Obama and gas prices

As gas prices continue to rise, President Obama is under increasing pressure from both Republicans and the public to take action. Gasbuddy.com, which tracks gas prices, shows an increase of almost 70 cents per gallon in Georgia since Christmas. During the same period, the national average gas price has increased by almost 60 cents. The current national gas price is $3.794 per gallon, while Georgia is a few cents cheaper at $3.703. There may not be any relief in the near future. The Energy Information Administration forecasts that gas prices will stay near $4 per gallon through the summer.

To date, President Obama’s main response has been to blame speculators. In 2011, the president asked the Department of Justice to investigate oil speculators for possible fraud or manipulation of prices. McClatchy Newspapers found the Oil and Gas Price Fraud Working Group, a subgroup of the Financial Fraud Enforcement Task Force, has met “only four or five times since its creation.” President Obama ordered the group back to work last week while at the same time saying that it never stopped working.

Speculators are not the problem. OPEC is the cartel of oil-producing countries that sets the price for much of the world’s oil. The OPEC basket price for March 14, yesterday’s close of business, was $124.29 per barrel. Currently, oil is trading on the New York Mercantile Exchange between $103 and $106 per barrel. Oil is actually selling on the commodities market for less than OPEC is charging. This means that the “speculators” are actually bidding the price of oil down.

President Obama and the Democrats maintain that the president does not control the price of oil and therefore should not be blamed for rising gas prices. The Democrats did not feel that the president was so helpless when George Bush resided in the White House, however. Many blamed President Bush’s ties to the oil industry for 2008’s record spike in gas prices.

While it is true that President Obama cannot take action that will swiftly bring gas prices down, it is also true that many of his policies have contributed to the increase in gas prices. The president’s affinity for green energy and dislike for oil has led to policies that are hostile to oil producers. For example, although President Obama has taken credit for the fact that U.S. oil production is at an eight year high, he failed to mention that the increase was due to drilling permits issued under President Bush.

According to the Institute for Energy Research, the number of offshore drilling permits has fallen by more than 50 percent under President Obama. The percentage of applications approved has fallen from a historical average of 73 percent to the current approval rate of 23 percent. Approval time has increased from an average of 60 days to more than 90. The Obama Administration was held in contempt for continuing its moratorium on off-shore drilling after its executive-ordered ban was struck down by a federal judge. Even before the oil spill, one of President Obama’s first executive actions was to cancel 77 Bush-era oil leases in Utah. Further, the Obama Administration has also unveiled new regulation of fracking, the drilling technique that has made the oil and natural gas booms in Pennsylvania, Ohio, and North Dakota possible. Increased regulation may well lead to fewer permits in these areas as well.

Another high profile decision was President Obama’s rejection of the Keystone XL pipeline. Obama killed the pipeline in January after three years of study. In February 2012, the president lobbied Democratic senators to vote down a Republican bill that would have approved the pipeline according to Investor’s Business Daily, killing the bill a second time. The Canadian oil that would have been piped to U.S. refineries will now likely go to emerging markets in China.

The Energy Information Administration cites the closure of three refineries since September 2011 that supplied gasoline to the East Coast as a factor in rising gas prices. An additional refinery may be shut down in July if no buyer is found. The reduced supply has been partially offset by a new refinery in Delaware City, but has undoubtedly contributed to higher prices. President Obama engineered the purchase of Chrysler by Fiat, but has shown no interest in finding new operators for these refineries.

The Federal Reserve has also increased the money supply through quantitative easing, where the Fed buys securities from banks and expands the money supply. According to the N.Y. Times, the Fed has added more than $2 trillion to the money supply since the economic crisis began in 2008. When more money is in the system, each individual dollar is worth less. As supply increases, demand decreases.

As Republicans on Congress’ Joint Economic Committee noted in report detailed in CNS News last year, “Oil is an international commodity that trades in dollars. The value of the unit of exchange, in this case the dollar, plays an important role in determining the ‘headline’ price for the underlying commodity.” The report further notes that the first round of quantitative easing resulted in an increase of more than $17 per barrel of oil. This is approximately an increase of more than 50 cents per gallon of gasoline.

