As gas prices rev up into high gear well before the summer months of traditional high demand predictions estimate prices at the pump will reach well over $4.00 a gallon. Along with the impacts this will have on the average consumer, these increases will, and already have, produced gushers of political rhetoric, laying blame squarely on the President’s shoulders. While high gas prices are great fodder for political gamesmanship, their accuracy is often suspect. How much influence does or can the leader of the U.S. have over the price of crude, let alone the prices at the pump?
Each political party plays the petrol price blame-game. Many a Democrat was overly eager to place copious amounts of blame on George W. Bush for the ceiling shattering prices which occurred under his watch. Bush took office in 2001 when prices sat at $1.60 per gallon. By July 2008 they soared to record levels as consumers payed an average of $4.40 per gallon. Democrat exuberance aside, was Bush responsible for this? Despite the sharp fluctuations, gas prices did trend upwards throughout Bush’s presidency until they reached their high point in the middle of 2008. What was going on at that time? Well, the country was embroiled in the Afghan and Iraq wars. Between 1993 and 2003 refineries were consolidated at fairly high rates, dramatically increasing market shares for the top refiners in the country, essentially reducing competition. Demand was also increasing globally, futures markets were trading crude at all time highs and the dollar was weak.
Now with a new round of price increases and predictions for more, Republicans are taking advantage of their turn to hit Obama on the issue. The GOP blames the President’s regulatory and domestic production policies, especially his decision to delay the Keystone XL Pipeline, for the current prices. But once again, how accurate is this assessment of his accountability? Newt Gingrich was quick to point out that prices were at $1.89 a gallon when Obama took office and today the average price is $3.52 per gallon as compared to the $1.13 per gallon when he was Speaker of the House. Mr. Gingrich’s comparison, however, omits what was happening at the time President Obama was inaugurated. In January 2009 the country, and the world, was in the depths of the Great Recession. Consumer demand was at extremely low levels which dragged prices down to their lowest point since 2003. By late 2009 prices rebounded to pre-recession levels fluctuating erratically as they have done over the past decade. Running contrary to Republican criticisms, the administration has approved numerous offshore drilling permits, has opened previously closed areas to leasing and is considering drilling in the Arctic. Despite this, prices have continued to rise straining the credibility of the usual talking points. Some economists equated the current increases to signs of a strengthening recovery. Others identified growing demand from developing countries and China and resulting supply concerns as the drivers of price increases.
Speculating the Recovery Away
If the Presidents are not to blame for higher gas prices then who or what is? While actual supply disruptions or reductions due to natural disasters, regional unrest, increased demand and decreased production are very real catalysts for temporary fluctuations, the drivers of the increasing volatility of oil prices over the past dozen years are due in a large part to the futures markets or speculators. These are markets whose players hedge bets on future crude prices on what are essentially “what-if’s”. What if the hurricane hits the Gulf Coast? What if revolution breaks out in the Middle East? What if a particular dictator passes wind in the wrong direction?
Currently, there are no natural disasters impeding supplies. There are no new wars breaking out. Demand, in the US at least, is low and production has not decreased. The price increases hinge upon speculation market-based fear. Fear over what-if Iran blockades the Strait of Hormuz? Fear over what-if Iran extends an oil embargo, even though European countries were already close to instituting a boycott of Iranian crude. Fear over what-if a European double-dip recession occurs. Fear over what-if the United Nations acts against Syria. Fear over what-if there is armed conflict with Iran. None of these events have actually occurred, nor are there certainties that they will, yet speculation of their potential to take place is driving prices close to record levels. Based on this trend predictions place prices at the pump at $4.25 a gallon by this summer with $5.00 a gallon gasoline looming ominously nearby. As a result the strengthening US recovery will slow, consumer spending will contract, demand will drop and businesses will delay their plans for expansion and hiring. It’s difficult to accept how so much hinges on the hedged bets of a small group of investors.
What’s the fix?
Republicans in Congress are reigniting their calls for deregulation and increased domestic production. But does that solve the problem? Will increased domestic production isolate consumers from market volatility? Will one more pipeline increase our access to stable sources and bring prices down to sustainable levels? The simple answer…No.
As US demand for oil has dropped due to the recession, reduced driving times and higher efficiency vehicles, the country has become a net exporter of oil. Stepped up domestic production will only serve to increase the sale of North American oil overseas to satisfy the growing thirst of Asian markets. But for the sake of argument, if domestically produced oil did remain in this country and supply increased reducing gasoline prices to the levels consumers desire, what will producers do? If prices fall, producers’ profit margins will decrease and they will reassess their strategies. Producers will reduce production in order to decrease supply for the purposes of driving prices back up to profitable levels. This is the current situation in the natural gas industry. This is also evident from the significant decrease in domestic production and exploration when crude prices dropped in the 1980’s. Essentially, if prices reach levels consumers want, producers will cut production to protect profits.
Economists say, the country’s recovery is only one shock away from crisis. This is a disturbing assessment. It’s disturbing because it illustrates how dependent the US economy is on one finite resource. So how does the US cushion its economy against the constant threats from volatile markets?
Diversity is the key to survivability in nature. Diversification is key to a successful investment portfolio. It’s key to a viable energy policy. Diversity increases one’s potential to adapt to sudden shifts in the environment – whichever environment that may be – and survive until equilibrium is reached once again.
What does diversity have to do with fixing the problem of high gas prices? Well, nothing. Nothing to do with bringing gas prices down, not directly at least. But diversity does have something to do with increasing consumer choices at the pump through biofuel. Biofuel is produced from a variety of sources, from agricultural waste to used cooking oil to the weedy plant camelina to algae. Agricultural waste from corn crops is estimated to meet 50% of India’s transportation fuel needs by 2020 and has recently met EPA requirements as a source of ethanol. Used cooking oil has expanded from garage-based biodiesel projects to its prominent use as jet fuel on commercial airlines like Alaska Airlines and the Dutch-based KLM. Private companies are also building regional facilities to refine used cooking oil for local government and private sector consumer use. Camelina- and algae-based biofuels use is on the verge of exploding after successful US Navy and Air Force trials proved themselves as viable military jet and naval vessel fuels.
If a biofuel infrastructure is developed, the same as the oil and gas infrastructure was developed decades ago through government and private sector partnerships, alternatives to gasoline can be provided for consumers. When gasoline prices soar, consumers would then have a choice of products introducing an element of rivalry into a market noticeably lacking competitors. This also provides a palatable free market solution for those critics who favor market-based answers. Now, the argument may arise that government subsidies dispersed in support of biofuels does not represent a free market approach. But this neglects to recognize how those very government subsidies and private sector partnerships created the oil and gas infrastructure we all utilize daily. Is there any reason why that same process should not be applied now to develop these alternatives?
As sources of oil become increasingly difficult to extract and market forces continually ratchet prices higher, the challenges associated with biofuel development become all that more acceptable to take on. Theodore Roosevelt felt, “Nothing in the world is worth having or worth doing unless it means effort, pain, difficulty… “ It simply requires an acknowledgment that despite the criticisms or technical complications, the results will be worth the costs and difficulties to ensure much needed alternatives are made available.