Why Obama can't control gas prices
Many of us fail to understand a near-maxim of gas prices: No one can really control them and certainly not an American president. And we should know why that is the case since the price of gasoline impacts us all and the global economy.
President Obama is being lambasted by Republicans for not doing enough to lower gas prices. And that can hurt him politically because according to a recent Reuters/Ipsos online poll, 68 percent of Americans disapprove of how he’s handling gas prices.Skip to next paragraph
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Republicans argue that Mr. Obama should do things like “drill, drill, drill,” build the Keystone pipeline, and exploit America’s natural gas. John Boehner, Speaker of the House of Representatives, has accused Obama of leaving the national gas tank on “E,” and the gas-price issue has sparked a TV ad war between Republicans and Democrats. Meanwhile, Newt Gingrich has promised $2.50 per gallon gas.
And so the president responded this week by asking Congress to give regulators more power to curb speculation in the oil market.
Such curbs might work but only if Congress agrees, the curbs are extensive, foreign oil markets follow suit with similar curbs, and traders see them as serious and lasting. Even then, Obama will only be one of many actors involved.
Many of us fail to understand a near-maxim of gas prices: No one can really control them and certainly not an American president. And we should know why that is the case since gas prices impact us all and the global economy.
Let me tell you a little story.
I visited the headquarters of the Organization of Petroleum Exporting Countries (OPEC) in May 2003. OPEC leaders were happy to tell me that they had created a price range aimed at keeping oil prices roughly between $28 to $35 dollars per barrel (in New York Mercantile Exchange oil prices).
They showed me that they had kept oil prices in that price band for 95 percent of the days between May 2001 and May 2003. They increased oil production when oil prices rose toward $35 dollars per barrel and decreased production as it approached $28 per barrel. This way they could make good money without having prices rise so high that others would have an incentive to develop alternatives to OPEC oil.
Well fast forward a few years. Oil prices rocketed from $50 per barrel in February 2007 to over $147 per barrel in July 2008. So much for OPEC’s price band. If OPEC failed miserably to control prices over time, what can an American president do – or any actor for that matter?
It’s vital to understand why oil prices are so hard to control, if we are ever to going to get a grip on this issue. First, since 1983, oil has been traded on futures markets. The combined action of traders who buy and sell oil futures decides the price of oil at any time. If you think Obama or any actor can control these prices, that means you think they can control markets.