No short-term fix?

Republicans are right to be concerned that they have no "short-term fix" for high gas prices, especially given Bush's dirt-deep poll numbers for his handling of gas prices. To be fair, neither side has made much sense in recent weeks. Democrats want conservation, while Republicans want increased exploration, but neither will lower gas prices by November 2006, and Republicans need that to stay alive.

Far be it from me to offer the GOP a solution, but perhaps they're not seeing what's right in front of their noses. Between a fourth and a third of the current price of crude oil is directly attributable to political instability in oil exporting countries. Get rid of that instability, and watch gas prices fall.

Crude oil prices have exploded this year because of three factors: the reduction in production capacity in the Persian Gulf due to the Iraq War, increased demand from India and China alongside expanded demand from the rest of the industrialized world, and political and social disturbances in countries whose export capacity is at least of the same order of magnitude as the global excess petroleum production capacity (currently about 0.5 to 1.0 million barrels per day, or mbpd, all of it in the Persian Gulf).

If Iran lowers its production -- say, due to in response to threats from the US -- global excess petroleum production capacity will follow, driving crude oil prices into the $100 range, or above. Most of the increase will not be due to strict supply-demand considerations, but will instead be in anticipation of the negative effects of political instability on oil export. This is called the "risk premium", and according to James Mulva, CEO of Conoco-Phillips, it is currently about $20 per barrel.

Note to Congress: Want a "short-term fix"? Stabilize our relationships with oil exporting countries.

Oil markets are eager for positive news from Iran. Following what was called a "technical selloff," which brough crude oil prices to below $70 from above $75 per barrel a week ago, yesterday's unprecedented letter from Iranian President Ahmadinejad's letter to President Bush led to further drop of $2 to $68.25 a barrel (see here, also). Yet, after the State Department dismissed the letter earlier today, prices rallied by over $2 to $70.69.

According to Wachovia economist Jason Schenker (WaPo), Rice's comment removed the "glimmer of hope that the Iran situation could come to a somewhat quiet resolution."

The only solution -- to this, and to Iran's nuclear ambitions -- is engagement. As Chuck Hagel (R-Nebr.) said in an editorial to the Financial Times on Monday (subscription required):

Allies of the US will support tough action against Iran only if they are confident America is serious about achieving a negotiated, diplomatic solution. The continued unwillingness of the US to engage Iran will make other states hesitate to support, and possibly oppose, these tougher measures.

Amen.