Gas Prices and the Oil Supply

The actual price of a barrel of oil is constantly changing, since oil is a commodity that is traded on the futures market. Buying and selling oil futures is called speculating, because you're making trades based on expectations of future supply and demand. When Israel threatens to bomb Iran, for example, speculators drive up the price of oil to hedge against a possible shortage in the future. President Obama called on Congress to impose tighter regulations on oil speculators, but even if Congress acted (which it hasn't), the rest of the world would have to follow suit to really affect global gas prices [source: Yetiv].

What about increasing the oil supply? Can't the president boost U.S. production? It's true that aggressive increases in U.S. oil production would bring the global supply closer to the demand for oil. Unfortunately, the U.S. is such a small player on the international oil scene -- we control only 2 percent of the world's oil reserves -- that even if we doubled our current production capacity, we still wouldn't make much of a dent [source: Thaler]. It would also take a number of years to assemble the drilling rigs, pipelines and manpower to make that type of production increase, meaning oil prices would be unaffected in the short-term.

The only way the president can quickly boost the oil supply is by tapping the Strategic Petroleum Reserve, an emergency stockpile of more than 700 million barrels of crude oil stored along the U.S. Gulf Coast. (A barrel of oil equals about 159 liters, or 42 gallons). In June 2011, President Obama released 30 million barrels of oil from the emergency reserves in response to crises in Libya and Yemen. President Bush also tapped the reserves in the aftermath of Hurricane Katrina, temporarily lowering gas prices 10 to 15 percent [source: The New York Times]. Experts agree, however, that these emergency reserves should be reserved for emergencies, not employed as temporary relief to market-driven problems.

In the meantime, President Obama is undoubtedly familiar with the statistic that the incumbent party has lost the presidential election in each of the past five periods of high gas prices dating back to Gerald Ford in 1976 [source: Laskoski]. Republicans know it, too, which is why we're likely to hear a lot of talk about "Obama's" high gas prices all summer.

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