Can anything be done about skyrocketing oil prices?

McClatchy NewspapersApril 29, 2008 

WASHINGTON — President Bush lamented Tuesday that there was no magic wand to wave to lower oil prices, but there are simple steps he could take to lower the soaring price of crude. Here are some answers to questions about making oil cheaper.

Q: Bush said, "I think that if there was a magic wand to say, 'OK, drop price,' I'd do that. ...But there is no magic wand to wave right now." Is there nothing he can do?

A: One step that could have an immediate impact would be to fill the Strategic Petroleum Reserve with heavier, sour crude oil. Right now, the SPR is being partially filled by light, sweet crude, which is lower in sulfur. This is the variety most sought after by refiners and taking it off global markets and putting it into the reserve makes it more scarce, thus higher priced. About three-tenths of a percent of global supply of light, sweet crude is being diverted to the SPR.

Q: What would this switch achieve?

Philip Verleger, a noted oil industry analyst, believes this move could help lower the price of gasoline, and diesel fuel could fall by $1 a gallon.

Q: Why would switching what goes into the SPR make a difference?

A: The heavy crude oil sells for a lower price globally, so this makes economic sense. And it makes more light, sweet crude available and thus cheaper.

Environmental rules require diesel fuel to contain 15 parts per million or less of sulfur, and that's easier to meet with the light, sweet crude, which contains less sulfur. The government could relax sulfur standards temporarily; that, too, could lower prices.

Q: Could Bush suspend any other rules to ease prices?

A: Recent congressional mandates for ethanol to be blended into gasoline effectively replaces about 4 million gallons of gasoline production, Verleger said. That reduces the amount of hydrogen — a byproduct in refining — available for making low-sulfur diesel, which makes diesel more expensive. Temporarily relaxing ethanol requirements could help bring down diesel fuel costs.

Q: Bush said that another reason for high prices is the lack of refining capacity. Is this true?

A: He's correct that no new U.S. refineries have been built in 30 years. But refiners have significantly expanded U.S. facilities, and new refineries are sprouting up all over the world, especially in China, India and the Middle East.

The net result is that the U.S. is increasingly an importer of finished gasoline, along with crude oil for refining. Global refining capacity is clearly on the rise.

Q: Bush repeated his call Tuesday that new U.S refineries could be built on military bases. Why hasn't this happened?

A: Most military bases are far from the source of oil production in the Gulf of Mexico and the pipeline infrastructure that leads from there. It makes a nice sound bite but isn't a real-world solution.

"What he said today was the equivalent of, 'You are doing a great job, Brownie,' said Verleger, referring to Bush's infamous support of his embattled emergency management chief after Hurricane Katrina.

Q: Presidential candidates John McCain and Hillary Clinton have suggested temporarily waiving the 18.4-cents-per-gallon federal fuel tax. Would this help motorists?

A: Bush said he'd "take a look" at the idea. It might give a little relief to consumers, but would carry some big costs. It would presumably add to deficit spending. It would reduce funds for the Highway Trust Fund, which pays for infrastructure repair. And to the degree it drives gasoline prices down, Americans would drive more, which would reduce supplies and push up prices, said Len Burman, director of the Tax Policy Center, which is run jointly by the liberal Brookings Institution and centrist Urban Institute.

Verleger's congressional testimony:

www.petersoninstitute.org/publications/papers/verleger1207.pdf

McClatchy Newspapers 2008

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