President Obama’s Role in Current Gas Prices

Newt Gingrich — Gas Price Fairy

If you have been following the news at all, you know that President Obama is catching a lot of heat over rising gas prices. He used his weekly radio address this week to talk about the issue:

Obama calls GOP gas price plan “a bumper sticker”

Most of his critics are way off the mark, for reasons I will get into below, but Newt Gingrich is perhaps the most out-of-touch with reality:

Gingrich: I’m the $2.50 gas president — Obama is the $10 gas guy

“If you would like to have a national American energy policy, never again bow to a Saudi king and pay $2.50 a gallon, Newt Gingrich will be your candidate,” he said to cheers. “If you want $10 a gallon gasoline, an anti-energy secretary, and in weakness requiring us to depend on foreigners for our energy, Barack Obama should be your candidate.”

Pandering to the Naive

I believe the reason people are so misinformed about the energy markets is because they are listening to people like Newt spew this sort of uninformed tripe. He is helping to dumb down the electorate by offering simplistic and unrealistic solutions to complex problems. Newt’s comments are either based on a fundamental misunderstanding of why gas prices are where they are, or he is just blatantly pandering to people he believes are too naive to understand the issues. Then again, when it comes to gas prices, logic goes out the window and far too many people are perfectly willing to believe all sorts of crazy things.

Let’s try to shed a bit more light on the subject. (Of course, “shedding light” often brings out comments from the sort of people who are ready to take Newt at face value, or who believe it’s all just about oil company greed).

As I noted in my previous column — Why Bill O’Reilly’s Gasoline Price Solution Doesn’t Work — I did two interviews on the subject of Obama and gas prices last week. One was with Brian Beutler at Talking Points Memo (TPM): The Truth About Political Attacks Over High Gas Prices. The second was with Alan Colmes from Fox News Radio.

In both interviews, I made the point that President Obama is absolutely not responsible for current gas prices. If McCain had been elected, gas prices would still be where they are, and Democrats would be using the issue against him. The reason for this is that projects that bring gasoline to consumers take years to execute. If President Obama declared tomorrow that oil companies could drill anywhere they wanted, it would have no impact on supplies (and by extension, fuel prices) for years. Further, there are no assurances that even this would moderate gasoline prices, because these prices are increasingly being driven by factors outside of the United States.

Oil is a Globally Traded Commodity

This last point is important, and it is critical to understand if you want to understand why gasoline prices are rising. If you look at consumption habits around the world, it is true that in the U.S. gasoline demand has plummeted. We might expect that we should therefore see falling gasoline prices. But the oil markets are not limited to the borders of the United States, and the U.S. is still heavily dependent upon oil imports (and hence, we pay the world price) for the fuel that we produce. As long as growth in developing countries remains strong, people there are happy to buy the oil products that the U.S. or EU is not using, keeping the price pressure very high. In a nutshell, the price of gasoline is not determined by U.S. presidential policy, but rather by how much people in India, Vietnam, or China are willing to pay for oil. Demand growth in those countries has been extremely strong even in the face of $100 oil, and that is a fundamental reason why there has been no gas price relief despite that fact that 1). Gasoline demand in the U.S. is down; and 2). Oil production in the U.S. has been rising.

If you really believe that Obama has a lot of control over gasoline prices, then ask yourself why prices are up all around the world. Why are people in the UK protesting gasoline prices? Do Obama’s policies drive up prices throughout the world? Of course not. Gasoline prices are responding to the same market forces in Europe, Asia, and even in oil-exporting countries like Canada. The fact that gas prices are up everywhere should tip people off that this issue extends far beyond the powers of the American president.

But there is a flip-side to this for Obama supporters, which I have written about recently: Are President Obama’s Policies Causing U.S. Oil Production to Rise? If President Obama is not responsible for current gas prices because of the lag time it takes for policies to have an impact and for projects to get implemented, then he is also not responsible for the current uptick in domestic oil and natural gas production. So you can’t have it both ways: If you want to give him credit for higher oil production, you can’t then dodge blame for higher gas prices. Either he owns both or he owns neither. And in fact, he owns neither.

So what then is the president’s role as far as gas prices or oil production? At best we can say that the policies a president puts in place today can make some impact on the markets in a few years. So five years from now we may be lamenting or praising President Obama’s energy policy decisions. We can of course speculate on how they may turn out. His policies may ultimately hurt supplies and raise prices, but they have no bearing on today’s gas prices. In reality, due to the increasing importance of consumers in developing countries, even long-term there isn’t a lot that a U.S. president is going to be able to do to impact prices. Obama could put policies in place that increase supplies, but that won’t necessarily result in cheap gasoline.

Conclusion: Don’t Rely on Politicians to Lower Gas Prices

Is there anything then that a president could do to affect domestic gas prices in the short term? Yes, there are a few options, but there are consequences to all. A president might convince Congress to lower or eliminate federal gasoline taxes, but that would result in a revenue shortfall that would need to be made up. It would also likely result in some increased demand, eliminating part of the benefit of the tax cut. The federal gasoline tax is only 18.4 cents per gallon, and one might imagine that if it was totally eliminated that prices might ease somewhat initially, but that might in turn increase demand so that consumers would not see the entire 18.4 cent per gallon benefit.

The government could also subsidize the price of gasoline as is done in Venezuela, where the cost is only a dime or so a gallon. This is also the case in some other oil-producing countries like Saudi Arabia. (Wikipedia has an entry on typical gasoline prices around the world). But these are countries that make a lot of money from oil exports. These countries also consume far less gasoline than does the United States. So if the U.S. embarked upon a program of subsidizing gasoline consumption, the costs would be mind-boggling. Further, I would argue that it makes very little sense to subsidize consumption of a depleting resource.

The most sensible thing that governments can do is to encourage a move away from gasoline dependence. In that case, even if prices continue to rise, the economy won’t be as susceptible to the price shock. In fact, when people ask me what they should do to protect themselves against high gas prices, the first thing I ask is “What do you drive?” Do your part to limit gasoline’s hold on your life, and you won’t have to hold your breath that a politician is going to solve this problem for you. They have been making empty promises for decades, and there are very good reasons why they (both Democrats and Republicans) have failed. So you should stop looking to them for the answer.