Throughout the 2012 Presidential Election and the GOP Primaries, Republicans hammered President Obama for rising gas prices since 2008. Presidential hopeful Newt Gingrich claimed gas prices could fall under two dollars if elected. Governor Romney, on at least two occasions during the national debates, said that gas prices had doubled under President Obama’s watch. At the same time, Governor Romney touted his North American energy independence by 2020 plan. And then there’s this:
Make no mistake, oil production, consumption, and prices are a big deal. Our global economy is a carbon-based one, and the United States alone consumes roughly 20% of global oil production. Families throughout the United States are hit hard by rising gas prices at the pump, so no wonder this question came up during the second (town hall) Presidential Debate:
“Your energy secretary, Steven Chu, has now been on record three times stating it’s not policy of his department to help lower gas prices. Do you agree with Secretary Chu that this is not the job of the Energy Department?”
I will address President Obama’s answer later on, but the most immediate answer is: do Democrats, let alone Republicans, want to dictate the price of oil through the federal government? Ignoring free market principles for a moment, consider the following options to reduce gas prices:
- Subsidize gas prices.
- Create a government program that gives free gas to the poor.
- Release oil from the strategic reserve.
With gas already averaging $3.57 in 2012, a $1.57 per gallon subsidy would be fiscal suicide. Likewise, a government program that gives free gas to the poor would costly. Moreover, the incentive to sell the gas at market prices would be high, and would essentially defeat the program’s intent. Releasing oil from the strategic reserve and flooding the market with cheap oil could only last for a few months at best and leaves the United States unguarded against oil shocks that could cripple the economy (which is why we created the strategic reserve decades ago). Better options must surely be out there, but it is clear that the options listed so far are no good.
There are two other factors that drive gas prices worth mentioning in the blog. The first is the global economy. Again, the global economy is carbon-based, and only when the global economy tanks do gas prices fall thanks to the sudden oversupply of crude oil. The second is inflation. Just as $.10 burgers and fries existed only during your grandparents’ days, surely $2.00/gallon gas is a thing of the past. The following graph neatly summarizes both of these points:
As seen above, 1998 (Asian Financial Crisis), 2002 (recession), 2008 (great recession) all caused gas prices to drop. However, it generally follows that crushing economic losses offset any upside in cheaper gas. Likewise, because the graph adjusts for inflation and shows all prices in 2012 dollars, Americans have not seen $2/gallon gasoline since mid-2003.
Governor Romney’s plan to energy independence brings up an idea yet to be explored in this blog: increasing supply by opening up large swaths of land to exploration and development. Indeed, increasingly supply is a good idea. Yet, there are problems. It is in OPEC’s interest to keep its revenues high, and OPEC can reduce supply to keep oil prices high. Further, and believe it or not, America is already the third largest oil producer on the planet. Marginal gains in oil production will be a drop in the already massive global bucket.
Perhaps the largest problem with increasing oil production is one that never once, in any one of the three debates, got any attention. And that problem is Deepwater Horizon. Deepwater Horizon highlighted the very reasons why ramping up production in environmentally sensitive areas can be an ecological and, for the fishermen in the Gulf, an economic disaster. Increasing supply is smart, but only if it is done in a smart and environmentally friendly way. Incidentally, the Keystone/XL pipeline decision, can be explained away in a similar fashion: there could be environmental consequences and if the oil is not sold here, then it will be sold elsewhere. And because oil is a global commodity, the pipeline’s effect on price will be negligible.
Under President Obama, oil production has indeed increased. In fact, oil production is higher now than at any point under President George W. Bush.
The flip side to increasing supply, and the one President Obama mentioned to answer the question posed to him during the town hall debate, is to reduce demand. While Governor Romney fell silent, President Obama highlighted efficiency. His plan to require a fleet-average 54.5 miles per gallon in all cars sold in the United States by 2025, on top of his 35.5 miles per gallon by 2016 announcement in 2009, is a good one. While it requires auto manufacturers to make substantial investments, auto manufacturers can spread the costs over time and pass along the costs to consumers. Consumers offset the higher costs by purchasing less fuel and ultimately come out ahead. In a world of increasing demand for a nonrenewable resource, increasing efficiency is the best option on the table.
The takeaway is this: because oil is a global commodity, it is the world market that sets the prices, and the best option in using a nonrenewable—and costly—resource wisely is to use it efficiently. Like horses and bayonets, cheap gas is a relic of the past, and any insinuation that President Obama is keeping gas prices high is as petty and as ludicrous as the billboard above.