The Obama administration announced last week that it would be investigating oil companies and oil markets to uncover possible fraud, price gouging and manipulation by speculators.
Are you kidding me? The president knows that the public is generally suspicious of oil companies, so this plays well politically. He also needs a scapegoat. It is sheer hypocrisy to affix blame to the oil companies when it is the administration's very own policies that are contributing to the problem.
If you believe in free markets and the free exchange of goods, there are several basic principles to keep in mind. Neither the president nor Congress nor oil companies sets the price of gas. In a free market, they do not have the power to do so. Gas prices, like other prices in a free market, are based on supply and demand or anticipated changes in supply and demand. It is ultimately consumers who "set" the price of a good by their buying or not buying. However, government plays a key role in the availability and supply of oil, which affects the long-term market price.
There are several factors contributing to the rise in gas prices.
One is called QE2, or Quantitative Easing, Round 2, the decision last August of the Federal Reserve to buy $600 billion of Treasury bonds. This pumped a lot of money into the financial markets. The administration was trying yet another technique to jump-start the economy and reduce unemployment. However, injecting more cash into the banking system is having a very bad effect on the U.S. dollar.
The weakened dollar has caused a large rise in commodity prices around the world in the past eight months. Everything we buy, especially gas and food, is going up in price. If you think it is hard for you to buy standard fare in the grocery store these days, think of people in poorer nations where their food budget is more than half of their income. The present unrest in the Middle East can be directly linked to frustration at higher and higher food prices.
Another factor in oil's current price was the decision by the Obama administration to enact a moratorium in the Gulf of Mexico following the big spill there last April. Even with the moratorium supposedly lifted, the Energy Department has been very slow to approve permits for new wells. Smaller oil companies have been pleading for opportunities to drill again. Some are going out of business. Jobs are being lost. Limited drilling translates to limited supply, which translates to higher prices.
Finally, there is so-called speculation. Oil is a commodity traded in markets around the world. Seeing what is happening, investors are buying more oil contracts for future delivery at marked-up prices. Anticipated shortages of oil and anticipated decreases in the value of the dollar feed into this buying.
The problem is not the investors, or "speculators," if you like the pejorative term. They are just the messengers for the markets. It doesn't solve the problem to shoot the messenger.
Whenever the topic of drilling comes up, the uninformed usually say, "Look, if we drill now, it will take 10 years to get gas to the market. It will have no impact on the price of gas." This demonstrates a lack of understanding of economics and of market psychology.
In July 15, 2008, when the price of gas was more than $4 a gallon and oil was at $145 a barrel, the Bush administration announced aggressive policies of drilling in the Gulf and elsewhere. Such previous initiatives had been blocked by a Democratic Congress. But common sense won out, and in five months, oil was just over $30 a barrel, a drop of 79 percent in the price of crude.
It is not the current supply of gas and oil that is driving the markets right now. It is the anticipated supply based on future expectations. That is why it is called a futures market. Oil is purchased months in advance based on estimates of market conditions down the road.
There are other variables in the petroleum markets, of course, including increasing worldwide demand, political unrest in the Middle East, weather factors and production issues at refineries. But the impact of the president's misguided and antimarket policies is tremendous.
The world is facing an economic crisis with rising prices for oil, corn, soybeans, beef — all food, really — and commodity prices. The price of gold is hitting a new record almost daily. Since QE2, the price of gold has risen 23 percent and silver is up 150 percent. Meanwhile, the Obama administration puts resources into investigations and hearings and political posturing, all of which does nothing to bring a gallon of gas to the markets.
George Michael lives in Williamsport and is a former principal of Grace Academy. His email address is email@example.com.