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10 Questions with Phil Kerpen on Gas Prices

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Phil Kerpen, VP of policy for Americans for Prosperity is our guest for this installment of our 10 Questions series.

We’d like to thank Phil for taking the time to speak with us about our nations high gas prices and their direct link to this administrations policies.

1) How high do you expect gas prices to go this summer?

We’re seeing an easing of commodity prices now with the end of QE2 that will likely contain any significant price increases this summer. We’re unlikely however to see much of a decline, given the enormous hostility to energy production and refining from the administration’s regulatory policy. Given persistent deficits and economic weakness, QE3 (though it probably won’t be called that) is a real possibility, and it that happens all bets are off and prices could keep rising significantly.

2) What is your view of the relative importance of energy demand and speculation in determining prices?

There is significant investment demand in the energy complex, and current market psychology has most of the interest on the long side. Because investors are forward-looking, they see declining production coming and are pricing it in.

3) What is the cumulative effect of Obama’s energy regulations on domestic US production?

They are an enormous favor. We have an administration that is explicitly hostile to energy, from an energy secretary who pines for European prices of eight dollars a gallon or more, to an interior secretary actually held in contempt of court for an unlawful moratorium in the gulf, to a White House science adviser who advocates rationing of energy as a way to dedevelop the United States and shift our wealth abroad. Obama himself, who is constantly flip-flopping on energy, has at times said he wants prices to skyrocket.

They have acted to make these wishes happen. From production restrictions in the Gulf of Mexico and Alaska to the de facto reimposition of the moratorium in the Outer Continental Shelf to the cancellation of leases and the unlawful attempts to create vast new wilderness areas without the approval of Congress, the Interior Department is determined to thwart energy production. The EPA, not to be outdone, has ratchet up permitting requirements on both the production side — most infamously blocking Shell’s offshore development in Alaska on a clean air permitting issue — and in refining, with greenhouse gas regulations that amount to cap-and-trade via an end-run around Congress.

This administration set out to make energy more expensive ans has succeeded. It’s not the only factor, but it’s a huge factor.

4) To what extent does the Administration’s reliance on “new” technologies that seemingly depend largely on the availability of Rare Earth Elements (REE’s) that are, largely, unavailable in the US (and generally available only in places that are generally unfriendly to us – such as China) imperil our long-term security?

(In other words, by tying our energy future to technologies dependent on REE’s are we not just trading one hostile region – the Middle East – for another – China?)

Any time government intervenes in the market it misallocates resources and risks shortages and other problems. If we cleared away regulations and allowed development of American resources we would be much better positioned strategically. I’ll admit haven’t been following the rare earths issue closely, but one thing I learned from Julian Simon is that there are no real resource constraints to human ingenuity in a free society. if government gets out of the way, i have every confidence Americans can successfully compete with China.

5) How effective will strategies such as subsidizing Brazilian production of oil and importing from “friendly” nations as opposed to subsidizing unfriendly nations and having them nationalize our efforts be in addressing the problem?

I don’t think we subsidies here or abroad. We just need to stop inhibiting development.

6) Is there any chance the current administration will soften its myopic stance on domestic production?

They certainly will soften their rhetoric on domestic production, and largely already have. But I don’t expect significant policy changes because rationing energy is so central to the so-0called green worldview that is at the heart of what this administration believes in. I address this in chapters 7 and 8 of my book Democracy Denied that is due out in October.

7) How much impact does simply announcing drilling versus actual capturing oil impact prices?

The key is what market participants actually expect future production to be. When Congress lifted the ban in the Outer Continental Shelf in October 2008 — with Pelosi and Reid in charge by the way, but forced by public pressure to do the right thing — we saw a steep decline in prices that flowed through to the retail level. When Obama became president, he blocked any new leases from actually being offered, even canceling the one lease sale he scheduled off the coast of Virginia. So I think markets will remain skeptical this time, certainly if Obama is still president.

8) What impact has QE 1 and 2 had on the market and how good or bad would QE 3 effect the market?

Major impact on all the commodities.

How can we inform the American people regarding…

9) That only sovereign oil suppliers (e.g. Saudi Arabia, Iran, Russia) have the market power to manipulate prices on more than a transient basis, not mythical speculators

Almost all the swing capacity in the world is in Saudi Arabia. but even they can’t suppress the price for very long in a deliberate market manipulation. They flooded the market in the late 1990s, but the impact was short lived. And while OPEC tries to restrict production from time to time to boost prices, most countries cheat their quotes. That said, even the largest private companies are very small relative to the nationals and have absolutely no market power.

10) The real meaning of profits as a signal for increasing supply via new development rather than unjust gains that need to be captured by the government as punishment

There is no system better than the profit motive for efficiently allocating resources. Higher prices drive innovation and substitution far more effectively than government programs because markets aggregate information from millions of decision makers rather than dozens of bureaucrats or politicians

Bonus) The corollary that taxing profits will only exacerbate the problem by impeding new development of supplie

Higher taxes — as proposed by the administration — will further discourage production in those few places that haven’t been rules of limits. Will certainly make things worse. The economic ignorance behind proposes higher taxes as a way to lower prices is pretty amazing.

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