Pain at the Pump

By now nearly everyone is aware of the sharp increase in the retail price of motor fuels, following significant increases in the price of oil.  It shouldn’t be a surprise that this has caught the attention of politicians whose interest may be heightened by concerns relating to the mid-term elections scheduled for November 8.  This has given rise to a number of proposed solutions which are generally ill advised, short term in nature, and fail to address the fundamental problem of too much demand chasing too little supply.

This apparent unwillingness to recognize the most basic tenant of economics, the relationship between supply, demand, and price, creates a real dilemma for investors.

The political class seems to be focusing on making motor fuels more affordable, theoretically increasing demand, and giving, what may be just lip service, to the issue of increasing supply.  For example, the Governor of Michigan is still trying to shut down Line 5, a 645 mile, 30 inch pipeline, that moves 540,000 barrels per day of light crude and natural gas liquids between Superior, WI and Sarnia, Ontario, Canada.  At the same time, she is seeking to lower taxes on gasoline.

Increasing the supply of oil and gas will require substantial, long term investments that will only go forward if potential participants are confident that they are not facing arbitrary reversals of the basic ground rules.  Think Keystone.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA