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Gas Price Conspiracy Theories "Absurd," Pundit Argues

September 21, 2006
With gas prices falling at the pump and crude oil trading at a six-month low, many political pundits and partisans have begun raising the specter of "conspiracy," claiming the trend is spurred by the coming election.

But H. Sterling Burnett, a senior fellow with the National Center for Policy Analysis (NCPA) argues that this theory is absurd.

"This is basic economics," said Burnett. "Markets, when not encumbered by foolish legislation to 'fix' a problem, work."

Burnett notes that the reason for the recent price drop can be attributed to three main factors:

• Increased supply: Previously high prices are bringing more oil to market -- drilling rigs and production are up, refineries are being expanded here and built in other countries for the first time in years and new technologies are being applied to exploit traditional and non-traditional sources.

• Decreased demand: In response to high prices, consumers are conserving. For example, sales of SUV's have fallen and more fuel-efficient cars are flying off the lots.

• Risk bubble burst: Much of the current price of oil is due to a speculative "risk bubble," that has burst as the Middle East has calmed -- more Iraqi oil is reaching the market, Iran seems unlikely to face sanctions and Israel has left Lebanon -- and the hurricane season has been milder than predicted. This means inventories, which were built up as a hedge against future shortages, are high.

"Oil may never be $15 or $20 a barrel again," said Burnett. "But absent a significant political crisis, such as OPEC reducing supply, they will continue to fall."

Prices aren't likely to continue falling for too many months, however. The U.S. Energy Information Agency predicts gasoline prices of $2.55 a gallon by January before climbing again next spring.

The EIA estimate is based on an expectation of rising demand with only a limited increase in supply. According to EIA, worldwide petroleum consumption should grow by about 1.2 million barrels a day in 2006 and 1.7 million barrels a day in 2007. In 2005 the world used about 84 million barrels of oil a day.

EIA forecasts oil production capacity will increase only slightly in 2007, all of which will come from Saudi Arabia.

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