Monday, October 02, 2006

Markets and Attention Span

When oil was over $70/barrel not long ago, it appeared that Congress might pass meaningful measures to enhance domestic energy production, as well as addressing long-overdue efficiency improvements in the US automobile fleet. Now, the combination of sagging energy prices and entrenched positions has trapped pending legislation in the limbo between their House and Senate versions, in the pre-election recess. This sends a bad signal. If prices fall farther, will we begin unraveling subsidies to alternative energy or hybrid cars? Just as oil companies don't change their investment decisions with every rise or fall of a volatile commodity market, our national energy strategy shouldn't hinge on today's price of oil or natural gas.

It's understandable that we should feel relieved that the price of gasoline at the pump has dropped to a more comfortable level, with last week's national average at $2.38/gallon. And I'm as happy as anyone that natural gas looks to be cheaper this winter than last, since my move to Virginia has left me with two homes to heat, at least until the other sells. But we can't forget that it took years to create the supply and demand conditions that, with the addition of a couple of devastating hurricanes and some serious geopolitical risks, took us to the recent highs. $75 crude oil had its roots in the global oil price collapse of the late 1990s, when companies were forced to slash their drilling programs.

If we want to change the path we're on, we must grasp the time lags inherent in this critical industry. Our actions today will have a great deal of influence on what we will pay for energy five to ten years from now, but very little on prices next week or next month.

Regardless of the outcome of the mid-term elections, it would send a positive signal if the current Congress ended its session with a compromise on the stalled drilling legislation. The most promising, if least obvious, avenue lies not in ruling entire coastlines in or out, but in drawing a distinction between oil and non-associated natural gas, which entails lower risks and greater benefits for the environment. In any case, the shape of the ultimate compromise matters less than sending a message that the government will remain engaged with our energy problems, regardless of the current price of West Texas Intermediate on the NYMEX.

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