Gasoline prices are high today and may keep escalating over the summer driving season. This cannot be good for The Barry's reelection chances. So, he has tried to deflect this political negative by blaming speculators and greedy oil companies. These rationales may be partially true, but, I believe, the real reasons for high oil and gasoline prices are due to a much greater multiplicity of forces:
- Barack Obama has indicated recently that he wants to eliminate "tax subsidies" for oil companies (see:
Business Week Article). These subsidies are nothing more than the equivalent of depreciation ... a time honored accounting practice on which I have commented before on this blog (see:
Oily Proposal). All hell would break loose if Obama were to suggest the elimination of depreciation expenses for any other U.S. industry. This threat surely may cause oil companies to anticipate lower margins and may have them beginning to take counter measures.
- The Federal Reserve Bank has been maintaining a weak dollar policy to the point were it costs about $1.30 to buy a Euro when this exchange rate should be closer to parity. Since oil around the world is traded in dollars, this, by itself, has caused oil prices to be inflated by as much as 30%.
- Clearly all the unrest in the Mideast has caused a risk premium to be added to the price of oil. Two major producers, Libya and Iran, in particular, are in the limelight. Libya is in political chaos after its successful revolution and Iran lives under the daily threat of an Israel attack to stop its development of atomic weapons. Thus, most countries are balancing these threats with the hoarding of oil. So, even though there is a glut of oil worldwide, prices will still likely stay high.
- Obama's energy policy is blatantly anti-U.S. He has essentially stopped offshore oil discovery in the Gulf of Mexico and elsewhere off the U.S. coast, put the kibosh of the the Keystone pipeline, and is actively trying to kill the U.S. coal industry (see:
Our Once King Coal).
- Investor speculation on higher oil prices is made a lot easier by extremely low interest rates. The Federal Reserve has kept interest rates for banks at below 1% for over three years and has continually indicated that they would stay low into the foreseeable future. Thus the carrying-cost penalty for speculation is quite low and will likely stay low. I'm sure that the Fed could squeeze much of the speculation on higher prices out of the oil futures market by letting interest rates rise to their natural level ... rather than Obama's today-proposed punitive measures (see:
Voice of America).
Thus, the next time you spend your retirement funds to fill up your gas tank, blame the real culprits, world Islamic extremist unrest, the Obama administration, and the Federal Reserve Bank ... not greedy capitalism and out-of-control speculation. Most of these things could be corrected overnight ... and may well be, sometime right before November's elections.
