Puncture the oil bubble: It’s past time to act

Americans, especially those who can least afford the skyrocketing price of gasoline, which has more than doubled over the past three years, are suffering enormous economic pain as a result of this inordinate spike in the cost of driving to work, getting their kids to school or getting the other daily necessities done.

When President Bush was queried about this, he responded by saying he doesn’t have a magic wand to bring down gas prices. As for a “magic wand,” sadly, that’s true. But as the chief executive chosen by the American people to address the major issues that affect their lives, that curt reply hardly relieves him (or, for that matter, any of our elected representatives in Washington) of the obligation to pursue and implement every possible approach to bring down these burdensome, totally unwarranted, exorbitant gas prices.

For the third time in the last 10 years, our country is experiencing a “bubble” in a specific segment of our economy. This threatens once again to engender a devastating collapse with onerous financial and economic consequences. First, in 1999-2000 we had the dot-com tech bubble, in which irrational enthusiasm led to a speculative boom that pushed common stock prices beyond the stratosphere. Then, inevitably, they crashed down, with millions of investors suffering enormous losses, which in turn brought about an agonizing recession.

Sadly, no one in Washington, no regulator, took any step to try to put a damper on this runaway madness.

Then, in 2004-2007, we witnessed another raging bubble triggered by the frenzied belief that house prices would keep rising at astronomical rates forever, facilitated by the superabundant provision of credit/mortgages made available by the banks on irresistibly attractive terms. It was more than obvious that we were, as a country, on a wild ride and that restraint was needed or else the whole thing would come crashing down. Sure enough, it did. And yet no one in Washington stepped in until it was far too late and irreparable damage had been done to our banking system, to millions of homebuyers and to the fabric of our economy.

We, the president and the regulators must learn to identify when a segment of the economy is going out of whack and curb it before it’s too late. In each of the recent cases the blow-up was readily recognizable and predictable, yet nothing was done. People rationalized that “this time it’s different” or “it will probably work itself out.” Strongly motivated vested interests were enjoying enormous profits and convincing reluctant regulators to let the market operate without government interference.

William Martin Jr., a former chairman of the Federal Reserve, astutely pointed out that the role of the Fed is to “take the punch bowl away when the party starts to get to wild.” Yet when I wrote Fed Chairman Alan Greenspan, with whom I’ve had the pleasure to play in charity tennis tournaments, a letter in 1998 urging him to raise margin requirements on stocks to curb the “irrational exuberance” that prevailed at the time, he refused and told me he didn’t believe in “micromanaging, only macromanaging.”

As we all now know, the only thing that was so dangerously out of line back then was the stock market and the speculative tech bubble. If Mr. Greenspan had targeted the “irrational exuberance” that he himself had identified, we would have avoided that debacle.

Similarly, if Greenspan had dealt with the real estate exuberance brought on by overly loose credit policies, we could have avoided the housing/credit disaster as well. If the Fed or the relevant regulator would only learn to target the specific, unfolding, readily recognizable problem — if they would “micromanage” the emerging problem — we could avoid these catastrophes.

Now we have the oil “bubble,” with crude trading at over $130 a barrel — 13 times its price in 1999, more than five times the $25 it was trading for in 2003, and double its price just 12 months ago. It’s surely a bubble, assisted by the Saudi-OPEC supply-price-fixing conspiracy, with nearly everyone predicting it will inflate to $150 a barrel, $200 a barrel, or even higher.

Just as in 1999 (when two brilliant writers prognosticated in a best-seller entitled Dow 36,000) it’s always at or near the very top of a bubble that it becomes front-page news and everybody projects its rise to further unimagined heights.

Those who today deny there is an oil bubble try to convince the world that oil’s rise in price is all because of the demand-supply situation. We’ve had such a spike in the price of oil that one would expect demand to decline dramatically, and supply to proliferate. It hasn’t because it’s a manipulated market rigged by the Saudis and OPEC.

Oil is not trading up because the dollar is weak. The dollar is weak because oil is trading up, and as a consequence the U.S. has to issue ever more currency. The high cost of oil dramatically increases America’s trade deficit and causes the decline in the value of the dollar.

The seemingly easy quick-fix to incentivize ethanol production to provide affordable gas has instead exacerbated the problem. It has pushed up the price of corn and caused a worldwide food shortage without alleviating the spike in the price of gasoline. Oil is the only product in the world that’s not freely traded and it’s our own fault that we have allowed this perfidious cartel to get away with, in effect, imposing the most exorbitant tax on us in human history for the last 34 years.

