NCPA - National Center for Policy Analysis


June 29, 2006

When the Federal Reserve meets today, it will most likely lift interest rates to quell the fear of further inflation, mainly due to rising oil prices.  This method has been tried by the Fed before.  In 1981, the Fed slammed on the economy's brakes, letting interest rates soar above 20 percent in fear of rising oil prices. Yet inflation stayed stubbornly high.

It wasn't until President Reagan came into office and shifted focus from interest rates to the supply of oil that prices began to reach a stabilization point.  He was able to achieve this by:

  • Putting in measures to decontrol the price of oil and gas.
  • Pressuring Saudi Arabia to ramp up oil output, from 2 million barrels a day to nearly 9 million.

Likewise, the main concern today is supply:

  • The world uses about 85 million barrels a day with 2.5 trillion in reserves.
  • The United States uses about 20 million barrels a day, but produces just 8 million, depending on the rest of the world for more than half of our oil.
  • World demand is growing by 1.5 percent to 2 percent a year.

Congress has the power to make an enormous difference in our energy security, right away, by allowing drilling to start on the continental shelf and in the Arctic National Wildlife Reserve.

This would put cheaper and more energy on the market fast, making a much bigger dent in energy prices, and therefore inflation, than keeping ever-tighter credit on automatic pilot, says IBD.

Source: Editorial, "Crude Lessons," Investor's Business Daily, June 29, 2006


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