www.baltimoresun.com/news/opinion/oped/bs-ed-morici-gas-prices-20110425,0,3921883.story

baltimoresun.com

Bad policy, not profiteering, is the reason for $4 a gallon gas

By Peter Morici

9:51 AM EDT, April 25, 2011

Advertisement

When gas prices spike in the wake of Middle East turmoil or hurricanes, conspiracy theories abound about profiteering speculators. The truth is Americans are suffering from bad energy polices — politicians eager to sell pet projects and hoist blame onto others.

In such a fit, President Obama offers fanciful alternative energy technologies as a solution to rising pump prices and a task force to ferret out fraud in energy markets.

Even before disturbances in Egypt, Libya and elsewhere, economists expected oil prices to increase from their September lows of $75 per barrel to more than $100 a barrel by this summer.

Economic recovery is pushing up gasoline demand and jet travel; President Obama's restrictions on off-shore drilling are curtailing U.S. oil supplies; electric vehicles and hybrids won't appreciably dent U.S. gasoline consumption before the end of this decade; and Chinese oil imports are growing 10 percent a year. All Middle East strife did was accelerate the price surge.

When political unrest or natural events make future oil prices uncertain, big consumers like refineries and airlines limit their risks by purchasing contracts for future deliveries, and the cost of reasonably insuring those contracts adds to prices.

For example, Egypt and Libya alone had the potential to disrupt delivery of 5 percent of the global crude oil supply; however the short term flexibility of global consumers to curtail consumption is very low, so the immediate price effect of such a loss in supply could be more than 25 percent. Measured against the September or October prices, that would be about a $20 dollar per barrel jump.

When refiners, airlines and others purchase contracts for future delivery, if the expected jump in prices is in the range of $20, traders on the other side of those contracts bear the risks of even higher prices and need a buffer to offset potential losses. Hence a $30 jump on a 90 or 180 day contract is hardly unreasonable.

Between the effects of increased demand and tightening global supplies expected before the Egyptian rebellion and continued concern that the democracy movement could spread to autocratic regimes like Saudi Arabia, a price increase from $75 in September to $105 in April is quite reasonable.

Also, profiteering in the gasoline market appears equally remote. Prices have increased about $1.10 gallon since September to $3.86 in April, while the cost of crude oil has increased a bit more than $33 a barrel, or 80 cents per gallon. When market conditions improve for refiners, such as during the summer driving season, their margins generally improve. Another 30 cents seems well within what could be expected, and there appears to be little room for speculators in the gasoline market to be taking an outsized slice.

Before readers pounce on refiners, they should note that refining, historically, has not been a high profit business. If margins don't increase when prices are strong, those folks can't stay in business. It's like hotel rates, seasonal fluctuations and unusual events are built into the business model.

All this has a profound effect on U.S. growth. Economists expected that the economic recovery could withstand a gradual increase in gas prices to more than $3.50 by summer, but the sudden jump this winter and spring caused most forecasters, this one included, to scale back first quarter growth estimates from 3.3 percent to something in the range of 2.8 percent.

Add other festering problems such as the debt crisis in Europe, state governments accelerating layoffs, uncertainty imposed by the budget and debt ceiling melodramas in Congress, and business fears about the Obama administration's penchant to scapegoat and regulate, most forecasters are expecting the Commerce Department to report Friday first quarter growth was closer to 2 percent. Already, new unemployment claims are on the rise again, and the recent improvement in the monthly jobs creation numbers may be short lived.

Americans could have it another way. U.S. oil consumption is about 15.3 million barrels a day, with imports supplying 9.5 million barrels a day and domestic production at 5.8 million barrels a day. Prudent emphasis on more fuel efficient vehicles — not just wiz bang electrics and hybrids — could cut domestic fuel consumption by 2.5 million barrels a day. Renewed development of economically viable oil reserves could increase domestic production by about 4 million barrels a day, and imports could be cut by one-half to two thirds.

While gas prices might still be high, the money Americans spend at the pump and on better vehicles would stay at home to create high paying jobs and boost growth and living standards for all Americans.

More domestically produced oil would not add to environmental problems — those have to be managed whether oil is produced in the United States or imported. Indeed, greater reliance on domestic oil would be kinder to the environment because U.S. policymakers are better able to require safe production methods at home than abroad.

Instead, seizing on public anger about rising gas prices, President Obama fails to take responsibility for his policies and relies on his best asset — his fine speaking voice — to troll for votes by villainizing oil companies and faceless speculators.

Such demagoguery imperils an already fragile American prosperity and debases the presidency. All politicians need to run for reelection, but presidents are elected to be statesmen and put the national interest above their own.

Mr. President, we are waiting.

Peter Morici is a professor at the University of Maryland's Smith School of Business and is the former chief economist at the U.S. International Trade Commission. His email is pmorici@rhsmith.umd.edu.