David R. Henderson  

Does Obama Bear Responsibility for the Increased Gasoline Price?

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Cato Institute scholars Peter van Doren and Jerry Taylor write that President Obama is not responsible for the spiraling price of gasoline. They correctly blame the price increase on the increase in the price of oil. They focus on the increased price of North Sea oil. But oil is sold in a world market and the increase in the price of North Sea oil would not be sustainable if other producers did not also raise their prices. The main reason for the increased price of gasoline is the increased price of oil in the world market.

So does Obama bear any responsibility for the increased price of oil in the world market? Yes. His saber rattling over Iran makes people nervous about war with Iran. A war with Iran would likely cut Iran's output. Because oil is so inelastically demanded, even a one million barrel per day (mbd) cut in output, in a 90 mbd market, would drive up the price by about 10%. Speculators, anticipating this, bid up the futures price. Arbitrage then causes the spot price to rise. See "Oil Speculators: Bad or Good" and "Oil Prices" by Robert Murphy.

So, yes, Obama does bear responsibility for the higher world price of gasoline.

Now, you could argue that he has been saber rattling over Iran only because Rick Santorum, Mitt Romney, and Newt Gingrich have been saber rattling. The only one not doing so is Ron Paul. But Obama still chose to saber rattle.


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The author at The Liberal Order in a related article titled What is causing the increase in gasoline prices? writes:
    David Henderson offers his insight. Mark Perry offers his. Here is some relevant information, but as Perry correctly notes, the demand for gasoline has been on the decline. Here is more information. There are many reasons for why gasoline prices are hi... [Tracked on March 10, 2012 8:44 PM]
COMMENTS (19 to date)
Scott Gustafson writes:

In natural resource economics, the marginal cost has two pieces - the marginal extraction cost and the marginal user cost. Administration policies have had little effect on MEC, but they have increased MUC. Moratoriums, very slow drilling approvals, the pipeline disapproval, reduced leasing - all of these signal decreased future production and higher future prices. That increases the MUC.

Isreali-Iran saber rattling would alone make oil traders nervous, so the question is the marginal contributions of Obama's (and Romney's, etc.) comments on subjective expectations of a conflict and the effects of a conflict on oil flows.

My not too careful guess is that we're down into the noise of daily price movements - less than a nickel a gallon - and that isn't big enough to be driving current political debates on gasoline prices.

UnlearningEcon writes:

You appear to ignore the part where speculators bid up the price and instead blame Obama?

Judith Gomez writes:

The conservative base, along with the extreme right wing base of the Republican political party and its members of the House and Senate, repeatedly claim President Obama is timid or weak in his public and private messages and position on Iran especially his preference for encouraging negotiation; I respectfully submit that your informative article, arrives a priori; flawed; rendering you sadly, among the many feathered tails wagging right along with misrepresentation of overall causal facts regarding gas prices, by the saber rattling GOP.

Kevin writes:
You appear to ignore the part where speculators bid up the price and instead blame Obama?

Speculators raise the spot price of oil in response to their beliefs about the future price of oil, which is in turn based their beliefs about things like war with Iran. Absent a shift in the probability of war (and higher future prices), speculators have no reason to predict (and ultimately generate) higher prices.

Chris Koresko writes:

Leaving politics aside, as far as we can with a question like this one, it seems to me that there are a few facts which would be enlightening (which I don't have at the tip of my fingers right now, but maybe someone reading this thread does).

First, what is Iran's oil output today and what are its total recoverable reserves? Both absolute numbers and as fractions of U.S. and non-Iran nations' numbers would be interesting.

What is the current U.S.+non-Iran output, and how much could it be increased in a free market given a set of policies, such as those advocated by the Republicans, which would promote that increase? I'm talking about a return to the normal permitting process in the Gulf of Mexico, opening up drilling in Alaska, green-lighting the Keystone pipeline, getting a sensible and predictable regulatory framework for 'fracking' in place, etc. There are also effects from restrictions on other energy sources which partly substitute for oil (e.g., coal) but my guess is that they're not the main issue.

If Iran's output is not much larger than the drop in current U.S. production, measured relative to what it would likely had been if the Republicans had been controlling the relevant policies starting in January 2009, then it strikes me as reasonable to assign most of the blame for the current high price to Obama and his domestic production policies. Otherwise, one could plausibly argue that the current tensions between Iran and the West might be an important factor in the price rise.

Reasonable?

Mark Bahner writes:

Hi,

See the cute cartoon (with computer-generated voices) at Mark Perry's website.

According to them, the reason for the rise in the price of gasoline isn't:

1) Middle East problems,

2) Speculators,

...or several other things. I won't spoil the plot, but the final graphic seemed interesting and persuasive. And if a computer says it, it's got to be right. Right?

Cartoon bears/dogs/indeterminate creatures explain gasoline prices

David R. Henderson writes:

@Judith Gomez,
You actually read my post in which I, like you, blamed three Republican presidential candidates for saber rattling, right? I think Obama is timid, but not in the way those three say. He should have told them to take a hike and he shouldn’t be kissy-face with Bibi. If he did that, prices would fall.

steve writes:

"He should have told them to take a hike and he shouldn’t be kissy-face with Bibi. If he did that, prices would fall."

Nope. Israel is the country that has been threatening. That drove up prices. Israel does not need our aid to attack. The US effort has been aimed at averting war.

Steve

frankcross writes:

Would a rational market really respond to saber rattling? Seems more likely they would assess the President's probable actions based on a variety of characteristics, especially the political dynamic, regardless of what the President said. The Iran effect would seem to be more about the political dynamic, rather than Obama himself. I.e., the same result would come from any politician seeking reelection and popularity

Ted Levy writes:

Seems pretty evident, David, that you've shown Cato is not doing enough to oppose Obama...

Larry DJ writes:

Oil is traded in USD. I would assume that policies that lead to a weak dollar also would lead to higher oil prices in US dollars.

Eric Evans writes:
Would a rational market really respond to saber rattling?

Does a "rational" market respond to regime uncertainty? Yes it does.

Steve Sailer writes:

I remember around 2008 when the Israeli Tourism Minister did some freelance saber-rattling about war with Iran and the price of oil shot up about $10. The next day the Israeli Foreign Ministry renounced everything he said -- he's just the Tourism minister, for heaven's sake! -- and the price went back down.

But I wonder how much money you could make in a few hours if you knew some idiot politician was going to say something stupid, for example, because you put the idea in his head.

ajb writes:

There is also environmental saber rattling. To the extent that the market believes the Obama and future Democratic admins will go slowly or more quickly on alternatives like shale oil or ramp up regulation in ways that make alternatives costly, world prices might react (both going up or down).

Ken B writes:

Steve Sailer:
My congressman is John Dingell. He has been in congress for decades, was not remotely rich when first elected, usually says stupid things, has complete control of when he says them, and is very rich!

Ken B writes:

Echoes some comments above but adds some detail
http://www.nationalreview.com/corner/293008/how-obama-choking-us-oil-production-mario-loyola

Mr. Econotarian writes:

While I'm no fan of unnecessary saber-rattling, isn't really the truth that the price of oil is so high because most of the non-Western producers have undemocratic and either highly socialist or crony capitalist governments?

Mike Giberson writes:

Mr. Econotarian, while it is true that "most of the non-Western producers have undemocratic and either highly socialist or crony capitalist governments", that isn't a good explanation for why prices are high. The governments were equally undemocratic and socialist (at least with respect to oil production) between 1985 and 2004, when prices were relatively low.

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