With gas prices having risen forty cents in the United States on average since last February, some are blaming President Obama. Most Americans understand that the price of gasoline domestcially rises and falls in approximate correlation with the price of crude oil, which of course is needed to make the gasoline. However, there is an erroneous tendency to reflexively assign blame or credit to the president for the state of gas prices. This is not to say that such claims never have any merit, but the reality is far more complicated. In order to assess whether this would be fair, it is first necessary to explore the factors that enter into determining the price of a barrel of oil.
First and foremost, like stocks, the price of oil is determined on exchanges by the actions of buyers and sellers all over the world. On these exchanges, various “brands” of crude are traded, pumped from different parts of the globe. Because the degree of refinement needed for these different types of crude varies (depending on the level of impurities they contain), and because each oil-exporting country is geopolitically unique, some price divergence is inevitable. On the whole, however, when the price of one brand rises or falls, chances are the others do likewise. This is because oil price is largely driven by prevailing global macroeconomic conditions, or more precisely, the perception of prevailing global macroeconomic conditions.
But the price of oil can also be influenced by something else — the strength or weakness of the U.S. dollar. This is because the aforementioned global brands of oil are priced in the American currency, which means that all other things being equal, there is an inverse correlation between the price of oil and dollar strength. If investors are bearish on the U.S. dollar, they will offload at least some of their greenbacks and take on other assets such as stocks, precious metals, and commodities (such as oil), thereby sending their prices higher. In addition, they will seek to short the dollar versus other currencies whose value they think will appreciate. Hence, in the wake of both rounds of the Federal Reserve’s inflationary quantitative easing, asset prices rose while the value of the dollar fell.
Interestingly, the better the global economy gets (or is perceived to be getting), the higher the price of oil is likely to go, and often without much regard for the ratio of actual supply to demand. Each week, the governments of major economies release important economic data concerning unemployment, retail sales, home sales, purchasing managers’ indexes, and other information. Releases that show marked improvement can send the price of oil higher, especially if the data is seen as part of a wider bullish trend. By the same token, rising oil prices may inhibit economic growth because increased energy costs can discourage production and consumption alike.
The truth is that on a given day, it often isn’t clear why oil prices rise or fall. Did oil spike because of escalating tensions vis-à-vis Iran and the fear of a possible disruption in the supply of oil from the Middle East? Or was it because unemployment in the world’s largest economy decreased more than expected? Or maybe oil rose not because of macroeconomic factors, but because of technical considerations and was caused by the previous day’s close above $100. (Of course, explaining oil price action as a result of technical analysis is a whole other matter.)
Whether you’d like to blame the president for high gas prices or not, it is crucial to understand these ingredients of oil’s price discovery process. In the next article, we'll look more closely at Obama's policies and determine to what extent they have contributed to higher gas prices, if any.
Photo Credit: Wikimedia Commons
The Discussion
OPEC has 12/13 members. These 12/13 men get together on a regular basis and agree to how much oil to produce. In every other industry, this would be price fixing and the participants would be in jail, however somehow this group gets away with it.
Michael,
Great article. I'm looking forward to the follow-on. Wouldn't it be great if explaining higher gas prices were that simple, but as you explain, it's speculation on the commodity markets influenced by many factors. Of course, if the logic holds for blaming Obama, then those doing the blaming would have to give him credit when prices drop; pump prices fluctuate. That said, I believe only 2 President can be directly blamed for increased gas prices, Nixon in 1973 where his action concerning Israel caused the Arab oil embargo and Carter in 1979 for deregulation.
Pres. Obama should not be held single-handedly responsible (yet-per Keystone XL). As we are still an importing nation, much has to do with output from our suppliers particularly those in OPEC, demand trends in Canada & Mexico, and various geopolitical situations around the globe.
Santorum blames Satan and Obama. Or is it Satan Obama?
3 Replies
2 Replies
1 Replies
So what I get from this is that gas/oil prices are primarily controlled not by the policies of any government or group of govs. but by a handful of nameless people who sit in rooms and trade commodities. These people are accountable only to the people for whom they make money, people who are already insanely wealthy.
I know this is an oversimplification of a complex system, but where is the control? It does not appear to be in the hands of people for whom the welfare of any large percent of the world's population is a prime concern. I find that quite troubling. Looking forward to the next article.
19 Replies
2 Replies
1 Replies
15 Replies
12 Replies
It's all politics. That's all.
The president gets blamed for anything and everything that happens on his watch.
When gas prices were rising under Bush, every Democrat I know squarely blamed him for it. "He's trying to help his oil buddies, he's not doing anything to stop it," blah blah blah.
Now when it's happening under a Democrat President, the Republicans are blaming him.
It's all so stupid.
Very good and accurate article. Kudos. Good setup for the next article which will be even more interesting. Quantitative Easing has repercussions. I have met several on PM who think we can just print money without regard to these considerations as though we have found the proverbial money forest (would take more than just a tree). The overall causes cannot be just attributed to Obama as they have been going on for decades. Previous GWB administration for any QE does not belong to Obama. Only QE afterward - and even then, it always belongs to the Federal Reserve which is a separate but root cause of much of the price increase pressure or stated another way deflation of the dollars currency value. The root of all evil being greed? Maybe so.
Price of gas when Obama took office: $1.80
Price of gas today: $4.00
6 Replies
4 Replies
3 Replies
Great piece. The price of oil is determined by a whole barrage of factors outside of Obama's control (except maybe the US unemployment bit, you can blame him for that).
But regardless of which factor drives it, I am applauding the rise in prices; they could not be high enough for me. Without sky-high prices there is no economic incentive to invest in cleaner technologies. As oil prices head upwards, green-tech becomes more and more competitive.
8 Replies
2 Replies
1 Replies
3 Replies
2 Replies
The elephant in this room is America's dependance on oil & its total disregard for the coming withdrawal. If we could somehow quit bitching about the production of fossil fuel and get serious about trying to find alternatives, we could claim to be wiser than many.
Maybe he's not 100% responsible, but he certainly hasn't done anything to help.
10 Replies
7 Replies
5 Replies
America is to blame for increasing American gas prices.
America has FAILED to address Strategically becoming Energy Independent first voiced by President Carter forty years ago.
America has been held hostage paying blood and treasure for forty years allowing our economy to be impacted by foreign nation's supplying oil at the cost of environomental destruction we ignored.
Whether anyone wishes to admit it or not, only American can solve its addiction to oil and only America is to blame for the price of that addiction.
1 Replies
Michael: it's good to talk about this now. I notice you're planning a second article, too.
We've had a relatively mild winter in the US, which has meant that those households which use oil as a means of heat (god, in this day and age, too...I can't imagine!) HAVEN'T had to buy as much of it. CNN said just yesterday that they've saved something like $400/household on fuel just over the winter.
There's a seasonal component to refining oil; it apparently takes time to switch over from refining heating fuel to refining for gasoline - that may have some bearing on the price of gas right now. But the largest component of the price rise is pure market speculation, which is of course, why we need more strict regulation of trading.
http://westorlandonews.com/2011/06/06/koch-brothers-in-forefront-of-oil-speculation/