Gas prices: it’s the market not the government
We’ve been reading a lot about the price of gas lately, especially in political discourse.
Republican presidential candidates, who routinely pay homage to small government, seem to want big government to step in and reduce gas prices.
Newt Gingrich has pledged, without any shred of evidence that he or big government knows how to or can do it, to reduce the gas price to $2.50 a gallon if (a big if, so he can promise away) he becomes president.
The Daily Local News editorial “Refinery closings not the reason for soaring gas prices” (3/1/12) says quite rightly that if we want to blame someone, it’s the free market, not the government.
The economist Robert Reich’s 2/20/12 blog “The Gas Wars” attributes the rising price of gas to Iran’s cutting off oil exports to Britain and France, “rising hopes for a global economic recovery,” and “overwhelming bets of hedge funds and other money managers.”
The third of these factors, speculation, bids up future prices out of line with actual need for the product. The speculators’ dream has always been to “corner the market,” that is, to profit by controlling a major part of supplies and driving up prices.
In “Why Republicans Aren’t Mentioning the Real Cause of Higher Prices at the Gas Pump” (3/15/12), Reich emphasizes speculation:
“…the rise in gas prices has almost nothing to do with energy policy. It has everything to do with America’s continuing failure to adequately regulate Wall Street….
“…Wall Street is betting on higher oil prices in the future — and that betting is causing prices to rise….
“Financial speculators historically accounted for about 30 percent of oil contracts, producers and end users for about 70 percent. But today speculators account for 64 percent of all contracts….”
Kevin Drum, “Q&A: What’s Going on With Gasoline Prices?” at Mother Jones, 3/2/12, runs through some of those factors and sums up:
“…here’s the main takeaway: Demand for oil is pushing up against supply limits, and that’s a permanent condition. From now on, demand is always going to be bumping up against supply limits because even if supply rises a bit in the future, demand is rising even faster. And when supply and demand are that tightly constrained, every small bump in demand or disruption in supply causes a big swing in prices. Last year it was the war in Libya that caused a price spike. This year it’s Iran. But it’s always going to be something. It doesn’t take much anymore to produce a $30 swing in oil prices….”
And here is Drum’s conclusion:
“Q: Do you have any good news to share?
“A: Not really. New shale oil finds in North Dakota might increase global supplies a bit, but probably not enough to make up for increasing demand from China and other emerging economies. Basically, prices are going to stay high for the foreseeable future; even small supply disruptions are likely to cause big price gyrations; and big supply disruptions are likely to cause full-blown recessions. Like it or not, this is our future. I recommend you buy a motorcycle.”
Similarly, Robert B. Semple Jr., “Obama Sets Gas Prices? Just another G.O.P. Myth” (New York Times, 3/18/12, p. SR 10), also emphasizes the price of oil, while showing that US oil production has actually gone up and use of foreign oil down in Obama’s presidency so far.
These charts sum up his analysis:
Since gas is refined from oil, and US production is up and consumption down, what is pushing up oil prices then? Since “global prices move in tandem,” and much faster than supply and demand move, it’s pretty obvious to me that speculation is hard at work.
Besides acknowledging the role of political instability in the Middle East and speculation, the Daily Local editorial also claims that “The price of oil is going up, in part, because the value of a dollar is going down. I’m just not seeing that.
Currencies fluctuate, but the US dollar is now where it was against Canadian currency 4 years ago, Mexican 3 years ago, Nigerian 2 1/2 years ago, Venezuelan 2 years ago, and Saudi 4 years ago. Compared to a year ago, the dollar shows no big rise or fall against any of those currencies—which happen to be those of our 5 chief foreign suppliers of oil—or against the euro or British pound either, for that matter.
In thinking comparatively, we should also recall that comparisons to past highs do not take inflation into account. According to the US Department of Energy, regular conventional gas last spiked (to $4.054 a gallon in the US (compared to around $9 in UK, France, and Germany, incidentally) in July 2008. $4.054 has now inflated to around $4.196 (at 3.5% inflation for that period according to InflationData.com; I’m surprised, I thought it would be higher). And we aren’t there yet.
In 1973-74, to counteract the spike in oil prices brought on by the Arab oil embargo, the Nixon administration imposed oil price controls in the US (resulting in the inevitable shortages).
How could government control prices without reducing supply? China owns that country’s two main refiners, sets the price of gas, and subsidizes some gas users (LA Times, 3/20/12).
“In a few Latin America and Middle-East nations, such as Venezuela and Saudi Arabia, oil is produced by a government-owned company and local gasoline prices are kept low as a benefit to the nation’s citizens” (CNN).
Or, theoretically, the government could try to hold down prices by forbidding petroleum export—which currently occurs, and no doubt more so if the XL Pipeline moves Canadian oil to the Caribbean.
However, such “big government” measures seem highly unlikely today, to say the least!
My guess is that we are just going to be living with factors beyond our government’s influence: the free market, supply and demand, and speculation as usual. On the positive side, at around $108 per barrel, we’re not near a record oil price, which was set in July 2008 (3.5% of inflation ago) at a shade over $147.
The irony is that as speculators bid up the price of oil, they can slow the economy, and that in turn can bring down the price of oil.
Meanwhile, I’m not sure about motorcycles, but why not dust off the bicycle for doing local errands?