A Little Bit of Liberty Goes a Long Way in Your Gas Tank
Can Newt Gingrich really lower gasoline prices to $2.50 per gallon? With his pro-war foreign policy, not a chance in Hell. Lately, all the talk about government control over gasoline prices coming from both sides of the isle is nothing more than political jockeying in an election year. There are many factors contributing to higher gasoline prices, most of which have nothing to do with national supply and demand. It's all rather technical and geopolitical, but I'll try to do my best to explain.
First, the United States has increased production of domestic crudes by 15 percent over the past two years, while domestic demand for petroleum has decreased. Take note of how many refineries in the Northeast has shut down indefinitely over the past year. So, it's not a problem of oil supply. However, our infrastructure for transport and delivering these home-produced crudes has not grown with the pace of production. The U.S. oil storage hub, for example, is land-locked in Cushing, Okla. Approving large-scale energy infrastructure update projects like the Keystone XL pipeline is a start to de-bottlenecking these supply channels. President Barack Obama dropped the ball on that "shovel-ready" job in a flailing economy that is also down-trodden with high gasoline prices.
Next, the U.S. financial crude contract, which is based of West Texas Intermediate crude blend, is no longer the international benchmark for crude prices. Around the spring of 2007, due to the land-locked storage hub at Cushing for WTI, the global oil market began favoring the London-based Brent crude contract, which represents a basket of Northern Sea blend of sweet crudes, as a pricing benchmark. Also, because the U.S. has become a net exporter of diesel fuel, and we import gasoline from Europe, prices tend to follow what is going on in the international oil market. The Brent crude contract can price up to $20-$25 per barrel more expensive than the WTI contract. In spring 2007, the WTI crude contract was pricing around $65 per barrel, and the Brent contract was pricing around $75 per barrel. Today, WTI is running about $106 per barrel and Brent at $125 per bbl.
Which brings us to the international oil market. The price of global crude shot up in response to ongoing political turmoil and war in Middle Eastern oil producing countries. The Arab Spring, uprisings in Libya, the talk of war with Iran and Syria all have increased the "upside risk" of oil prices globally. Due to economic sanctions against Iran, major oil consuming countries like China are forced to look for crude elsewhere. Add in supply disruptions in Libya or in the North Sea and you've got a hyper bullish market which results in higher global oil prices.
Also, do not forget monetary policy. All global oil is priced in U.S. dollars. This is one of the reasons why we can continue monetizing the debt. If the world's largest commodity was to ever transfer off of the dollar standard, the U.S. monetary complex would collapse. So, with that in mind, whenever the dollar gets weaker, the price of oil goes up and vice-versa. The U.S. Federal Reserve began cutting interest rates and inflating the dollar after the bank-inspired malinvestment crisis of 2008 led to the housing collapse and kick started the weakening of the U.S. economy. This Keynesian monetary policy has not been reversed and is now being championed to save the European Union from a financial collapse.
Now, considering the Euro-zone debt crisis, investors are squeamish that the financial crisis could impact global oil demand. So, central banks including the U.S. Federal Reserve keep pouring money into European banking sector to prevent default. This looming debt crisis is adding to the volatile oil atmosphere.
Add in speculative oil trading from hedge funds and "slow money" investors in the free market who treat oil futures as just another stock index, and you've got a bunch of players buying into a vacuum when there's a market rally based on a headline about Iran, or selling into a stop loss when the big headline is about possible manufacturing growth in China. Note that these players have absolutely no responsibility to supply physical oil or products to the global market at any time. They are just in it to make a buck off the volatility.
So there you have it. It's not just one thing, it's all things that contribute to higher oil prices. Poor foreign policy, poor domestic energy policy and poor monetary policy as well as speculative traders.
One thing is certain, we will not wake up tomorrow, the next year or even the next thirty years and be completely independent of our need for fossil fuel energy. So, while Obama should get some credit for talking extensively about alternative energy (although his domestic energy policies have failed, see Solyndra and Chevy Volt), socialism will not correct this. A government controlled energy market and its stringent environmental regulations are not conducive to lower prices.
The solution to higher gasoline prices is sound money, a non-interventional foreign policy, and improvements in the country's energy infrastructure, while the free market develops long-term solutions in the alternate energy sector. There's only one candidate running for President in 2012 whose political platform would create an environment for cheaper gasoline prices. His name is Ron Paul.