Thursday, March 1, 2012

What's the Matter with Gas Prices?

A few days ago, I saw this picture posted on Facebook that gave me the urge to launch into a bit of a tirade, so what better place to do so than on here? In any case, the picture was of a post-it note on a gas pump that said the following:
"Hey there voter! Do you remember that on Inauguration Day 2009, the national average for a gallon of gasoline was about $1.78? How's that "hope and change" working out for you?"
Well, the long and short of it is that this statement is misleading and wrong in a number of ways. It also made me look into the back-and-forth debate about rising gasoline prices going on right now. I'd like to clear a number of things up about that. Right now, there are a number of misconceptions floating around that blame the rise in gas prices on one of two things: President Obama's policies, or the Federal Reserve. Well, let's take a closer look at each argument, shall we?

For starters, let me quickly explain why the statement above about cheap gas in 2009 is false. Deep recessions cause huge shortfalls in demand. As any economics student would know, a slack in demand leads to lower prices. The rise in gas prices reflects in part an increase in demand as the global economy slowly recovers. There are a number of factors that play into the price of gas, but first let's look at what factors aren't behind the recent rise in prices.

Well, right now, the argument against President Obama is that a number of his policies are driving gas prices up. Before I take a closer look at the specifics, let me be very clear about one thing: Presidents have very little control over gas prices. Which is why I think criticizing the President for high gas prices is unfair, whether it be Obama right now or Bush in mid-2008. Well, the first attack on Obama is the assertion that his blocking the Keystone XL pipeline from being built is driving up gas prices. Well, first of all, how would blocking a pipeline from being built drive prices up? If anything, they would stay the same. It isn't as if, upon the pipeline being blocked, all oil refineries decided to raise prices out of spite. It just doesn't work like that. What's more, if he had approved the pipeline, gas prices wouldn't have gone down immediately, building a pipeline takes time. More importantly, though, is the fact that building the pipeline would actually increase gas prices in many states, according to a study by Cornell's economics department. The reason behind this is the fact that the pipeline would allow oil to be piped south to the coast and sold for a higher profit in export markets rather than in the U.S. So the idea that the Keystone XL pipeline is some sort of panacea for higher gas prices is dubious, at best. 

Another assertion against Obama is that he's cut domestic oil production. Well, that's simply not true, domestic oil production is at an eight year high. The degree to which Obama can take credit might be debatable, but he certainly hasn't cut domestic drilling. Republicans also like to criticize Obama for wanting to end subsidies and tax breaks for large oil companies. While this is somewhat unrelated, a study by Loyola University suggests that, historically, for every $1 billion spent in subsidies on oil and gas companies, we'd get a $150 million return. Yup, we're really getting our money's worth there, huh?

Next up, people blaming the Federal Reserve's monetary policy for the rise in gas prices. They say that the low interest rates have caused the exchange rate of the dollar to decline relative to foreign currencies, making imported oil more expensive in dollars. There are a number of things wrong with this, so I'll take it one at a time. First: the Federal Reserve does NOT CONTROL PRICES. There's such a thing as price theory. Markets generally determine prices of things, we're not living in a centrally planned economy, contrary to what some would have you believe. Comrade Bernanke isn't trying to pull a fast one on us. Supply disruptions due to the Arab Spring are still going on, tensions with Iran are on the rise, and increased demand for oil in rapidly developing nations like China, India, and Brazil are driving prices up. Who knew that when people get richer they actually want to drive more? Well I sure didn't. When demand for gas goes up, so does price, when supply decreases, price goes up. If you don't believe me, take someone else's word for it: the Energy Information Administration says that world crude oil prices account for 76% of the price of a gallon of gas. What's more, here's what they have to say about the Fed's secret agenda to raise gas prices:
"Despite these many possible explanations, the actual correlation between oil prices and exchange rates has not been stable over time, and was close to zero for more than half of the last decade."
That evidence is really starting to pile up, isn't it? Even if the Fed was driving (heh, puns) up gas prices, raising interest rates right now would be incredibly disastrous. High gas prices might be a drag on the economy, but raising interest rates, as any economist would tell you, is contractionary for an economy. In other words, I hope you like double-dip recessions.

So the next time you hear someone griping about gas prices and blaming Obama or the Fed, here's what you need to know: they have no idea what they're talking about.