(by Mark McCutchan)
According to the AAA, the national average price of self-serve regular gasoline is now $3.86 a gallon – 30 cents more than a month ago and a dollar more than last year at this time.
President Obama gave a short weekly address addressing consumers’ gas price concerns last Saturday titled “Instead of Subsidizing Yesterday’s Energy Sources, We Need to Invest in Tomorrow’s”.
Whenever gas prices shoot up, like clockwork, you see politicians racing to the cameras, waving three-point plans for two dollar gas. You see people trying to grab headlines or score a few points. The truth is, there’s no silver bullet that can bring down gas prices right away.”
“But there are a few things we can do. This includes safe and responsible production of oil at home, which we are pursuing. In fact, last year, American oil production reached its highest level since 2003.
Increasing national oil production to lower prices is a Republican fallacy (hawked by 2012 contenders Pawlenty and Romney here) that has been adopted by Obama to appear to be “doing something” about high gas prices. But oil produced on U.S. soil does not go solely to the U.S. needs. It goes to the highest bidder on the world market, and if China outbids American customers, China gets it. Ramping up U.S. oil production at riskier, more remote and less productive sites will do very little to change the price of oil, or our future dependence on foreign oil.
On Thursday, my Attorney General also launched a task force with just one job: rooting out cases of fraud or manipulation in the oil markets that might affect gas prices, including any illegal activity by traders and speculators. We’re going to make sure that no one is taking advantage of the American people for their own short-term gain.
Given that the Obama administration responded not very aggressively to real Wall Street malpractice (discussed by WP here), why did the president so quickly jump to the conclusion that Wall Street lawbreakers caused gas prices to hit $4 a gallon?
President Obama reads the polls, and many politicos see $4 gas as a bad sign for President Obama’s reelection chances in 2012. “My poll numbers go up and down depending on the latest crisis, and right now gas prices are weighing heavily on people,” President Obama said at a fund-raiser in Los Angeles on April 21st.
The latest NYT/CBS News poll say 57 percent don’t like the way he’s handling the economy. American consumers don’t directly feel the budget deficit, but they do feel the hit to the pocketbook when a tank of gas costs $80 or more, and it colors their view of the economy and the country – 70 percent believing the country is headed in the wrong direction.
Who do Americans blame for high gas prices? Here are the results of the latest Marist poll:
36 % – volatility in the Middle East
34% – US oil companies
11 % – Obama and Democrats
10% – Unsure
7% – Congressional Republicans
3% – State and local taxes (?!)
Back to the President’s speech:
And another step we need to take is to finally end the $4 billion in taxpayer subsidies we give to the oil and gas companies each year. That’s $4 billion of your money going to these companies when they’re making record profits and you’re paying near record prices at the pump. It has to stop.
The President is right – it is pointless to give taxpayer money to Big Oil when they are making record profits. He’s wrong, though, about its effect– eliminating subsidies may only pressure the oil companies to hike prices in order to keep post-tax profits stable.
Instead of subsidizing yesterday’s energy sources, we need to invest in tomorrow’s. We need to invest in clean, renewable energy. In the long term, that’s the answer.
Again, Obama’s right and wrong – right that we need to switch subsidies to renewable energy, and wrong that it will affect pump prices in the next few years; it’s a long term investment that will be effective in lowering energy prices.
The Real Reasons
Here are the real reasons for higher gas prices – increasing demand, a relatively steady supply, and some futures trading by speculators worried over supply disruptions.
Demand continues to increase as the world’s economies continue to recover from our long recession caused by the 2008 financial meltdown. While U.S. oil consumption is recovering to 2008 levels, Chinese oil consumption continues to advance at a blistering pace (graph 1) because of high economic growth, population growth, and an even higher growth in the popularity of automobiles (graph 2)
Graph 1 – Oil Consumption – US (Red), China (Blue)
Graph 2 – Car Production – US (Red), China (Blue)
The supply of oil world-wide has been steady, but the oil production equipment in rebel-controlled portions of Libya, Sarir and Messina, has been knocked out by government attacks, and will be down for at least 4 more weeks. These two fields have a production capacity of about 400,000 barrels per day.
Last week’s gas price hike last week was aided by concern that violence during Nigerian elections would disrupt the production of crude oil used by some East Coast refineries, as well as continued anxiety over the turmoil in other oil-producing countries. And the Russian government announced Thursday it will ban exports of gasoline in May, to ease local shortages and price hikes. Since Russia exported about 4 million barrels/mo in January (latest numbers), this could further tighten the world gasoline market.
Futures trading may be a contributor to the price hikes, but it has a legitimate market function.
From the U.S. Commodity Futures Trading Commission:
Many people think that futures markets are just about speculating or “gambling.” Futures markets can be used for speculating, but they are designed as vehicles for hedging and risk management so that people can avoid “gambling” if that is not their choice.
So if an airline wants to hedge against rising jet fuel prices, it may want to buy a jet fuel futures contract that will make a profit if prices go up, balancing out the their increased cost of their jet fuel. If the administration is concerned about market volatility due to futures trading, a Tobin tax would dampen speculator action.
What To Do About the High Price of Gas
The high price of gasoline is just one symptom of our dysfunctional energy policy. Not only do we need to reduce our dependence on foreign oil, we need to reduce our dependence on all fossil fuel to keep our economy powered more sustainably and cleanly.
In the short term, we can do very little about the price of gas. President Obama knows it, and he’s trying to jawbone the markets down – not very effective for long – and move us to a less oil-addicted society to address the problem over the long run. We can all help out and save money by driving less, planning our errands better, and reducing recreational trips to ease the pain at the gas pumps.
In the intermediate term we can encourage our government to do much more, even before the 2012 elections:
* Promote public transport like high-speed rail systems to reduce gas consumption (most are electric), boost construction jobs, and strengthen our cities.
* Promote renewable American energy sources like solar, wind, and hydroelectric through effective tax policies and renewable energy standards. Clean energy development can also create over a million new jobs.
* Promote electric car technology through collaborations of the Department of Energy and private companies like this story: Google and 80 other companies are collaborating with the DOE to make it simple for drivers of electric vehicles to find parts and charging sites.
* Continue to promote efficiency through increased fuel efficiency standards for cars.
* Eliminate tax subsidies to the oil, coal, nuclear and ethanol industries to reduce the market distortions.
* Institute a carbon tax on fossil fuel. By itself it would not lower prices (it would probably raise them slightly), but it would be a powerful signal to the market that the era of cheap fossil fuel is over, and it finally makes financial sense to switch to renewable sources. A carbon tax may not have the touted “market efficiency” of cap-and-trade policy, but it is simple and adjustable. A carbon tax would have the added benefit of reducing climate change, and the tax revenue could be used to provide an offsetting tax refund, invest in renewable energy development, transition fossil fuel industry workers, and reduce the deficit.
Please write to your legislators, the President, and a letter to the editor of your local newspapers to support any of these ideas.