The stock market started off 2012 with a strong rally, but so did gasoline prices. The January increase was listed as one of the steepest ever and had market forecasters calling for prices as high as $5 per gallon at some point in 2012. The average price of gas has yet to reach that price, based on a national average, but it could still happen if the summer driving season comes in more active than expected, or if Middle East tensions increase again.
With the presidential election set for later this year, politicians are getting active in advocating ways to lower prices at the pump. Below are three ways that Obama could advocate to lower gas prices. The short-term impact might be minimal, but it could help the U.S. lower prices over time and also depend less on more volatile supplies.
Push Toward Domestic Energy
In March 2011, the White House released some details on a plan to secure the nation's energy future. Its first point was to expand domestic oil and gas production. Hydraulic fracturing, or fracking, is a technique that sends a mix of water, chemicals or sand into the ground to break apart rock and release gas. Drilling for oil can be done in a similar fashion that utilizes new techniques and technologies that allow for the oil to be extracted from wells that were thought dry under older methods.
These two methods are being combined to create a huge source of domestic supply that can help reduce dependence on foreign sources and increase supply to lower overall prices. Vehicles that run on natural gas already exist, though mass-market cars and trucks are still a ways off. Fracking techniques are still controversial and are alleged to cause earthquakes or pollute drinking water sources, but have been approved for use for the most part.
Increase Overall Supply
The increase in domestic production is increasing supply, which can help to lower prices. Obama's energy plan detailed that in 2010 oil production reached its highest level since 2003, while natural gas reached a 30 year high. The vast increase in natural gas supplies has seriously dented prices, and firms are cutting back on production because it has become uneconomic to extract it in certain regions. The White House also touted freeing up millions of acres of federal and public land, as well as offshore locations, for drilling. Overall, increasing domestic supply is seen as the best approach to lower gas prices over the long haul.
Of course, overseas sources, especially through OPEC, will continue to account for a large percentage of supply. Securing more dependable and less volatile partners could help smooth out supply, and hopefully price swings. Overall, gas prices have risen because of huge demand increases in emerging markets such as China and India. Again, finding domestic supply increases offers perhaps the best solution.
Decreasing demand could also lower gas prices. Transportation consumes an estimated 70% of that nation's gas supply, so finding ways to reduce driving could help lower demand, and eventually gas prices. Vehicles that run on alternative sources of energy, including natural gas, as well as those that run partially on electricity can also help. Obama's energy outlook cited more than 12 manufacturers of electric vehicles, many of which receive government subsidies to get the technology closer to mass production. Light and high-speed rail transportation could also help, if built in a cost effective manner. Smaller methods to improve efficiency and lower demand include producing cars that are more fuel efficient.
The Bottom Line
Clearly, increasing domestic supply is among the best approaches to lowering gas prices over the long term. On the fringes, finding stable international supplies and lowering demand through alternative sources of energy and more efficient vehicles can also help. Any politician that continues to emphasize these approaches could engage voters and help his or her chances of election.
More From Investopedia