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Friday, April 29, 2011

The White House Investigates Energy Prices

Prices at the pump are up. Whenever that happens, you can count on various politicians to ignore the forces at work affecting market prices, and instead stoke talk about fraud and conspiracy.

Unfortunately, this time around, among the politicians calling for an investigation into oil and gas prices is the President of the United States.

Speaking in Reno, Nevada, on April 21, President Obama declared: “Last month I asked my Attorney General to look into any cases of price gouging so we can make sure nobody is being taken advantage of at the pump. Today, I’m going to go a step further. The Attorney General is putting together a team whose job it is to root out any cases of fraud or manipulation in the oil markets that might affect gas prices, and that includes the role of traders and speculators. We’re going to make sure that nobody is taking advantage of American consumers for their own short-term gain.”

How unfortunate it is that the President either fails to understand how markets work, or is simply playing cheap politics.

Let’s save taxpayers the money that would be spent on the Attorney General investigating energy prices. It is no secret what is pushing oil prices, and therefore gasoline prices, higher. The following four reasons are central.

First, the Federal Reserve has been running historically loose monetary policy for over two-and-a-half years now. That has translated into a decline in the value of the dollar, and a rise in inflation and inflation expectation. Since oil is priced in dollars, part of the rise in the price of oil is clearly linked to faulty U.S. monetary policy.

Second, ongoing unrest and uncertainty in North Africa and the Middle East has injected a risk premium into the price of oil. As long as threats and unrest continue in this part of the world, this premium on the price of oil will persist.

Third, as economies in various parts of the world recover, rising demand comes into the price equation – though this is a minor component, as there’s nothing surprising in the current demand trend.

Fourth, in addition to supply issues and risks in North Africa and the Middle East, U.S. energy policy clearly works against domestic energy exploration and development. Indeed, rather than talking up investigations into fictitious price conspiracies, the President would actually accomplish something positive by removing his bans on both offshore and onshore energy development, while also stopping his EPA from moving ahead with greenhouse gas emission regulations.

Interestingly, at an April 26 energy conference, EPA Administrator Lisa Jackson admitted that the EPA using the Clean Air Act to regulate emissions, such as CO2, was not an “ideal tool,” according to a Bloomberg news report. However, Jackson was still looking for government controls over such emissions via new legislation. In addition, Bloomberg reported: “When asked today whether she thinks Congress will succeed in stopping the EPA rules, Jackson said: ‘I certainly hope not.’”

Keep in mind that 85% of offshore resources are currently off limits from development. And the EPA’s efforts send clear signals to energy firms and investors to move away from investments in refineries, oil exploration, and coal production. Since markets are forward looking, these anti-production actions by government exert upward pressures on prices.

There’s no mystery or conspiracy when it comes to high prices at the pump. It’s overwhelmingly about bad monetary policy, global risks, and misguided energy policies.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council

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