Your pain is their gain

In a purely political move some Republican legislators are blaming President Obama for the recent rise in gas prices. They claim that thanks to the President, domestic oil production is down; except that production is at its highest levels since 2003. They blame the President for putting a moratorium on new deep water oil drilling instead of acknowledging that it was a multitude of failures by big business that lead to this freeze. In essence the charge from Republicans is that the President is to blame for a reduction in oil supply in the US and that is affecting global pricing. Unfortunately for this argument the US supplies a very small percentage of the world’s oil and any reduction or increase is drop in the bucket of world oil supply.

The reality of the situation is that actual supply has nothing to do with the increases in pricing we have experienced over the past few weeks. The problem here is the free market system that determines oil prices. The buyers of oil buy in advance and this requires that they act as prognosticators of future oil supply and demand. The steep increase in oil prices is tied to concerns of the oil buyers that future supply might decrease. Rather than wait until supply is actually affected they are raising prices now to eliminate their risk in the upcoming weeks and months. The only people affected in this equation are the consumers since the oil buyers have passed along all of the uncertainty.

It is estimated that this free market speculation has artificially increased the cost by $20 per barrel. According to the US Energy Information Administration an increase of $10 per barrel of crude oil translates to an increase of around $0.24 per gallon for the consumer. This means that we are paying almost $0.50 per gallon more than the real value of gasoline.

Some legislators such as Jay Rockefeller have suggested that the President should release oil from our reserves. With all due respect to the Senator Rockefeller the unusually high cost of gas is a function of oil speculation not supply. While a new supply of oil might quell fears of some oil buyers, this line of thinking gives a free pass to the real cause of the increased prices at the pump, corporate greed. Rather than use the power of our government to push for accountability in the private sector like we do with the insurance industry we let the big oil companies cover their risk on the backs of hard working Americans. Unfortunately when you take the risk out of the risk - reward equation, all you are left with is reward. For Big Oil this is a heads they win tales we lose situations and instead of discussing the real issue our politicians are tossing around baseless rhetoric they hope to parlay into political gains.