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The President and First Lady welcomed 30,000 from around the country for the 133rd White House Easter Egg Roll, April 25, 2011.
Dr. Peter Morici: When US gas prices
spike, owing to Middle East turmoil or hurricanes, conspiracy theories abound
about profiteering speculators. The truth is Americans are suffering from bad
energy polices - - politicians eager to sell pet projects and hoist blame onto
others.
In such a fit, President Obama offers fanciful alternative energy technologies
as a solution to rising pump prices and a task force to ferret out fraud in
energy markets.
Even before disturbances in Egypt, Libya and elsewhere, economists expected oil
prices to increase from their September lows of $75 per barrel to more than $100
a barrel by this summer.
Economic recovery is pushing up gasoline demand and jet travel; President
Obama’s restrictions on off-shore drilling are curtailing US oil supplies;
electric vehicles and hybrids won’t appreciably dent US gasoline consumption
before the end of this decade; and Chinese oil imports are growing 10% a year.
All Middle East strife did was accelerate the price surge.
When political unrest or natural events make future oil prices uncertain, big
consumers, like refineries and airlines, limit their risks by purchasing
contracts for future deliveries, and the cost of reasonably insuring those
contracts adds to prices.
For example, Egypt and Libya, alone, had the potential to disrupt delivery of 5%
of the global crude oil supply; however the short term flexibility of global
consumers to curtail consumption is very low—the immediate price effect of such
a loss in supply could be more than 25%. Measured against the September or
October prices, that would be about a $20 dollar jump.
When refiners, airlines and others purchase contracts for future delivery, if
the expected jump in prices is in the range of $20, traders on the other side of
those contracts bear the risks of even higher prices and need a buffer to offset
potential losses. Hence a $30 jump on a 90 or 180 day contract is hardly
unreasonable.
Between the effects of increased demand and tightening global supplies, expected
before the Egyptian rebellion, and continued concern that the democracy movement
could spread to autocratic and mildly repressive regimes like Saudi Arabia, a
price increase from $75 in September to $105 in April is quite reasonable.
Also, profiteering in the gasoline market appears equally remote. Prices have
increased about $1.10 gallon since September to $3.86 in April, while the cost
of crude oil has increased a bit more than $33 a barrel or 80 cents per gallon.
When market conditions improve, such as during the summer driving season,
refiners’ margins generally improve. Another 30 cents seems well within what
could be expected, and there appears to be little room for speculators in the
gasoline market to be taking an outsized slice.
Before readers pounce on refiners—refining, historically, is not a high profit
business. If margins don’t increase when prices are strong, those folks can’t
stay in business. It’s like hotel rates, seasonal fluctuations and unusual
events are built into the business model.
All this has profound effect on US growth. Economists expected that the economic
recovery could withstand a gradual increase in gas prices to more than $3.50 by
summer, but the sudden jump this winter and spring caused most forecasters, this
one included, to scale back first quarter growth estimates from 3.3% to
something in the range of 2.8%.
Add other festering problems such as the debt crisis in Europe, state
governments accelerating layoffs, uncertainty imposed by the budget and debt
ceiling melodramas in Congress, and business fears about the Administration’s
penchant to scapegoat and regulate, most forecasters are expecting the Commerce
Department to report Friday first quarter growth was closer to 2%. Already, new
unemployment claims are on the rise again, and the recent improvement in the
monthly jobs creation numbers may be short lived.
Americans could have it another way. US oil consumption is about 15.3m barrels a
day, with imports supplying 9.5m barrels a day and domestic production at 5.8m
barrels a day. Prudent emphasis on more fuel efficient vehicles—not just wiz
bang electrics—could cut domestic fuel consumption by 2.5m barrels a day,
renewed development of economically viable oil reserves could increase domestic
production by about 4m barrels a day, and imports could be cut by one-half to
two thirds.
While gas prices might still be high, the money Americans spend at the pump and
on better vehicles would stay at home to create high paying jobs, and boost
growth and living standards for all Americans.
More domestically produced oil would not add to environmental problems—those
have to be managed whether oil is produced in the United States or imported.
Indeed, greater reliance on domestic oil would be kinder to the environment,
because US policymakers are better able to require safe production methods at
home than abroad.
Instead, seizing on public anger about rising gas prices, President Obama fails
to take responsibility for his policies and relies on his best asset—his fine
speaking voice—to troll for votes by villainizing oil companies and faceless
speculators.
Such demagoguery imperils an already fragile American prosperity and debases the
presidency. All politicians need to run for reelection but Presidents are
elected to be statesmen and put the national interest above their own.
Mr. President, we are waiting.
The Real Cost of Higher Gas:
Peter Morici,
Professor, Robert H. Smith School of Business, University of Maryland,
