On Gas Prices, Believe What Obama Does, Not What He Says

The president seems to favor only those energy projects that involve a crystal ball for him (think Solyndra) and a heavy bill for the taxpayers.

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Who or what is most at fault for current and anticipated high gasoline prices? Choose one: a) increased demand in China and other countries; b) OPEC; c) geopolitical tensions; d) technical difficulties; or e) President Obama's anti-U.S. supply policies? It may surprise you to find out that some experts believe the most important driver to be "a)", increased demand in China. As with all markets, supply and demand determine price—whether it is oranges or oil. Expectations about demand growth and the availability of supply are reflected in future prices and may even have some impact on current prices.

So what happened with gasoline? The bottom line is that even with OPEC crude production slightly above what was anticipated, a fairly warm winter, and weak demand from U.S. and European markets, suppliers failed to accurately gauge the increase in demand from Asian markets. While a massive oversimplification, it helps to think of China as a big, oil-absorbing blob with an insatiable appetite.

[ See a collection of political cartoons on gas prices.]

In a must-read Business Insiders article published by Joe Weisenthal, the author cites a study by Barcap's Miswin Mahesh and Amrita Sen that underscores this key point:

The problem with judging the global pace of oil demand growth is that the epicenter of that growth has most definitely moved away from the U.S. to Asia, and China in particular. Yet, due to the lack of prompt alternatives, the more readily available data from the U.S. is still used as a global guide to the health of the oil markets.

While not agreeing with everything Weisenthal concludes, I think his primary assessment is spot on. Specifically, his insight that "Asian and [former Soviet Union] oil demand are growing at a faster pace than markets are currently pricing in [ sic]." Moreover, Weisenthal correctly notes, "the overall state of global oil demand may be nothing to write home about, equally, it is not declining, contrary to market expectations [emphasis added]."

To be sure, production is down in places such as the Sudan and Yemen and some normally stable sources of supply—think Canada, Norway, Australia, and the United Kingdom—have been hit by ill-timed technical glitches. Then, of course, we have to layer on top concerns about a chest-beating Iran. Taken altogether, markets are somewhat smack-to-the-forehead surprised and the price per barrel of oil has increased accordingly.

[ Check out the U.S. News energy blog.]

Interestingly, some point to the fact that current production of crude oil and natural gas liquids is high (and expected to grow) as an excuse to sit on our hands. It is not clear why one should imply the other, particularly since we cannot control demand growth in China and the former Soviet Union.  

Unfortunately, that is not the end of the story. The price of crude is only stage one. Most crude oil derived products purchased by manufacturers and consumers require refining. Without getting too much into the weeds, East coast refineries are paying Brent Crude prices of more than $120/barrel. Midwestern refineries are sourcing at the U.S. domestic West Texas Intermediate price of $109/barrel. As Weisenthal points out, East coast refineries have been feeling the price squeeze to such an extent that they have shut down capacity, further reducing supply. Just think of the refineries as restaurants that shut down operations from 2:30 to 5 because the money they would make during those hours does not justify the cost of doing business.

The bottom line is that the price of crude oil accounts for 76 cents out of every dollar we pay for gasoline, according to an Energy Information Agency estimate. So critics of increasing domestic oil production have a simple question to answer: Why wouldn't we work on 76 percent of the problem?

[ See a collection of political cartoons on energy policy.]

Why not, for example, increase our capacity to rely on nonhostile sources of energy through projects, such as the Keystone XL pipeline, that are sourced and financed by the private sector? 

Monetary policy also plays a role in oil prices. While some disagree about its relative significance, there is no escaping the fact that, like other commodities, oil is traded in dollars. As the Wall Street Journal pointed out in an editorial, the price of oil therefore "rises when the value of the dollar falls, all else being equal." The Fed's monetary policy has been so easy in recent years that it makes Casanova seem chaste, so we shouldn't be surprised that commodity prices have begun to push upward. In fact, the Fed, controlled by a majority of Obama appointees, in recent months has confirmed its commitment to "near zero interest rates" for both 2013 and 2014.

Mixed together, all of these factors make a nasty cocktail. It would be easier to believe President Obama's protestations of concern about higher gas prices if senior members of his administration—most notably the Secretary of Energy Steven Chu— hadn't been long-time advocates of higher gas prices.

[ Read the U.S. News debate: Is Obama to Blame for High Gas Prices?]

At best, his current positioning seems disingenuous.

If President Obama really believes as he recently claimed in his State of the Union address that we should work on developing all sources of energy, it is also disingenuous not to facilitate a ramping up of all sources of domestic oil production to offset current demand trends. Unfortunately, when you watch what he does instead of listening to what he says, the president seems to favor only those energy projects that involve a crystal ball for him (think Solyndra) and a heavy bill for the taxpayers.


Corrected 3/05/2012: A previous version of this article mischaracterized when the Business Insider and Wall Street Journal articles were published.