- The Washington Times - Sunday, May 7, 2006

The awesome power of supply and demand was at work last week as gasoline use fell and inventories rose — producing a double-whammy that drove down market prices for gas and oil.

Americans learn about supply and demand in high school economics (or at least they should have) but that lesson gets lost in all the suspicion, anger and political demagoguery that usually follows higher fuel prices.

The rules of supply and demand are coldly efficient and simple and give consumers the power to raise commodity prices or reduce them. When demand increases and producers can’t keep up with it, prices rise to reflect supply shortages, which become more valuable.

When price levels cut into consumer incomes, people tend to use less. The result is demand lessens, supplies rise and prices come down. This is true of about every commodity on Earth, from corn to coffee beans.

Several weeks ago I reported that if oil prices continued to climb, gas prices would keep rising until consumers began cutting back which in turn would result in lower prices — proving the free market works.

Last week the government reported gasoline demand has been flat for a month, while fuel refineries had scrambled to boost production to catch up with higher gasoline use.

The Energy Department reported that over the last four weeks average daily gasoline demand in the U.S. was little higher than a year ago.

The result, flat demand and rising inventories, was a classic supply-and-demand scenario. Word that U.S. demand was flat sent a signal to the oil markets last week that told them, “Wait a minute, gas isn’t being consumed in the U.S. as fast as we projected.” That signaled lower demand for oil and that sent oil prices down more than $2 a barrel by midweek, and lower in the days that followed.

“The decline in crude [oil] followed a sharp drop in gasoline futures, which sank more than 9 cents to $2.08 a gallon,” the Associated Press reported. This is not the pump price, which when taxes and other costs are added on, averaged $2.92 a gallon last week.

What few consumers know is that oil and gas commodities are traded just like stocks on the open market. Prices are bid on the basis of demand that include long-term forecasts for worldwide demand for oil.

But price bids are based on other factors, like fear. And lately fear has ruled the oil trading business: fear that Iran, a major exporter, will cut its supply, unrest in Nigeria, or even fears of the coming hurricane season shutting down oil rigs in the Gulf of Mexico.

All this has stirred fears here about the effect of all this on our own economy. Last year, the price of crude climbed to $40 a barrel, then to $50 and then $60 and more, as economic forecasters said oil would drive up inflation, sandbag the U.S. economy’s growth, and send gas prices on a never-ending spiral. But last year, it will be recalled, the core inflation rate was tame, the economy’s growth rate was a robust 3 percent for the year, and roared to 4.8 percent in this year’s first quarter.

Higher oil and gas prices no doubt had an impact on costs and on consumer behavior, but America’s $12 trillion economy absorbed them and kept growing.

It will also be recalled that we went through a similar period last year, as gas prices rose to new heights, where demand fell and gas prices fell with it, only to rise again as lower prices boosted demand.

The question of course is what are we going to do about? Consumers for now are responding the way you would expect them to by using less gas — car pooling, using mass transit, driving more efficiently. Last week, it was reported consumers weren’t buying the big SUVs, but Toyota plants couldn’t produce the gas-stingy hybrids fast enough.

Beyond that we need to boost oil production in our own country and build more refineries. The Republican-run House took up a bill last week to make it easier to build refineries in the U.S., but the Democrats voted to block its approval.

We have lots of oil that can be safely drilled in the Outer Continental Shelf and in the Arctic National Wildlife Refuge to help make the U.S. more energy independent. But legislation to make that happen was blocked by Democrats, too.

The Democrats’ agenda for the energy problem seems to be no drilling in Alaska, no new oil refineries and no nuclear energy plants. Instead, let’s raise taxes on the oil companies — which would produce not a drop of new oil nor an additional gallon of gas. In fact, it would lead to less because oil companies would have less to spend for new oil exploration and refineries.

There’s a great campaign issue in all this for the GOP. The only solution is to boost oil and gas supplies. And clearly the Democrats unalterably oppose doing that. Make that the issue this November.

Donald Lambro, chief political correspondent of The Washington Times, is a nationally syndicated columnist.

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