Today, a conservative advocacy group launched the previous ad to coincide with President Obama’s two-day tour promoting his energy policy. The ad contains a number of data points that lend credence to the right’s view that President Obama’s energy policy is primarily responsible for high gasoline prices.
That said, is President Obama really primarily responsible for these increases?
The left would likely retort that prices are high not because of Obama’s energy policies, but despite them. Many liberals would further contend that financial speculators are primarily to blame for these increases.
While I have a definitive view on this topic, I thought it might be more interesting to have readers debate the issue in the comment section, as well as register their views in the following poll.
I’m looking forward to a very active and lively debate.
Reflections of a Rational Republican 
The causal link between the presidency and a global commodity price is tenuous. Consider President Nixon in 1973 and the Arab oil embargo. In that case there was an action and reaction causality. Today we have the developing nations of India and China consuming oil in increasing quantities. When I traveled China on a bicycle in 1985 there were very few vehicles. Now when I cross the street in Beijing it is taking your life in your hands. The world has changed. Blaming either George W. Bush or Barack Obama for the price at the pump is great politics but it has little basis in fact. True the United States foreign policy towards Iran and the Straits of Hormuz indeed have an effect on the price of crude and speculation would have some effect on the price, as would the Saudis capacity to pump. Remember OPEC? I do not recall President Obama as having a seat at that table of OPEC yet somehow he could bring the price down by taking some imaginary action.
The complexity of our global economy today has very little to do with the economy under Presidents Eisenhower, Nixon or Reagan. The end of the Cold War has brought about a global economy in a way we have not seen since before World War One. The population and the overall wealth of citizens in China and India are drivers of the price of gold and oil far more than a chief executive.
Ray,
I agree with you. The question now is: What are the main factors driving this increase?
I have my own theories, but I would rather hear theories from readers before throwing my views out there. Plus, my readers are a heck of a lot more interesting than me. 😉
To tell you the truth, I would love to say it was Obama’s fault. I would love to say that he is 100% to blame. But I’m just not sure. Yes, increased drilling would lower prices. Yes, less regulation on the industry would lower prices. But is he responsible for this huge explosion in price? I honestly don’t know. I admittedly don’t know that much about how prices are affected (other than supply v. demand). I would love to hear what you have to say.
Patrick,
I agree that I would love to blame Obama for the price increase, and there are certain actions that he took at the margin that could have put an upward bias on prices like less drilling in the Gulf and delaying the opening of the Keystone pipeline. That said, there are other far more direct forces acting on gasoline prices that have nothing to do with Obama. That said, I am going to reserve my views until a bit later on as more people “speculate” as to why prices have risen so much recently. 😉
It’s nice to see that others share a more reserved view. As I said, I’d love to pin it solely on him, but there are many other factors as well.
Yes, BP’s drilling “costs” probably increased after that platform blew up in 2009. In an actuarial sense, other people were paying costs BP hadn’t been paying.
wikipedia.org/wiki/Deepwater_Horizon_oil_spill
wikipedia.org/wiki/Externality
US output isn’t as sensitive to energy cost changes as in 1970s.
The economy continues to recover.
Oil will never be “cheap” again (at “same” volume), because extraction costs are higher now. Shifting to natural gas will give nearterm biggest savings.
I don’t think Obama’s at all to blame for high prices, nor was Bush in 2007. I’d say it’s a global recovery increasing demand (not sure if that’s true, just a guess), oil production remaining steady from the Persian Gulf, and fears of war in the region leading to some legitimate speculation.
Scott,
I think Obama deserves some blame, but it is at the margin (i.e., <5%). However, aside from that, I agree with all of your reasons – a global recovery, and tension in the Middle East.
That said, I think there are several other reasons affecting the price as well, but I'll leave that to other folks to figure out…for now.
Well, and after this, let’s vote on whether the Earth orbits the sun, and whether we can turn lead into gold.
Or we can just, you know, look up the answer to a factual question:
I’ve written about this; here are some charts, here is the National Review complaining about politicians’ demagoguery over the president’s control of oil prices (in 2004, needless to say. Today that’s contrary to the interests of the Party, and not to be disseminated) along with some links to studies about the impact of drilling.
None of this means, on its own, that we shouldn’t drill more. But folks like Mitt Romney are lying that we can wean ourselves from foreign oil, or even affect the price, by doing so.
Of course gasoline prices aren’t correlated to domestic oil production, because, as you say, oil is a globally traded commodity. However, the argument that the US shouldn’t increase domestic oil production because it won’t lower the global price is like arguing the sky is green. Any action that increases supply at the margin has a huge impact on oil prices. This is precisely why the Saudis’s 1-3 million barrels per day (I may be off by a couple of million barrels here) spare capacity has a HUGE impact on oil prices in a 86+ million barrel per day market.
Of course oil supply is only one variable impacting the gasoline price. Demand is also another huge factor. I haven’t down the analysis yet, but I’d be willing to bet that the correlation between gasoline prices and GDP growth is extremely high. Another big driver of gasoline prices is refining capacity. Right now that appears to be a key bottleneck, and explains why gasoline prices have risen far faster recently than crude oil prices have.
