Contact: Teresa Sotto, 202-328-5046, [email protected]
Federal action to reduce oil prices, either by rolling back the federal gasoline tax or tapping the Strategic Petroleum Reserve, "would bring little benefit to consumers and [could] do much to harm the economy," according to a new paper by Resources for the Future (RFF) scholar John Anderson.
This winter's price hike, which came less than a year after oil dropped to its lowest price in a generation, underscores the inherent unpredictability of the world oil market, but it came nowhere close to threatening the American economy, Anderson says.
Unlike previous hikes in 1973, 1979, and 1990, which were triggered by dramatic political or military events, this year's run-up was prompted by the most basic economic forces -- a mismatch of supply and demand. The culprits were poorly timed production decisions of the Organization of Petroleum Exporting Countries (OPEC) and a host of unpredictable events, including the financial crises in East Asia and Russia, fluctuating winter temperatures, high demand in North America, and the erratic supply of oil from Iraq.
Most important was OPEC's decision to increase oil production just prior to the East Asian financial crisis -- thereby leaving a glut on the market just when demand decreased -- and to cut production in late-1999, just prior to a surge in demand in Asia, Europe, and the United States. "The point is not that Saudi Arabia, the dominant force in OPEC, should have been smarter. The point is that a lot of genuinely unpredictable things happen in the world, and the market for commodities like oil is inherently unstable," Anderson says.
Iraq, in its struggle with the United Nations Security Council over the U.N. sanctions, aggravated the swings in an unbalanced market. The United Nations allowed Iraq to increase exports massively in 1998-99, contributing to the world oil glut that lowered prices. Then, in late 1999, as the market tightened and prices were rapidly rising, Iraq shut off production briefly in its quarrel with the U.N. Security Council. Currently Iraqi exports are erratic, reflecting both real production problems and political tactics to pressure the U.N., Anderson concludes.
Repealing the last 4.3 cents per gallon of the federal gasoline tax, as some in Congress have proposed, would result in the loss of $5.5 billion per year in revenue and could actually backfire, according to Anderson. Instead of going wholly to consumers, at least some of the benefit of the tax roll-back would accrue to both domestic and foreign producers of oil, as higher demand leads to higher prices, Anderson said. The other option available to federal officials -- tapping into the Strategic Petroleum Reserve -- would not provide oil relative to the size of the worldwide market to reduce prices over a prolonged period.
Anderson's paper is available on RFF's Web site at http://www.rff.org. Resources for the Future is a nonprofit and nonpartisan think tank located in Washington, DC that conducts independent research -- rooted primarily in economics and other social sciences -- on environmental and natural resource issues.
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