To the Members of Congress: The Only Three Moves That Will Stop the Oil Price Advance

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

An Open Letter to Congress:

First there was the trillion-dollar pork fest for energy.

Then there was the decision to go with corn-based ethanol.

Now, Congress has voted to stop adding oil to the national Strategic Petroleum Reserve (which was created in the 1970s to smooth out pricing disruptions and supply problems).

Talk about missing the point!

Sure you could argue that by putting less into the strategic reserves we could take some of the pressure off price… and by implication help bring it down from its record level at more than $130 a barrel.

I mean it sure sounds good in theory, especially in an election year. But in reality the strategic petroleum reserves would last only 2 months, even if we cut off all imports tomorrow. So there's simply not enough volume to make a dent in recent price hikes.

Nor can we drill or refine our way out of this mess, as President George Bush seems to favor. In a recent interview with Yahoo! News, the president suggested both as alternatives when in reality we can do neither.

For one thing, refiners are the ultimate middlemen and they're pinched at these prices. They simply can't make money as they try to refine an increasingly expensive product and sell it to users who are chaffing at $4 a gallon. That's why stocks like Western Refining Inc. (WNR), Tesoro Corp. (TSO), and Valero Energy Corp. (VLO), for example, have fallen by nearly 30-40% in recent months. Their margins get worse with each up-tick in oil prices from here on out now that we've reached a point where high prices are beginning to dampen demand.

For another, drilling and refining our way out of this assumes we have oil to begin with… we don't. And even if we turn the Alaskan Tundra into Swiss cheese, the demand reduction we're seeing here in the United States is being dramatically offset by developing countries that are guzzling gasoline at unprecedented rates.

In fact, those are precisely the reasons that I've been predicting for years that oil prices were headed skyward and why I've just recently boosted my target price for crude oil to $225 a barrel.

For what it's worth, here's my simple three-step plan.

1. Encourage people to use less. This is not rocket science, guys, and I have no idea why our leadership can't understand this but apparently logic doesn't apply inside the Beltway. Our current fuel standards literally date to the 1970s and pre-date the emergence of both mini-vans and gas guzzling SUVs. They average 25 mpg when we all know damn well that manufacturers around the world are fully capable of building 40-50 mpg cars and are doing so for other markets like Europe and Asia where…taa daa…they sell a ton of small, zippy, gas-efficient vehicles.
2. Create incentives for this to happen. Instead of providing pork laden tax breaks to the oil industry and stimulus packages that are simply nothing more than a glorified handout, why not shift the money to the consumers who need it? Seems to me that once people figure out they have a meaningful and lasting way of saving money, they'll not only make it happen, but line up immediately to get started.
3. Reward those that develop alternatives. We have some of the best brains in the world in places like Silicon Valley and our University System. The fact that they're not working overtime on this issue suggests to me that they're not being prodded in the right place. We would easily jump start this process and conservation by rewarding alternative development and usage.

Call me crazy, but there's a reason why they call it "supply and demand."

The bottom line is that if we demand less, prices will come down.

News and Related Story Links:

• FoxNews.com:
  Congress Votes Overwhelmingly to Stop Oil Reserve Shipments.

• MarketWatch.com:
  U.S. stock futures can't hold gain as oil breaks $130

• Money Morning Special Investment Research Report:
  Money Morning Boosts Oil Target Price to $225 a Barrel, Thanks to Continued Scarcity, Burgeoning Demand in China.

• Wikipedia:
  Strategic Petroleum Reserve.

• Web Site:
  Department of Energy Strategic Petroleum Reserve.