Fareed Zakaria has been doing a bit of a nut lately, attempting to convince American voters that Obama does not really have the power over oil prices that republican candidates and commentators claim he does. He has been fighting against the likes of Newt Gingrich, who has claimed he knows how to get “gas” back down to $2.50 per gallon, and Eric Bolling who has a “secret plan” to reduce gas prices by a dollar or more. Here are some of the graphs Zakaria has been posting on Facebook:
In 2005, oil imports accounted for nearly 60 per cent of America’s daily consumption, in 2010 imports were less than half of consumption (45%)
America produces 200 times as much oil as Germany, but gas prices in the two countries rise and fall in tandem (U.S. pays far lower gas taxes)
Pretty self explanatory, U.S. Oil production seems to have no correlation to prices.
The price of oil comes down to simple economics: supply and demand. Oil is bought and sold on a world market, no matter where it is produced. Therefore, the high price of oil in America really comes down to two factors: speculation, and worldwide supply & demand. Neither of which are within the scope of the U.S. Presidency to control. Speculation is not within the scope of this blog to outline, however, I can talk about worldwide supply & demand.
Zakaria has been pointing to a massive rise in economic power in China, India and Brazil, and the corresponding expansions in their middle classes, as examples of why demand is increasing. The theory goes like this: as people become economically empowered, their consumption of energy will increase: they will upgrade their personal mode of transportation, consume energy intensive products, and consume energy in itself. The easiest way to see this is through the prism of personal transportation: as people move from public transportation and less fuel intense motorbikes and small cars towards bigger and higher fuel consumption vehicles, their individual demand for petrol will increase. And as a society, the overall demand for petrol will increase.
Even though it is not one of the big three, Sri Lanka provides a poignant example of this. Since the end of their civil war in 2009, and thanks to massive booms in neighbouring countries, Sri Lanka’s GDP has recently been growing at around 8%pa. This has lead to a massive expansion of the middle class, who is now trading up to motorcycles and cars. BMW alone has reported a 1600% increase in sales in the last two years. Colombo, the capital city, has had to take the drastic step of completely overhauling their road system, turning every road into a one-way road, in order to fight booming congestion. The increase in economic activity in Sri Lanka has resulted in a boom in vehicle ownership, which has greatly increased the demand for petrol.
Another recent example of booming petrol demand is countries switching from nuclear power to oil and coal. Just over a year ago, Japan was hit by a Tsunami that has rocked the world’s faith in nuclear power. Many countries, lead by Japan and Germany, have now shut down their nuclear power plants and are relying on coal and oil to cover the power shortage. Power plants require massive amounts of fuel, and when entire countries, especially big energy users like Germany and Japan, switch from nuclear to petrol, the rise in demand is incredible. This has corresponded quite nicely with the massive rise in the last year.
Worldwide Supply of Oil is fickle, and can be affected by a number of international events. The Arab Spring, sanctions on Iran, the whims of Hugo Chavez and the calculations of OPEC just to name a few. The major players in the worldwide supply of petrol are incredibly independent of Washington, and are generally more intent on watching their own pocketbooks than listening to anything the US President has to say. OPEC has been known to alter the supply of oil in order to ensure the prices that it wants. Furthermore, as Zakaria said in a discussion with Anderson Cooper and Stephen Moore, “the world consumes about 80million barrels of oil a day. The total U.S. increase in production, if you were to do everything that Newt Gingrich fantasizes about, would be less than half a per cent of that. So the chance that it would have any impact on the price of oil, particularly in the short run, is pure fantasy. Newt surely knows better. – Fareed Zakaria.
The recent high oil prices have almost nothing to do with the U.S. (apart from maybe sanctions on the Iranians), but more to do with increasing demand on the world stage. Even if the United States were to tap every single oil resource at its disposal, it would all be sold on a world market. Even if that was enough to make a significant dent in demand and bring prices down, countries like Saudi Arabia more than have the ability to rein in their own production to ensure high prices. Obama, and the U.S. Presidency, has little to no power over oil prices.
Here is Fareed Zakaria debating Stephen Moore: