Gas Prices (Gasp): What Bogeyman?

by Holly Fretwell

Similar to politicians from the past, President Obama, is pointing fingers at bogeymen for causing higher gas prices. In the past it has been toward people like me for driving an SUV, or non-hybrid mini-van.  Last week Obama created a task force to root out fraudulent speculators. Whether speculators are fraudulent or can impact the price of gas I will leave unanswered here, but speculation about who is impacting the price of gas should include a much broader list. Here are a few of the bogeyman that play a role:

• The Federal Reserve: International gas prices are typically set in U.S. dollars. A depreciating dollar means higher gas prices because the exchange value of the dollar has fallen. Federal Reserve quantitative easing (aka increasing the supply of money) puts downward pressure on the value of the dollar making foreign goods relatively more expensive.
• The Chinese: economic recovery in emerging economies is increasing the demand for oil similar to 2008 when gas prices reached $140 per barrel. Chinese oil imports have increased at a rate near 10 percent per year. China’s growth in GDP exceeded 10 percent last year. Demand for gas is also rising in other emerging economies.
• The Obama administration: An effective national energy tax intended to reduce

CO₂ emissions would increase the price of energy, gas included. In addition, though verbally fostering increased oil development within the U.S., in his weekly address he suggested that “[i]nstead of subsidizing yesterday’s energy sources, we need to invest in tomorrow’s.” I am not a great supporter of subsidies of any sort. Nonetheless, reducing subsidies to the oil industry is not going to have the implied result of reduced gas prices. And, importantly, politically determined investments have not proven economically or environmentally efficient; think ethanol.

• Environmentalists: There have been no new oil refineries built in the United States since 1976. The high cost of new refineries, in part due to high environmental regulations, has caused a squeeze on new building.
• Egypt, Libya, and other politically oppressed oil exporting countries: Political unrest in oil exporting nations causes gas price spikes. This is in part due to supply disruptions and in part a result of expectations and hence behavior.

Therein sits a basic model of supply and demand. Global demand has increased causing an increase in price. Supply, or production, has not kept pace with the rising demand. Regardless of who is blamed, the bottom line is that gas prices respond to supply and demand.

Given the push by the president to move toward alternative energy sources and reduce CO₂ emissions, lower gas prices are not in his favor; lower emissions and lower gas prices are incongruous. Politicians claiming to strive for both are subject to being called oxymoronic.