Oil Prices: Don't just Do Something, Stand There!

Oil Prices: Don't just Do Something, Stand There!

A lesson in reserve, literally.

Here's to hoping that this administration will forgo the easy (and, really, ineffective) answer to higher gas prices and think of strategic interests instead.

What's Up With Oil: A guide to why prices are so high.
Why are they high?

But current prices do raise an interesting question: What has happened over the past 10 months to ruin forecasts of oil at $22 per barrel? The short answer is plenty.

Most important, demand has skyrocketed. Not only in the U.S., where economic growth has been gangbusters, but also in China, which has leapt ahead of Japan to become the second largest oil market in the world. While there is some debate about whether China is consuming oil or using it to build a strategic stockpile, the result is the same strong demand. China's growth has also sparked an economic recovery and higher oil demand in the rest of Asia. Count India, too, as an increasingly oil-thirsty economy.

What should be done about it?

But hundreds of millions of barrels of oil is a seductive target for political manipulation, as Bill Clinton proved when he released reserves to tame gasoline prices before the 1996 election. We hope President Bush resists that temptation, because in the long term such a response would be dangerous.

If every President turned to the oil reserve when prices shoot up, companies would reduce the amount of inventory they are willing to carry and exacerbate the supply problem. In the short term, there is also no economic need to draw on the reserve. The economy is humming along and panicking would only create other dislocations. The oil reserve was not designed, nor should it be used, to relieve consumers at the pump for a few weeks.