02.29.2012 0

The gas price manipulation boogeyman returns

High Gas PricesBy Bill Wilson — Another price shock in oil and gasoline prices, with oil above $100 a barrel and gasoline marching steadily to $4 a gallon nationally, would not be complete without Democrats again waiving the speculators’ card.

The latest peddler of this myth was none other than Calif. Rep. Xavier Becerra, vice chairman of the House Democratic Caucus, who told a press briefing on Capitol Hill: “It isn’t a shortage of gasoline, it’s a manipulation of the gas prices. You have got to go after the gougers, you have to make it so that they can’t win.”

This followed House Minority Leader Nancy Pelosi’s Feb. 22 assessment of rising oil and gas prices: “We need to take strong action to protect consumers from this speculation.”

Meanwhile, the Obama Administration has accounted for rising prices by market forces, saying alternatively that it’s because the economy is recovering and includes increased demand overseas, particularly China.

Perhaps they should get their stories straight, because they are contradictory. Are prices being manipulated, or are they rising as supply fails to keep up with increased demand as the economy recovers?

To be certain, demand did increase globally from 88.3 million barrels a day in 201 to 89 million in 2011 according to the Energy Information Agency — with a 700,000 barrel increase in demand in Asia and the Pacific — global production also rose to 90 million a day as of Dec. 2011.

So, Becerra is correct inasmuch as there is no shortage of gasoline. There is something else afoot. But it is not price manipulation.

Instead, both of these divergent explanations miss the underlying weakness of the dollar that is the real cause for price pressures in commodities, include food, oil, gasoline, and precious metals like gold.

An increase in one asset or another might be explained by a simple supply disruption or even overspeculation. But in a broad range of commodities — which are priced and traded in dollars — it looks much more like a monetary inflation problem. Commodities are often held as hedges against a weak dollar.

That is not to understate the value of domestic energy production. The domestic regulatory environment makes price spikes all the more acute here in the U.S. The nation’s refining capacity is declining along with continued restrictions on domestic oil production.

We simply lack the domestic capacity to increase output when we experience these price shocks. In fact, we have declined from producing 9.6 million barrels of oil a day in 1970 to about 5.59 million a day now.

Current restrictions on drilling cannot be repealed fast enough. But critics who note that current increases in domestic production have not had an immediate impact on prices are correct. We produced an additional 120,000 barrels a day more in 2011 than we did in 2010, with an additional increase of 240,000 barrels a day projected for 2012.

Part of the problem is that the increase is not nearly enough. The U.S. consumed 8.74 million barrels of oil a day in 2011, but only produced 5.59 million. We would need to produce an additional 3.15 million barrels of oil a day to become independent of foreign sources of oil.

But while that would certainly help ease prices some, it will not address the underlying weakness of the dollar. Nor will attacking investors. The U.S. was not oil independent in 1998 either, but oil was only $11.49 a barrel. It has increased 822 percent since then.

Meanwhile, the Federal Reserve’s balance sheet has expanded from $511 billion at the beginning of 1998 to more than $2.975 trillion today, a 481 percent increase. Similarly, the price of gold has jumped 507 percent since 1998 to $1786 an ounce.

Politicians who wish to truly address these price shocks ignore inflation and the weak dollar at their own peril.

Of course, this happens every time the nation experiences price shocks: government officials thrash about looking for anyone to blame but themselves for a problem they helped to create with their big spending, money printing ways.

Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.

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