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?
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