“What Does That Have To Do With The Price Of Oil In China?”

September 30, 2011

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During President George W. Bush’s first term my wife, kids and I were still living in the United States, and heard a steady stream of assurances from the media that the president was craftily jacking up the price of gas at the pump to benefit his and Vice President Dick Cheney's cronies in Halliburton.

When it got closer to the 2004 election the media switched things around somewhat, assuring us that in reality “Big Oil” was controlling the price of gas at the pump to ensure the re-election of President Bush’s administration.

Although the question of why, if Big Oil could control the price of gas at the pump at will like that, they cared who was in office, was left unanswered.

As pseudonymous industry observer Albert N. Milliron noted, under the Bush administrations, the media drumbeat was “George Bush the Oil man is pocketing the profits, Bush is allowing prices to increase for his big oil supporters.” And now that President Obama is in office, the media's explanation has suddenly switched to blaming “world events” controlling oil prices.

Down 9 Percent to Up By 67 Percent?
For comparison purposes, gas prices during the first twenty-six months of President Bush’s first term in office increased by 7 percent, Milliron noted, adding that by the end of his second term, “the price had decreased by 9 percent from the time he took office (adjusted for inflation).” After the first twenty-six months of Obama’s term in office “the price of gasoline has spiked over 67 percent.”As political blog The Foundry noted in February of this year, “The day before President Obama was inaugurated the average price of a gallon of gas was $1.83. Today, that average is $3.14.”

Durn those “world events” anyway, you might be thinking, give me greedy Texas Big Oil cronyism any day, I get screwed a lot less. In fact, despite media misdirection, neither President Obama nor President Bush had much to do with it.

What makes the media’s sudden shift from blaming presidential mischief to telling you in 2009 that oil prices moved beyond the President’s control to being set by “world events” even more odd is that President Obama specifically promised to jack up energy prices -- in September 2008, candidate Obama’s Energy Secretary in-waiting, Steven Chu, said “Somehow we have to figure out how to boost the price of gasoline to the levels in Europe.”

But before you chalk that up as one campaign promise President Obama appears fully intent on fulfilling, the fact is he couldn't have accomplished that all by himself if he tried.

Gas Under $2 A Gallon Under President Bachmann?On the other hand, Republican presidential candidate Michelle Bachmann recently promised that, if elected, her administration would get the price of gasoline down to about two bucks a gallon. There are a number of reasons why we wouldn’t want a Bachmann presidency, such promises are one of them.

Why not? Are we opposed to $2 gas? Of course not -- we currently live in New Zealand, where gas costs roughly US$6 per gallon, and of course the best swim club would be the one 45 minutes away, not the one a few minutes down the road. But we’re uncomfortable when any politician proposes monkeying around with market forces to achieve partisan political ends.

Green columnist Jim DiPeso does a good job explaining what does, in fact, control oil prices, and why posturing by political candidates is just that. The reason for the price of oil can be summed up, as according to basic economics the price of pretty much anything can be summed up in two words: India and China. No, sorry, that should be “supply” and “demand.”

Is salt expensive? No. Why not? We have a lot of it. Are diamonds expensive? Sure are. Why? Because De Beers has decided that there will be relatively few of a girl’s best friend, so which ones as there are will command higher prices.

Now, the problem with oil is that it’s a worldwide-demanded item. The rarity of lutefisk doesn’t mean it’s horribly expensive in Fiji since nobody there wants to eat it. Yet pretty much every country in the world demands oil.

Another factor is that the same barrel of oil works just as well in Beijing, Delhi, New York or Auckland. If oil production rises anywhere in the world that affects the global supply -- there’s no such thing as oil drilled in Alaska that only works in America, it can as easily be sold to the Japanese or Argentinians as to Americans. Which is why protectionist strategies are so stupid -- a president can say “You have to sell oil for $10 a barrel if you’re selling to the United States.” Fine, oil producers say, enjoy your solar-powered cars, we can sell all the oil we want to China, India and Europe and not lose a penny. No skin off our nose.

Bottom line, there’s precious little an American president, be it George Bush, Barack Obama or Michelle Bachmann, can do to affect many of the big-picture variables that pretty much control oil prices short of taking over Saudi Arabia. Now if any candidates were floating that idea...

Saudi Arabia, which is by far the most important factor in deciding the price of world oil by virtue of producing so much of it, is constantly playing a find-the-line game. Sure they could double their prices tomorrow and the world would have to pay them, but then we’d get serious about finding alternatives as the world economy was crashing around our -- and Saudi Arabia's -- ears. They could lower prices and sell a zillion barrels, but then, as DiPeso says, they might not have “enough cash on hand for King Abdullah to shush local malcontents who liked what they saw this year in Cairo's Tahrir Square.”

The Goldilocks Price of OilAs TheDailyGreen writes, Saudi Arabia and their OPEC cohorts are constantly searching for a Goldilocks price -- “Not too low, ensuring a hefty flow of dollars into cartel member treasuries, and not too high, ensuring that the cartel doesn't crash the economies of its customers and collapse demand.”

Other big-picture items give the oil market indigestion, and the president of the United States, despite whatever opinion he may hold of himself, has no control over most of them -- “hurricanes knocking out platforms in the Gulf of Mexico, militants sabotaging oil facilities in the Niger River Delta, Putin and company hatching murky political intrigues in the Kremlin,” as DiPeso says.

If a hurricane wipes out the coffee bean crop in Brazil you’ll see the price of a can of coffee skyrocket in the supermarket, since there’s less coffee to fill a pretty steady demand. When that happens what coffee there is gets pricier, because now more people want something there's less of.

Same way with oil prices -- a pipeline gets cut somewhere, that lowers the production, making oil more scarce, and prices go up. President Obama announces a ban on deepwater drilling, that takes more oil out of the world markets, and the price at the pump goes up.

Michelle Bachmann's Half-Correct, Actually.Now, candidate Bachmann has part of it correct: As president she can open up a lot more drilling. That boosts supply, which by itself yes, would bring down price. But there might not be enough oil to knock prices down to two bucks a gallon -- as DiPeso says, studies show we could probably squeeze out half a million barrels per day, but not only would it take years for that to come online, it’s a fraction of world production. If you can find a few million barrels a day, okay, let’s talk about price plunges, but half a million a day, no.

Plus if America brings more oil online, what’s to stop Saudi Arabia from cutting back its production by that amount? Or twice that amount, just to teach America a lesson?

Greenies say hey, as soon as we get those solar cars up and running we can thumb our noses at the Saudis. Maybe so, but we’ve been working on those for how long now?

No, as DiPeso, among others, say, the only thing that can really cut oil prices off at their knees is a serious drop in demand. And if that happens anytime soon it probably means bad news, like a serious depression where nobody can afford to drive.

This has always been the grim, cold comfort of bad economic times -- as The Wall Street Journal wrote in late September, retail gasoline prices “have fallen below $3 a gallon in places” in America, thanks to a sharp decline in crude-oil prices, and could go as low as $3.25 per gallon by November.

That’s the good news - bad news syndrome. The good news is hey, gas prices are coming down. The bad news is that it’s because, as the Journal says, “prices for oil, gasoline and other commodities dove last week along with world stock markets over concerns the global economy is headed for another recession... oil fell to $79.85 per barrel Friday, a drop of 9 percent for the week. Oil reached a three-year high of $113.93 on April 29.”

No doubt President Obama will be as quick to take credit for the international oil market’s drop in price as he will be to blame President Bush when market forces inevitably drive it up again, but don’t let that fool you. He’s just along for the ride like the rest of us.

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