Yet while the president doesn’t have a magic wand, there are steps he could take immediately to dampen, if not completely puncture, the bubble. First, he should instantly raise the margin requirements required to trade oil (and other food products too) from 5 percent to 10 to slow speculative trading, which is fueling price rises for oil, corn, rice and other farm products.

While the Saudis and OPEC, through their brokerage commodity accounts, can still push up oil futures, raising the margin requirements is one non-costly step that could prevent the crash that is inevitable if prices reach excessive, unrealistic heights. So, notwithstanding opposition among leaders of the commodity exchanges, who are now coining money, raise margin requirements from 5 percent to 10.

Second, stop courting an embarrassing rebuff by pleading with the Saudi king and oil minister to pump more oil. There is no reason America should be held hostage to foreign oil! Let’s break up OPEC! Let oil trade in the free market like every other commodity and let competition in the market set the supply and price.

To break up the OPEC cartel, announce, if need be, that we will not buy one barrel of oil from any country that meets to conspire to fix the supply or the price, even if we need to enlist our citizenry temporarily to accept rationing, as we so effectively did during World War II.

The Saudis and OPEC were always quick to cut oil production the minute the price threatened to break below the bottom of their target range. But as the price keeps spiking, blowing through every price level, they assert there is no need to increase OPEC’s production level to provide price stability. This is, even though they have cited stability as their goal. What would OPEC members do if we set up OWPEC, the Organization of Wheat Producing and Exporting Countries, or ORPEC, the Organization of Rice Producing and Exporting Countries?

We should confront this illegal cartel by bringing it before the World Trade Organization, as we now do for far less objectionable international price fixing or unfair subsidy issues.

Perhaps even more appropriately, we should bring OPEC and its executives before the international criminal court (as we do in the U.S. for far less egregious antitrust collaborations) for the outrageous price manipulation and enormous external tax OPEC has imposed on the United States and the other oil-consuming nations over the last generation.

Our leaders need to rally our patriotic countrymen to join this crusade and inspire them, as John Kennedy so aptly did, to “ask not what your country can do for you, ask what you can do for your country.” Ultimately, all Americans will benefit from such an undertaking. Oil will return to at most $40 a barrel and probably even to $20 a barrel or less since in reality it’s one of the most abundant commodities on earth.

Finally, we need to launch a real crusade as we did so successfully with the Manhattan Project, which enabled us to develop the atom bomb before the Nazis, and as we did in beating the Russians to the Moon. It was the launch of Sputnik, the first Soviet satellite, in 1957 that triggered the concerted national action to win the space race. Within a year after Sputnik, Congress passed the National Defense Education Act, which, to our eternal benefit, dramatically expanded public investment in education, particularly in science and engineering. Within 10 years of Sputnik, funding for the National Science Foundation had increased tenfold.

There is no more urgent or worthy goal than developing alternatives to oil.

Launch the crusade to achieve this exalted, most vital goal!

Go all out! Make it the highest priority.

Let’s develop the engines, new batteries, new fuel cells, new plug-in hybrids, new hydrogen products and yet undreamed-of solutions to achieve this goal. Set up a special government-funded organization similar to the National Institutes of Health, called the National Institutes of Energy, and fund it, fund it, fund it!

We spend $12 billion a month in Iraq — many Americans feel that we are actually there because of oil — and less than $2 billion a year on alternative energy research. We spend $16 billion a year on the space program. (Yes, it’s valuable and ultimately rewarding, but if we get to occupy Mars five or 10 years later, does it really matter to most Americans?) Hillary Clinton and John McCain advocate eliminating the 18-cent federal tax on a gallon of gasoline this summer, which would save the average driver $30 but cost the federal government $9 billion. I say use that $9 billion to provide the R&D dollars to universities and the private sector to win the battle to free us from dependence on oil.

Mr. President, act! You have in your power the “magic wand” not only to bring down gas prices but ultimately to eliminate our dependence on deleterious, inexpedient and even often unreliable oil.

Davis, a shareholder in The Hill’s parent company, is an economist, an MBA graduate (with distinction) from Harvard Business School and author of From Hard Knocks to Hot Stocks (William Morrow and Co.) and Making America Work Again (Crown).