There is yet another huge driver impacting gasoline prices that is tied directly to policy-making (just not presidential policy) that no commenter has pointed out yet. I’ll wait to see if someone does before I point it out.
Create a real or imaginary “shortage” and the price goes up until the market won’t tolerate it. The resulting overstock brings prices down.
Another theory is that the long term price of oil has to do more with the “true” value of the dollar. Shorter term variations are due to demand, supply, and hedging (speculation). Currently, about 1/100th of a barrel of oil will buy one a dollar.
You nailed it. Since commodities are denominated in dollars, and the dollar has been depreciating due to loose monetary policy, the price of oil has risen.
A quibble – why only three options? how about uncertainty over what’s going on in the middle east? how about increasing demand from china, india, brazil, africa? There’s probably hundreds of factors playing a role in higher prices
Exactly. That’s why I included the catch all “Other.” I know it’s imprecise, but I didn’t want to complicate things unnecessarily.
Oh, yeah. ‘Other’ must include Beelzebub. ;-D
BTW, AEI and others claim that keystonexl pipeline would “open” Canadian tar sands oil to the world, thereby increasing cost in the US.
However, sales of refined products would help US balance of trade.
And OT, kudos for being a levelheaded Republican. They’ve become relatively rare on the internet.
Could you spell this out for me a bit?
If the value of the dollar is declining, then the fact that it takes more dollars to buy oil doesn’t matter– not in real costs, anyway, only nominal. What am I missing?
The background here is, all world retail gasoline prices move exactly in tandem. See: http://grist.files.wordpress.com/2012/03/bingaman-gas-1.jpg?w=630&h=434
If an administration’s policy can affect that price, it’d have to be through some seriously long-term stuff (other sources of energy, maybe reducing worldwide demand via increased efficiency standards (but there’s the pesky rest-of-the-world demand there too)), or through instability in oil-laden countries.
That’s right. Part of the big price spike is due to inflation – hence the nominal price rise.
I also agree that there are many long-term policies that can bring down the price. I think the Obama administration has done a few good things in this area, but has ignored other things. For one, it raised CAFE standards, which force auto manufacturers to improve efficiency. Of course, in an environment in which people are replacing cars only once every 11.1 years, this policy will take a bit longer to effectuate than it has in the past.
The areas where the administration has come up short is not opening drilling in ANWR and other areas. At the margin these things bring down prices over the long haul. In the face of peak oil policy makers should be fully exploiting alternative transportation technologies and squeezing as much oil from the ground until we get some cost effective viable alternatives. Obama has done plenty of the former, but not enough of the latter. Republicans call for the latter, but ignore the former. We need both.
Short term, there are other policy actions a president can take. For instance, opening up offshore drilling and releasing oil from the SPR. Obama’s moratorium on drilling put upward pressure on oil prices (though politically, he had to have a moratorium for some period of time in the wake of the BP oil disaster). He opened the SPR in the wake of the Libyan conflict for instance. So, one can legitimately state that some policy actions Obama took were not helpful, though one would have to concede that some other actions he took were helpful. The problem is the President’s short-term policies contributed at the margin to pricing increases, while some of his long-term policies like CAFE will likely help bring down prices.
But there hasn’t been much inflation, certainly nothing that varies from the previous decade. See: http://www.clevelandfed.org/research/data/us-inflation/chartsdata/index.cfm
The areas where the administration has come up short is not opening drilling in ANWR and other areas. At the margin these things bring down prices over the long haul.
That’s a commonsense-sounding argument, but it’s an empirical assertion, and I don’t think there’s evidence to support it.
I mean, I could say, “increased investment in coffee production in Oklahoma could increase supply, thereby bringing coffee prices down.” It’s only true if we can manage the unlikely feat of growing enough coffee in Oklahoma to affect the market. I think that’s where we are with our oil production– please correct me if I’m wrong.
As I mentioned above, the US doesn’t have enough supply to affect the price. See this article from ’08 on what opening ANWR would have gotten us: http://uk.reuters.com/article/2008/04/29/us-bush-oil-anwr-idUKN2934033020080429?pageNumber=2&virtualBrandChannel=0&sp=true
(A quick Google search indicated that current Saudi production is around 10m bpd, just for frame of reference; please correct me if I’m wrong).
Now, as I said above, the simple fact that drilling won’t affect the price isn’t, on its own, a conclusive argument against drilling.
But it does mean that Mitt Romney is– as is all too common for the out of power party, see Bush 00 and Kerry 04– falsely ascribing magical powers over oil prices to the president.
As the article I quoted above put it: “U.S. oil production is back to the same level it was in March 2003, when gas cost $2.10 per gallon when adjusted for inflation. But that’s not what prices are now. That’s because oil is a global commodity and U.S. production has only a tiny influence on supply.”