Another major factor in the high price of gasoline is instability in the Middle East caused by the Iranian nuclear program. The Iranian quest for nuclear weapons predates the Obama Administration, but the president has frittered away time with fruitless negotiations while the Iranians worked and used diplomacy as a delaying tactic.

In the meantime, Obama has done everything possible to prevent Israel from launching a strike on Iranian nuclear facilities, even after Iran attempted a terror bombing inside the District of Columbia in October 2011. He is right that an Israeli strike would probably result in an Iranian blockade of the Persian Gulf causing oil prices to skyrocket, but he seriously underestimates Iranian Twelver religious fervor and their resolve to destroy Israel. The Iranian leadership believes that a Muslim messiah is coming soon and that their mission is launch a nuclear war to prepare the way for him.

A conventional war in the Middle East would be disastrous for oil prices. A nuclear war in the Middle East (or worse: one that reaches American shores) would be even worse. As the Iranians draw close to becoming a nuclear power, there is less time for sanctions to work and less chance for a peaceful solution. The price of oil includes a risk premium for the possibility of war in the Middle East that Obama’s inaction has made more likely.

Finally, President Obama is a bit disingenuous about wanting cheaper prices for gas and energy. In September 2008, Dr. Steven Chu, the man who later became President Obama’s energy secretary, told the Wall Street Journal, “Somehow we have to figure out how to boost the price of gasoline to the levels in Europe.” Chu wanted gas prices to increase in order to coax Americans into buying more energy-efficient cars and encouraging shorter commutes.

Barack Obama himself, in a January 2008 interview with the San Francisco Chronicle that can be heard on HotAir.com, said as a candidate that “under my plan of a cap and trade system, electricity rates would necessarily skyrocket.”  This would have been bad news for everyone, including people driven to purchase electric cars by Dr. Chu if cap-and-trade had passed. Although Congress never passed cap-and-trade, President Obama’s EPA is implementing carbon regulation unilaterally.

President Obama cannot personally control the price of oil, but his policies do have an effect on it. On balance, the president’s policies are contributing to the rising gas prices. The statements of candidate Obama and Dr. Chu are evidence that they knew exactly what they were doing all along.

Originally published on Examiner.com:

http://www.examiner.com/conservative-in-atlanta/obama-and-the-price-of-gas

Gas prices, Obamanomics, and the return of inflation

Drivers around Atlanta have undoubtedly noticed rising gas prices over the past few weeks.  Georgiagasprices.com reports that the average price of regular unleaded gasoline in Georgia is $3.428, just below the national average of $3.487.  Georgia’s average price has risen 42 cents per gallon in the past month and 78 cents in the past year.  This is an even sharper increase than the national average which is up 36 cents in the past month and 74 cents in the past year.

Part of the reason for the increase in gasoline prices is undoubtedly the unrest in the Middle East.  Whenever there is political instability in oil-producing regions of the world, which is fairly often, the price of oil tends to rise.  This, in turn, causes the price of gasoline and other items made from oil to rise.  The problem is compounded by the Obama Administration’s attempts to stop new domestic oil exploration and the EPA’s new carbon regulations. 

The rising price of oil may both mask and contribute to something more insidious as well:  a return of inflation.  Rampant inflation and resulting stagnant economic growth characterized the entire decade of the 1970s.  The inflation of the 1970s was caused by many of the same factors that are present in our economy today.  President Nixon ran up federal deficits and imposed wage and price controls.  Along with Federal Reserve Chairman Arthur Brooks, Nixon also increased the money supply sharply in an effort to end a recession and reduce unemployment.  Further, oil prices spiked twice in the 1970s as well; first, in 1973 with the Arab Oil Embargo and again in 1978 with the Iranian Revolution.

These factors are mirrored today in President Obama’s economic policies.  The federal deficits under Obama have led to an increase in the federal debt of $3.5 trillion.  Obama has also launched controls in some areas of the economy.  The president capped the pay of Wall St. CEOs of companies receiving federal bailouts.  He has also openly considered the idea of price controls as a remedy for health insurance costs that are rising even more sharply in the wake of the passage of Obamacare.  Federal Reserve Chairman Ben Bernanke is currently increasing the money supply by printing money under the guise of “quantitative easing.”

