Safehaven | Foreign Oil Dependency and Political Lunacy

May 23, 2008

Foreign Oil Dependency and Political Lunacy
by Will Hinton

If you are like me, you are probably starting to feel some angst over the continuing rise is gas prices. My wife and I are discussing the idea of selling our cars to get more fuel efficient ones. I may even get a Vespa.

A large factor that is driving my concern is the growing realization that our government doesn't have a clue about what a real energy policy should look like. Unfortunately it appears that both parties simply want to demogogue and attempt to buy votes.

"Yesterday the House of Representatives overwhelmingly approved legislation allowing the Justice Department to sue OPEC members for limiting oil supplies and working together to set crude prices...the bill would subject OPEC oil producers, including Saudi Arabia, Iran and Venezuela, to the same antitrust laws that U.S. companies must follow. The measure passed in a 324-84 vote, a big enough margin to override a presidential veto." - Reuters

Notice that this news piece came from Reuters and not The Onion. This legislation is so comical as to defy all logic. Who in the world do we (America) think we are that we can dictate how other counties use their own natural resources? Notwithstanding the inevitable global economic crisis it would cause, is there anything legally stopping OPEC counties from simply refusing to sell crude oil to the United States?

Does anyone actually believe that the United States will file antitrust charges against OPEC countries? Of course not. So in reality, this legislation is nothing more than the Democratic-led Congress pandering to the American voters so that they can say that they are "doing something" even though they aren't doing a damn thing.

Of course Republicans aren't suggesting much better. Newt Gingrich's American Solutions is advocating more domestic drilling, which would just delay the inevitable for another day for our children to deal with.

Yet no one seems to want to suggest the obvious: as a country, we need to quickly reduce our dependence on ALL oil, not just foreign oil. And the only way to do that is (paradoxically to some) to raise gas prices. The law of supply and demand dictates that higher prices lead to lower consumption. Always.

Want to know what is really happening with the increasing cost of gas? The New York Times said it perfectly last week:

"No industrialized economy is as reliant on oil, or as obsessed with gasoline prices, as the United States, the world's biggest consumer of oil. But the oil market is largely immune to Washington's machinations, and prices have more than quadrupled over the last six years for reasons that are increasingly disconnected from what happens in the United States."

The reality is that oil is a globally traded commodity, and Americans must pay international prices to get their share. And those prices reflect the fact that global supplies are stretched and struggling to meet a booming demand that is being driven by growth in developing countries, notably China and India. This has left the world with a very slim cushion of extra production."

Will Hinton
www.themarkettraders.com

Will Hinton is a partner with Brookhaven Advisors, an Investor Relations firm focused on introducing Canadian resource companies to American investors.