Thursday, February 23, 2012

Why those who blame the Obama administration for higher gasoline prices are on 'empty'

It seems as though Republican critics of the Obama administration in particular are ecstatic, even gleeful at the recent rise in gasoline prices.

Leaving aside their parochial reasons for this, it's worth rebutting some of the spurious claims that are being made in this regard.

First, there is the claim that the administration contributed to this increase by placing a moratorium on deep water drilling after the BP disaster and canceling the Keystone XL pipeline. Second (and this relates to it) is the ongoing narrative that the U.S. doesn't have enough refining capacity and therefore our supplies of gasoline (and other refined products like heating oil and jet fuel) are limited.

Let's begin with the first claim, that administration actions taken to protect the environment are the cause of the present price spike. There are two basic flaws here: 1) they do not acknowlege the reasons for these actions, and 2) these charges are not true at all.

The reasons why the administration made these decisions are quite plain.

If you go back to after the BP disaster in early 2010, businesses all along the Gulf Coast suffered as beaches were closed, tourists stayed away and the fishing industry suffered severe and lasting damage. More than that, however, the inept and bumbling attempts by BP and its contractors to cap the spill in deep water made it plain that the supposedly fail-safe systems failed, and they had no idea what they would actually do if the system did fail. In this context it was only prudent for the administration to put a six month moratorium on deepwater drilling until the reasons for the leak could be determined and methods to contain and cap such a spill developed. Imagine if they had not placed a moratorium and then another well, somewhere else in the gulf had blown out and created twice the disaster. The President is sworn to protect the United States of America and in the face of demonstrated incompetence by the drilling rig's operators he was right to follow the mantra, 'first do no harm.'

In the case of the pipeline, the project was under study and on a schedule to be decided early next year. Because it crosses an aquifer that supplies drinking water to Nebraska, and because of a rupture in a similar pipeline that spilled crude oil into the Yellowstone river in Montana last year, there was a good reason to proceed with caution. Congress however intervened and forced the President to make a decision within sixty days. Again, the President followed the advice, 'do no harm' and said 'no' to the pipeline.

What of the economic impacts? Virtually none. In the case of crude oil production in the gulf, it was down slightly during the six month moratorium (which only affected deepwater rigs, a fraction of the total) but has since recovered. As we can see from the linked chart, crude oil production was affected far more by Hurricane Ike in September 2008 than any of the minor effects of the moratorium. As to the Keystone pipeline, even if approved it would not be built for years or be operating at full capacity until at least a decade from now, so it's a stretch to tie it to anything relating to present gasoline prices. Further, the administration has almost certainly done far more to reduce demand for gasoline over coming decades by increasing fuel efficiency standards for new automobiles than the drop in the bucket that the Keystone pipeline would increase supply, whether it is eventually built (along a less environmentally sensitive route) or not.

OK, what of limited U.S. refining capacity, also said to be responsible for an increase in gasoline prices? Again, that is false. In fact, last year the United States became a net exporter of refined products. Maybe what we need to do is implement a tax on exports so gasoline produced in American refineries would be cheaper to sell in the United States than abroad.

There are both long and short term reasons for the run up in oil prices. Long term, it is simply a fact that there are billions of people in developing countries (especially China and India) who are now beginning to earn enough money to be able to afford motor vehicles and use fuel. So globally the demand for oil is, and will continue to, increase. The price will also continue to rise with it. The only realistic solution for the U.S. is to get entirely off of that treadmill by moving towards electric vehicles and other alternative sources of fuel. Short term, the increasing tension around the strait of Hormuz certainly plays a part. The west (including the U.S.) has been increasing the pressure on Iran even to the point of risking a war in the strait over the Iranian nuclear program. These sorts of foreign policy complications are inevitable given that much of the world's oil supply comes from a small area along the far end of the Persan Gulf. To assume that the diplomatic temperature around the Persian Gulf does not affect the price of oil is foolish. It does, and right now it is causing us to pay more. However, the President is to blame for this only in terms of the fact that he is not backing off from his stated position with the Iranians. So at least let's get the facts right on that.

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