Personally, I am inclined to want to drill in ANWR, but I can’t say it’s a strong preference, because I know roughly nothing about the counterargument. Environmental issues don’t interest me. That’s just a default inclination, not a conviction I’d care to defend! Nor do I know enough about the offshore drilling situation to have a strong preference. Certainly, no one wants another Deepwater Horizon BP spill to happen. Dunno where we are on preventing that & ramping up production, & I don’t know how much production we’d get out of going all out.
You are right that general inflation has been low for everything but food and fuel prices. Moreover, the CPI estimate for inflation typically backs out food and fuel prices – hence the apparent disconnect.
On Saudi Arabia, your figure of 10 mbpd is correct for average capacity. Spare capacity is what the Saudis can rapidly bring online above and beyond this average capacity in a pinch. I believe global spare capacity is something like 5 mbpd and Saudi Arabia accounts for something like 3 mbpd of it, making that country a strategy ally for the United States.
So even incremental capacity can make a big difference even if it is as small as ANWR.
The Saudis could ramp things up an extra 3m bpd, because they have an awful lot sitting there. Drilling ANWR in 2001 gets us an extra not quite a third of that in 2020– and that’s it, the peak amount from that area, forever. Those 780K bpd are better than a sharp stick in the eye, for sure, but not enough to move markets, either.
I disagree that they are not enough to move markets. They will move markets to some extent. The key question is how much. I agree that they probably wouldn’t move markets significantly, but they would move them lower than where they otherwise would be.
Respectfully, Sean, I’m just not sure there’s empirical support for that view. As I’ve said, I could definitely be wrong, but everything I’ve seen suggests that we lack the supply to move markets even by an insignificant amount.
“Respectfully, Sean, I’m just not sure there’s empirical support for that view.”
Maybe not, since it takes so long to get to peak production. That said, I think classical economics supports the argument well enough.
classical economics supports the argument well enough.
This is a fine situation for classical economics. Indeed it does support the view that additional supply will reduce price… contingent on our having substantial enough supply. That’s the whole question here. I haven’t seen empirical support for the argument that we do.
“contingent on our having substantial enough supply.”
It has nothing to do with having a substantial enough supply. If you have more supply, the price will move. The key question is how much it will move. I think you are right to conclude that opening ANWR wouldn’t move the price much, though it would still move the market in the right direction.
Delayed comment, but…
“Inflation” refers to the diminution in a currency’s domestic purchasing power, and has (as Reflectionephemeral pointed out) been pretty low lately. More relevant to this discussion (of a global commodity) are the recent trends in currency exchange rates–where the dollar is indeed “weakening” against many other currencies (the Euro, the Rupee, the Ruble, etc). While the dollar’s domestic purchasing power is not independent of exchange rates, the correlation is surprisingly loose.
In short, yes, the *international* weakening of the dollar offers a significant *partial* explanation for high gas prices.
Your point is well taken. However, we do not “think” in terms of constant dollars. We evaluate (a kind of “thinking”) the worth of an item by counting up how many of today’s dollars we would have to give up to own the item. You other point is also well taken. Gasoline (oil also) is a huge worldwide pool filled by producers and emptied by users. The actions of one or two politicians or even of a fairly large cartel have only temporary effects on today’s price. Arguably, in a process initially put in place by J. D. Rockefeller and Standard Oil, the “real cost” of fossil fuel for the average person has gone down.
Thanks for the reply. I definitely agree that at the end of the day, economics is a behavioral science, & we should look to our understanding of how humans actually act to understand policy. That said, it seems to me that that point is answering a slightly different question– is Pres. Obama to blame vs. will he be blamed.
I think he is to blame because he supports (silently) the long positions of futures traders which will raise prices and inhibit fossil fuels. President Obama is committed firmly to non-fossil fuels as well as using a little fossil fuel as possible. He will be blamed under the theory that whatever happens on a President’s watch is somehow his fault. I expect gasoline prices to go down and Mr. Obama will take credit. However, if they go up, he will blame Mr. Bush and the evil oil companies.
BP gulf spill was in 2010, not 2009. (my error above)
Oil prices have been dropping and it appears gas prices have peaked and are expected to drop, perhaps significantly. Question: will the same people who blame Obama for rising gas prices credit him for lowering them?
I think any drop is temporary. Gas prices typically peak in the summer. I expect this year to be no different.
However, I agree that the first people to blame Obama for high gas prices would be the last to give him any credit if they fall.
Oil drops to $90 for first time in almost 7 months. That writeup mentions a pile of factors– increasing domestic supply, uncertainty in Iran, slowing European & US economies, Chinese demand, Saudi production, etc. So, who knows. It’s only an AP article, so it’s not particularly definitive, but, well, that’s how the news is reported, at the least.
Your point above, about a correlation between GDP growth & oil prices, seems sound to me.
“Your point above, about a correlation between GDP growth & oil prices, seems sound to me.”
Yeah, that’s what scares me about this drop. Other commodities are broadly down as well. The only sign that doesn’t point to a double dip recession is that housing sales are up 3.3%. What’s also interesting about it, is that the Republicans are conspicuously silent about it. And I’m a Republican…