seized on the $75 target, saying that current prices were too low to sustain needed investments in oil exploration and production in higher-cost areas.

The big question is whether the OPEC countries can actually pull off a price maintenance strategy. Even if they succeed, $75 sounds a lot better to me than $150 or $200, unless Allan Sloan gets his way, in which case it won't make any difference.

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