Even with gasoline prices starting to come down from a price of two dollars a gallon, they are still much higher than they should be. American consumers are still angry, and the politicians blame the U.S. oil companies. Al Gore, for example, is calling for an FTC investigation. But if we put aside the hysteria, we will see that there are two fundamental questions to ask: What is the cause of the price hike? and: What can be done to correct the problem?

The answer to the first question is relatively simple. Prices rise when demand exceeds supply. The Organization of Petroleum Exporting Countries (OPEC) cut production of oil in March 1999 by a total of 4.32 million barrels per day in an effort to raise its price on the world market. The resulting limits on supply caused oil prices to rise in April 1999 from a low of $6 a barrel. By August prices were over $20 per barrel.

But OPEC's production cutbacks are only one reason for escalating gasoline and oil prices. U.S. federal and state government policies are the worst culprit. While American motorists pay an average of 42.4 cents per gallon in gasoline taxes (that's about $350.00 per year for every licensed driver in the country) the main problem is environmental restrictions. These regulations add cost to the production that is allowed and, in other cases, prevent American production entirely. The diminished, more costly supply adds to the selling price. For example, recent gas prices in Chicago and Milwaukee topped $2 per gallon. This was caused by a new EPA regulation called "RFG-2." One result of this ruling is that on a trip from St. Louis to Chicago, a driver passes through four government-created "gasoline control zones." With three octane grades in each zone, producers must supply twelve different gasoline blends for service stations along a single 300-mile stretch of highway. The added cost this entails for producers necessarily sends prices skyrocketing.

Environmental restrictions also limit production of natural gas, which currently supplies 25 percent of the energy Americans consume, a figure that will rise in the future. As one example, producers in Wyoming's Powder River Basin have seen the federal government suspend the issuing of drilling permits pending the outcome of a second environmental study, which is not expected out until next year. Powder River holds 39 trillion cubic feet of gas, which could be used to generate heat and electricity for many years, but the government's environmental restrictions severely limit production.

What must the United States do to ensure a steady supply of low-cost energy? We must eliminate government regulations and establish a free market. Specifically, we must remove the environmental restrictions that are strangling U.S. oil companies. The United States has abundant supplies of oil and natural gas that it currently is prohibited from developing. These exist in two major areas. One is offshore on the Outer Continental Shelf (OCS) and the other is in Alaska. The OCS is an area that stretches 200 miles out from the Atlantic, Pacific and Gulf coasts. Half the oil in the OCS, particularly off the California coast, is in areas that are currently closed by environmental restrictions. The second area abundant in oil is in Alaska's Arctic National Wildlife Refuge (ANWR). Senator Frank Murkowski of Alaska, chairman of the Senate Committee on Energy and Natural Resources, states that "ANWR could produce oil for decades, adding as much as $325 billion to the U.S. economy and reducing imports by well over one million barrels per day." Geologists claim that ANWR holds seven billion barrels, enabling it to add significantly to American energy production. The regulations preventing development of these areas severely limit the supply of oil and natural gas available to American consumers. If the United States is to have a steady flow of inexpensive oil products, it is imperative that the government restore freedom by allowing American oil companies unlimited access to these areas.

The consequence of not restoring freedom to producers will be steadily decreasing supply and increasing prices. It is already too late to do anything about the supply of heating oil for the coming winter. Refineries have been forced to use all available crude oil for the production of gasoline, and have not yet been able to convert to the production of heating oil. Be prepared: with supplies low, customers will pay higher prices for heat when demand rockets during winter's frigid months. But we can act to ensure sufficient supplies of gasoline and heating oil for the future.

If the U.S. government establishes freedom in the energy industry by removing environmental restrictions, we will witness a significant increase in domestic production of oil and natural gas. This will do more than increase supply and lower prices for American customers. It could herald a new commitment by the U.S. government to economic freedom and capitalism. The relative freedom of the computer industry has led to an explosion of innovativeness and productivity. The same freedom in the energy industry will lead to the same result.
 
Floyd Farleigh is an independent oil producer. Dr. Bernstein is a senior writer at the Ayn Rand Institute in Irvine, Calif. The Institute promotes the philosophy of Ayn Rand, author of Atlas Shrugged and The Fountainhead.