It is axiomatic in economics that as supply increases, price decreases.  Therefore, we can predict that as the supply of dollars increases through quantitative easing, increasing the money supply, that the price (or value) of those dollars will decrease.  Essentially this means that as the government prints more dollars, each individual dollar is worth less. 

Already, the specter of inflation is rearing its head in world markets.  One of the most notable areas of price increases is in world food markets, where food prices are at the highest point since the UN started tracking them in 1990.  Ironically, the rising cost of food in poor Arab countries may have been partly to blame for the outbreak of revolts against Middle Eastern dictators.  The unrest then further drives up oil prices, which leads to more inflation. 

President Obama with Fed Chairman Ben Bernanke

Bad weather and crop failures around the world have contributed to rising food costs, but economists believe that government mandates to use more food for ethanol production instead of consumption also play a major role in rising food costs.  Economics teaches that when something becomes more scarce, as when food is diverted to manufacture ethanol, it becomes more expensive. 

At the same time, ethanol remains uncompetitive in spite of government subsidies.  A plant in Soperton, Ga. that produced ethanol from wood recently shut down in spite of receiving over $150 million in government loan guarantees and grants, while a corn ethanol plant in Camilla, Ga. is in bankruptcy.  Ethanol subsidies and mandates are detrimental in that they add to the federal deficit while also driving up world food prices.

The Consumer Price Index (CPI), which measures inflation, has been relatively steady.  The CPI, however, does not typically include food and energy.  When food and energy prices are included, the CPI shows a sharp uptick in recent months. 

A further indication of the onset of inflation is the rising price of gold and silver.  Precious metals, gold in particular, are often considered a hedge against uncertainty and inflation.  After falling with the economy in 2008, the price of gold has rebounded sharply.  Since President Obama took office in 2009, the price of gold has risen from less than $900 per ounce to $1,467, an increase of more than 60%.  Silver has reacted even more dramatically, rising from just over $9 per ounce to $35, an increase of almost 300%.

Many economists do believe that monetary policy is the sole cause of inflation and that rising oil prices are a symptom of inflation, rather than being one of its causes.  In this case, rising oil prices are still bad news for the U.S. and world economies.  There is a strong link between spikes in oil prices and recessions.  The typical pattern is that oil prices increase dramatically, at least partially causing the recession.  As the economy slows, demand for oil decreases, which leads to a decline in the price.  This often allows the economy to rebound. 

This is the pattern followed in 2008 when record high gas prices were experienced just prior to the financial collapse.  After the onset of the recession, oil and gas prices dropped dramatically.  The Obama Administration’s regulatory and financial policies postponed the recovery and kept oil prices low until recently.  As the economy slowly recovers, oil prices would normally start to creep upward again.  The unrest in the Middle East provided more upward pressure as well.

Algerians riot over high food prices in 2009 (Flickr: 110109 Algeria slashes food prices amid riots)

In the current economic climate, the Federal Reserve is dramatically increasing the money supply.  At the same time, political unrest in the Middle East and Obama Administration policies at home are driving up the cost of oil and energy.  Problems with crops and diverting agricultural resources to ethanol production are increasing the cost of food as well.  If these trends continue, Georgians can expect gas prices to continue to rise, along with the prices of milk, bread, meat and other foods.  Eventually, if left unchecked, inflation will spread to other areas of the economy as well.

The cure for runaway inflation is almost as bad as the disease.  The rampant inflation of the 1970s was defeated only by the strategy of Ronald Reagan and Federal Reserve Chairman Paul Volcker to tighten the money supply (by increasing reserves of central banks and reducing the supply of money in the economy).  This strategy led directly to the recession of 1980, but ultimately inflation was defeated and the economy entered a strong recovery.  Other policies that President Obama is unlikely to embrace, such as tax cuts and reducing regulation, helped to ease the transition to tighter monetary policies.

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