Energy & Entrepreneurs 

A Look at Oil Prices and Policy

by Raymond J. Keating

Oil prices have increased in recent months. But it has not all been about unrest in North Africa and the Middle East.

Since the recent breakout of protests, unrest and military actions began in January, the price of a barrel of oil has jumped by roughly 17 percent.

However, this latest trend upward in prices actually began in September. For example, from late August to early January, oil prices increased by about 23 percent.

So, since the end of August, oil prices have risen by approximately 44 percent.

Beyond North Africa and the Middle East, what else is in play?

Some experts have pointed to a pick up in economic growth on various parts of the globe. And that increased demand, and expectations that growth will continue, have factored into the mix.

However, there are U.S. policy factors in play as well.

Foremost right now is Federal Reserve monetary policy. The Fed's expansive monetary policy since late summer 2008 is without precedent, and has generated significant risks regarding inflation and the value of the dollar. In fact, stepped-up inflation already has materialized in recent months. Given that oil is priced in dollars, no one should be surprised to see rising oil prices. Indeed, when it comes to the impact of past and continuing expansionary Fed policy, further rises in oil prices must be considered by businesses, investors and consumers.

For good measure, there are problems in terms of U.S. policy towards domestic exploration and development. The Obama administration, particularly since the BP oil spill, has been hostile to offshore oil and gas development. Currently, 85% of offshore resources are off limits. In addition, barriers and questions persist regarding onshore energy development as well.

And looming over the entire fossil fuel industry is the threat of EPA greenhouse gas regulations. If this regulatory effort is allowed to continue, the signals to oil firms, refiners and coal producers, for example, will be unmistakably negative. Enormous uncertainty about the costs and role of fossil fuels going forward have been created by the EPA's actions, and only serve to restrain desperately needed investment in energy development.

While North Africa and the Middle East continue to be wild cards in the oil price equation, there is no reason that U.S. policymakers need to be making matters worse through inflationary monetary policy, misguided and costly EPA regulatory efforts, and unwarranted restrictions on offshore and onshore energy development.

There is some positive movement in Congress. For example, last month, the House Energy and Commerce Committee voted in favor of H.R. 910 - the Energy Tax Prevention Act of 2011 - which would stop the EPA's attempt to regulate greenhouse gases. Mitch McConnell (R-KY) and James Inhofe (R-OK) have been leading the charge to stop the EPA in the Senate.

In addition, legislation has been offered in the House to advance energy exploration and development. For example, as the Houston Chronicle reported on March 29: "House Republicans on Tuesday unveiled a suite of bills that aim to expand offshore drilling by forcing the Obama administration to vet proposed exploration quickly and sell more oil and gas leases along the East Coast."

The three bills would require that the Interior Department act on applications for drilling permits in the Gulf of Mexico within 30 days; would "force the administration to conduct previously planned oil and natural gas lease sales in the Gulf and offshore Virginia that were delayed or canceled after last year's spill"; and would require "the government to sell leases in the nation's most energy-rich offshore areas, chiefly along parts of the Atlantic coast and Arctic waters near Alaska."

Getting the policy mix right would be beneficial in terms of energy costs now and into the future. These measures would be clear plusses, and deserve to be passed and signed into law.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.