"Oil and gas prices are high now for a
very simple reason: the U.S. Federal Reserve has gone on an unapologetic
campaign to push up inflation and push down the value of the U.S. dollar.
Just last week on CNBC James Bullard, the President of the Federal
Reserve Bank of St. Louis, stated this unequivocally. What is somewhat
overlooked is the degree to which an inflationary policy at home creates
inflation abroad. Many countries who peg their currencies to the U.S.
dollar need to follow suit with the Fed. As China, for example, prints
yuan to keep it from appreciating against the dollar, prices rise in
China. This is especially true for commodities like crude
oil."
No Easy Fix for Gas Prices
by Peter Schiff
This month, as unleaded gasoline prices increased for 17
consecutive days (to a national average of $3.647 per gallon – up 11%
thus far this year) and West Texas Intermediate crude joined Brent crude
in breaking through a $100 per barrel level, energy prices emerged as a
full blown political issue. While President Obama conveniently claimed
that rising prices were the consequence of an improving economy (they're
not, and it isn't) Republican fingers began to point sanctimoniously at
current drilling policies. And while none of the accusers had any idea
why prices were actually going up, the award for the most dangerous
'solution' must go to Bill O'Reilly at Fox News. The master of the
"No Spin Zone" announced that high pump prices could be
permanently brought down by a presidential order to restrict exports of
refined gasoline. Not only does Mr. O'Reilly's idea demonstrate contempt
for the U.S. Constitution but it also displays a thorough lack of
economic understanding.
Oil and gas prices are high now for a very simple reason: the U.S.
Federal Reserve has gone on an unapologetic campaign to push up inflation
and push down the value of the U.S. dollar. Just last week on CNBC James
Bullard, the President of the Federal Reserve Bank of St. Louis, stated
this unequivocally. What is somewhat overlooked is the degree to which an
inflationary policy at home creates inflation abroad. Many countries who
peg their currencies to the U.S. dollar need to follow suit with the Fed.
As China, for example, prints yuan to keep it from appreciating against
the dollar, prices rise in China. This is especially true for commodities
like crude oil.
Many critics, such as Mr. O'Reilly, have relied on a limited
understanding of the supply/demand dynamic to question why gas prices are
currently so high at home. With domestic gasoline production at a
multi-year high and domestic demand at a multi-year low, he logically
expects low prices. But he fails to grasp the fact that the price of
gasoline is set internationally and that U.S. factors are only a
component.
O'Reilly's loudly proclaimed solution is to limit the ability of U.S.
refiners (and drillers) to export production abroad. If the energy stays
at home, he argues, the increased supply would push down prices. Although
O'Reilly professes to be a believer in free markets he argues that oil
(and gasoline by extension) is really a natural resource that doesn't
belong to the energy companies, but to the "folks" on Main
Street. What good would "drill baby drill" do for us, he
argues, if all the production is simply shipped to China?
First off, the U.S. government has no authority whatsoever to determine
to whom a company may or may not sell. This concept should be absolutely
clear to anyone with at least a casual allegiance to free markets. In
particular, the U.S. Constitution makes it explicit that export duties
are prohibited. Furthermore, energy extracted from the ground, and
produced by a private enterprise, is no more a public good than a chest
of drawers that has been manufactured from a tree that grows on U.S soil.
Frankly, this point from Mr. O'Reilly comes straight out of the Marxist
handbook and in many ways mirrors the sentiments that have been
championed by the Occupy Wall Street movement. When such ideas come from
the supposed "right," we should be very concerned.
But apart from the Constitutional and ideological concerns, the idea
simply makes no economic sense.
In 2011 the United States ran a trade deficit of $558 billion. For now at
least America has been able to reap huge benefits from the willingness of
foreign producers to export to the U.S. without equal amounts of imports.
China supplies us with low priced consumer goods and Saudi Arabia sells
us vast quantities of oil. In return they take U.S. IOUs. Without their
largesse, domestic prices for consumers would be much higher. How long
they will continue to extend credit is anybody's guess, but shutting off
the spigots of one of our most valuable exports won't help.
In recent years petroleum has become an increasingly large component of
U.S. exports, partially filling the void left by our manufacturing
output. According to the IMF, the U.S. exported $10.3 billion of oil
products in 2001. By 2011, this figure had jumped nearly seven fold to
more than $70 billion. How would our trading partners respond if we
decided to deny them our gasoline?
Keeping more gasoline at home could hold down prices temporarily, but how
much better off would the "folks" be if all the prices of
Chinese made goods at Wal-Mart suddenly went up, or if such products
completely disappeared from our shelves because the Chinese government
decided to ban exports that they declared "belonged to the Chinese
people?" What would happen to the price of energy here if Saudi
Arabia made a similar decision with respect to their oil?
But most importantly, limiting the ability of U.S. energy companies to
export abroad will do absolutely nothing to improve the American economy.
As a result of our diminished purchasing power, American demand for oil
has declined in relation to the growing demand abroad. Consequently, we
are buying a continually lower percentage of the world's energy output.
Consumers in emerging markets can now afford to buy some of the
production that used to be snapped up by Americans. If U.S. suppliers
were limited to domestic customers, then prices could drop temporarily.
But what would happen then?
With the U.S. adopting a protectionist stance, and with gasoline prices
in the U.S. lower than in other parts of the world, less overseas crude
would be sent to American refineries. At the same time lower prices at
home would constrict profits for domestic suppliers who would then scale
back production (and lay off workers). The resulting decrease in supply
would send prices right back up, potentially higher than before. The only
change would be that we would have hamstrung one of our few viable
industrial sectors. (For more about how diminishing supplies could exert
upward pressures on a variety of energy products,
please see the article in the latest edition of my Global Investor
newsletter).
Mr. O'Reilly can spin this any way he wants it, but he is dead wrong on
this point. It is surprising to me that such comments have not sparked
greater outrage from the usual mainstream defenders of the free market.
To an extent that very few appreciate, America derives a great deal of
benefits from the current globalization of trade. Sparking a trade war
now would severely reduce our already falling living standards. And given
our weak position with respect to our trading partners, such a
provocation may be the ultimate example of bringing a knife to a gun
fight.
Rather than bashing oil companies, O'Reilly, as well as other frustrated
American motorists, should direct their anger at Washington. That is
because higher gasoline prices are really a Federal tax in disguise. The
government's enormous deficit is financed largely by bonds that are sold
to the Federal Reserve, which pays for them with newly printed money.
Those excess dollars are sent abroad where they help to bid oil prices
higher.
For years, mainstream economists argued that as long as unemployment
remained high, the Fed could print as much money as it wanted without
worrying about inflation. The argument was that the reduction in demand
that results from unemployment would limit the ability of business to
raise prices. However, what those economists overlooked was the
simultaneous reduction in domestic supply that results from a weaker
dollar (the consequence of printing money).
I have long argued that neither recession nor high unemployment would
protect us from inflation. If demand falls, but supply falls faster,
prices will rise. That is exactly what is happening with gas. The same
dynamic is already evident in the airline industry. Fewer people are
flying, but prices keep rising because airlines have responded to
declining demand by reducing capacity. Since seats are disappearing
faster than passengers, airlines can raise prices. At some point
Americans will be complaining about soaring food prices as much more of
what American farmers produce ends up on Chinese dinner tables. Because
the Fed is likely to continue monetizing huge budget deficits, Americans
are going to be consuming a lot less of everything, and paying a lot more
for those few things they can still afford.
http://www.europac.net/commentaries/no_easy_fix_gas_prices
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