Gas Prices (gasp): What Bogeyman?

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Similar to politicians from the past, President Obama is pointing fingers at bogeymen for causing higher gas prices. In the past it has been toward people like me for driving a SUV, or non-hybrid mini-van as it would be.  Last week Obama created a task force to root out fraudulent speculators. Whether speculators are fraudulent or can impact the price of gas I will leave unanswered here, but the speculation about who is impacting the price of gas should include a much broader list.

Here are a few of the bogeyman that play a role:

  • The Federal Reserve: International gas prices are typically set in U.S. dollars. A depreciating dollar means higher gas prices because the exchange value of the dollar has fallen. Federal Reserve quantitative easing (aka increasing the supply of money) puts downward pressure on the value of the dollar making foreign goods relatively more expensive.
  • The Chinese: economic recovery in emerging economies is increasing the demand for oil similar to 2008 when gas prices reached $140 per barrel. Chinese oil imports have increased at a rate near ten percent per year. China’s growth in GDP exceeded ten percent last year. Demand for gas is rising in other emerging economies as well.
  • The Obama administration: An effective national energy tax intended to reduce CO2 emissions would increase the price of energy, gas included. In addition, though verbally fostering increased oil development within the U.S., in his weekly address he suggested that “[i]nstead of subsidizing yesterday’s energy sources, we need to invest in tomorrow’s.” I am not a great supporter of subsidies of any sort. Nonetheless, reducing subsidies to the oil industry is not going to have the implied result of reduced gas prices. And, importantly, politically determined investments have not proven economically or environmentally efficient; think ethanol.
  • Environmentalists: There have been no new oil refineries built in the U.S.since 1976. The high cost of building new refineries, in part due to high environmental regulations, has caused a squeeze on new building.
  • Egypt, Libya, and other politically oppressed oil exporting countries: Political unrest in oil exporting nations causes gas price spikes. This is in part due to supply disruptions and in part a result of expectations and hence behavior.
Therein sits a basic supply and demand model. Global demand has increased causing an increase in price. Supply, or production, has not kept pace with the rising demand. Regardless of who is blamed, the bottom line is that gas prices respond to supply and demand.

Given the push by the president to move toward alternative energy sources and reduce CO2 emissions, lower gas prices are not in his favor; lower emissions and lower gas prices are incongruous. Politicians that claim to strive for both are subject to be called oxymoronic.

Originally posted at Environmental Trends.

Holly Fretwell is a Research Fellow at PERC and an adjunct instructor at Montana State University where she has taught  introductory economics, macroeconomics, natural resources and environmental economics. She works with the Foundation for Teaching Economics, giving workshops for  high school teachers to improve their skills in teaching and...
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