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Obama and Gas Prices: Blowing Hot Air

     Here we go again.  As Americans grapple not only with the loss of jobs, those who do have jobs now find it more expensive to get to those jobs because of the price of gasoline.  Make no mistake: the bulk of our oil imports is refined into gasoline and diesel for transportation purposes.  And once again, the price of gasoline becomes a political football with fingers being pointed and blame being assigned.  No doubt, within 90 days Congress (probably the Senate) will be parading oil company executives before committees for their 15 minutes of fame opportunities to play to the folks back home about how they stood up to Big Oil and are on the side of the average Joe out there.  Obama, for his part during a swing through friendly Left Coast territory, announced his solution by directing Attorney General Eric Holder to investigate the phenomena to make sure the American consumer is not being gouged by shady oil companies and gasoline distributors.

     Lest anyone forget, prior to the most recent recession- the worst since the Great Depression,- oil prices were spiking above $100 a barrel driving up the price of gasoline.  Of course, this was due to a simple supply and demand dynamic in that oil consumption in Asia, particularly China and India, was decreasing supply elsewhere in the world and driving prices up.  This dynamic was exacerbated by the collapse of the US housing market and resulting financial collapse because of exotic mortgage speculation and investment.  Remembering 2008, the response was TARP with respect to the banks and once Obama was sworn in, the government, in classic Keynesian response, injected $800 billion into the economy which achieved, when the dust settled, very little beyond adding about $800 billion to our federal debt.  At least with TARP, the losses were mitigated when the money was paid back with interest.  But, the stimulus money was gone…forever…never to be recovered other than the new roof on an rail station somewhere or a bridge here and there.  By then, the political landscape had changed in 2009-2010 and cries that another round of stimulus was needed, led by the likes of Paul Krugman and such, would have been political suicide.  Instead, the best way around this conundrum is the Federal Reserve.

     The United States imports $381 billion worth of oil every year.  We currently have a $44 billion trade deficit- in the long term an unsustainable level.  However, $30 billion of that, or close to 75% is attributable to oil imports.  Also, it is important to note that world and United States oil consumption levels are below the 2007-2008 levels when the last price spike occurred in oil.  Even though we import basically, as a percentage of total imports, the same amount of oil today as we did then and have lower demand, there is clearly adequate supply.  Adequate supply with decreased demand should equal either price decreases or at least price stabilization.  But, that is not the case here in 2011.  In other words, the dynamics of supply and demand have nothing to do with this.

      The Democratic/liberal response is to see a bogeyman behind every tree, or in every oil company board room.  Instead, Eric Holder needs to walk up the street and pay a visit to Bernanke.  Using the moniker QE2 for the second round of quantitative easing, this is nothing but a backdoor stimulus.  The Federal Reserve announced their intentions to pump about $1 trillion into the economy through QE2 through the purchase of US treasuries.  From September 2010 through the end of that year, when it was first postulated and then announced, oil prices increased 20% even without any money flowing into the system.  To wit, once the actual purchases of treasuries began and actual “money” started to flow into the economy, the price of oil has skyrocketed.  And here is the scary part:  the bulk of those purchases will not peak until June of 2011 meaning that as long as these fake, created dollars are flowing into the economy, gas prices will increase.

      This is simple economics.  The increase in the dollar supply equals a lower dollar value which equals an increase in oil prices.  Plain and simple.  So before the Congressional kangaroo courts open and we string up oil company executives behind the Capitol, Obama and Holder need look no further than the Federal Reserve and their QE2 policy which Obama and his Treasury Secretary, Tim Geitner,  supported.  Of course, Holder and company may turn up a case here and there of someone taking advantage of the system, but “price gouging” and “rampant speculation” are not the problems.  The problem is not capitalism per se; the problem is the Fed playing with the basic laws of capitalism.  To paraphrase Ronald Reagan at the Berlin Wall: “Ben Bernanke—end this insanity.”

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