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.
Norfolk, VA. — 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.
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.
Markets are unpredictable, impacted by greed, speculation, fear, global events, and economics – almost none of which Obama can easily impact, even if he tries to nudge actors to put curbs on speculation.
Second, even if Obama could impact some of these factors, all of them combine to shape the actions of oil traders in ways that nobody can easily guess. In fact, some studies show that professional money managers are no better than monkeys in predicting such markets.
Third, Obama could affect longer-term oil prices by spearheading a serious comprehensive energy policy, and working with China and India to do the same. But traders probably won’t sell oil futures now for a policy that will take effect in three, five, or 10 years, unless perhaps it is constructed and marketed exceedingly well.
Fourth, short-term measures like the ones Republicans are stressing won’t be enough to alter prices. For example, greater drilling in Alaska represents a drop in the global oil bucket. Moving America’s truck fleet to natural gas – a smart move – could impact oil prices, if that move were truly comprehensive and went into effect sooner rather than later. But those things are doubtful.
Fifth, American presidents are not all powerful as they are sometimes viewed or portrayed to be. Obama, like any president, has to work with others and faces many obstacles, which check his influence. For instance, agreeing on a comprehensive energy policy is no easy task, much less getting China, India, and others to join.
America should certainly launch a major energy policy that includes moving to hybrid and electric vehicles, as well as exploiting domestic natural gas as a bridge to a cleaner future. But let’s not be deluded into thinking that any one actor, much less the president, can do much about short-run oil prices. It’s a near maxim of modern energy that he can’t do so.