Joseph Mason is the Moyse/LBA Chair of Banking at the Ourso School of Business at Louisiana State University and a senior fellow at the Wharton School of the University of Pennsylvania.
In an attempt to respond to the 2008 financial crisis, the U.S. Federal Reserve embarked on an extraordinary expansionary monetary policy.
Yet this recovery will be undercut if high gasoline prices—like the 8 percent spike we've seen the last month alone—continue.
The consequences of high gas prices for consumers are very real. In a speech recently at the University of Miami, President Obama sympathized with the American public, arguing high gas prices are like a tax that "hurts everybody."
This is a curious statement coming from a president who has done little to promote lower gas prices. While numerous factors converge on a global level to influence the price of oil, without a doubt the Fed's monetary policy continues to cause uncertainty, spurring investors to look for ways to park their assets in oil futures.
The three rounds of quantitative easing have contributed to excess liquidity in U.S. financial markets, devaluing the U.S. dollar so as to make U.S.-priced products, like oil, cheaper for overseas investors.
Energy-hungry nations like China are using price signals to buy more oil when the price drops, putting upward pressure on the global price and making it harder for Americans at the pump. And their appetite for hydrocarbons shows no sign of slowing—the 2012 demand projections for the world's second largest oil consumer are forecasted to rise by 5 percent to 493 million tons this year, or 9.9 million barrels per day.
Some argue that oil prices are set on a global market and, consequently, Americans have little sway over price. Yet the relationship between monetary policy and oil prices is empirically supported. Researchers at the International Monetary Fund found that the high oil prices in 2004-05 could be explained by "an excessively expansionary [U.S.] monetary policy, with interest rates falling to record levels in an integrated international capital market. Stimulated by low interest rates and a depreciating U.S. dollar, demand for oil has expanded faster than supply."
And that was in 2005—long before rates hit their current extreme position relative to historical standards.
So what now? How should the president safeguard the recovery and lower gas prices? The United States is still the largest oil importer in the world. So while there's no magic bullet, supporting shovel-ready energy projects including Keystone XL, shale gas, and speeding the offshore permits are no-brainers. Economists are rightly worried about inflation and labor markets, not to mention energy prices, and these projects promise to provide a jobs renaissance. Let's use high energy prices and access to cheap capital to our advantage.
Additionally, boosting competitiveness of U.S. oil and natural gas companies with fair tax policies will ease gas prices long-term. Repeated calls from President Obama and some in Congress to repeal "dual capacity" and Section 199 undermine firms' ability to compete for scarce natural resources on a global level. ExxonMobil contributed significantly to the U.S. economy—$72 billion in 2011—yet continues to serve as a rhetorical whipping boy.
We don't hear the president calling for export restrictions or new taxes on automotive companies, so why should the oil and natural gas company be unfairly targeted? As former Rep. Harold Ford Jr. noted on MSNBC's Morning Joe: "We get excited in this country when we talk about Apple. It's a great U.S. company. But ExxonMobil's a great U.S. company as well, and we seem very shy to talk about."
While there are a number of factors influencing the price at the pump, and many of which are outside the president's control, the options available must be utilized. We need a stronger domestic energy policy that strengthens America's foothold in the global market and creates greater certainty. And we need an economic policy that expands economic possibilities for all.