Federal Analysts Finger Government For Gas Price Volatility
by William O'Keefe
August 18, 2011
When gasoline prices rise, as they did earlier this summer, politicians are quick to blame oil companies. When prices begin to decline, as they are now doing, the same politicians become mute.
If they point fingers when prices go up, should they give plaudits when those prices go down? The fact is oil companies deserve neither blame nor credit on the issue, since crude oil prices—which are set in the global market—are the primary drivers of prices at the pump.
For the time being, gasoline prices may serve as a surrogate for economic policy as the U.S. Energy Information Administration (EIA) recently noted (emphasis added):
Analysts have suggested that the appearance of a “disconnect” between prices and fundamentals could stem from the larger impact of broader factors, such as changes in longer-term market expectations. A similar point may be made about the latest price drop. Although recent U.S. and other data – including weak U.S. product deliveries and signs of a rebound in commercial crude inventories following the release of crude from strategic reserves – do point to softening oil market conditions, they do not seem fully to explain the scope and speed of the selloff, which came as a surprise to many market participants. Here again, the magnitude of the price swing may have less to do with incremental changes in oil statistics than with a broader, sweeping shift in the market’s perception of the health of the global economy and longer-term expectations of underlying macro-economic conditions. Widely publicized difficulties in U.S. government negotiations about debt limits, the downgrading of U.S. debt by one rating agency, renewed credit concerns in Europe, concerns about the persistence of high unemployment and a host of worse-than-expected economic indicators, including unexpectedly low growth for first-half 2011 U.S. GDP, all have contributed, in various ways, to a broad deterioration of market sentiment and less upbeat expectations of future economic growth.
So even federal analysts recognize the government itself plays a major role in the volatility of energy prices. This acknowledgement offers an important reminder that a variety of market factors—not a select few companies—drive prices at the pump.
Though everything from Beltway antics to increasing global demand from emerging countries to hurricanes contributes to the price swings in the oil market, policymakers can still work to mitigate their effects. The key involves, as EIA put it, influencing the “market’s perception of the health of the global economy and longer-term expectations of underlying macro-economic conditions.” And steps to doing that at a federal policy level include reforming the tax system, cutting deficit spending, mitigating uncertainty from regulations and increasing domestic production of natural resources.
There are signs that the Obama Administration may be slowly reaching the same conclusion. But until our economic house is put in order and barriers to private investment are removed, falling gasoline prices will be a daily reminder of a weak economy and the reasons for it.
‘Politics as usual’ is causing not just a weak economy but a loss of faith and respect for the government and our political leaders. That may prove more corrosive and harder to correct than the economy!