Knowing that the summer is approaching soon, common sense dictates that gas prices will increase. Although this has been an issue for quite some time, the Arab Spring brought the "pain at the pump" to people's attention. It is evident that gas prices have gone up, but why? According to recent Pew Center poll numbers, 31% of Americans think that the cause of the increase is the corporate greed of Big Oil. Big Business is a frequent scapegoat for when something in the economy goes wrong, and that portrayal is often inaccurate or overstated. Are Americans hurting at the pump because of the likes of Halliburton and Exxon-Mobil, or is there something else at play?
People like to blame those "evil speculators" for causing oil prices to go too high, but as Cato Institute senior fellows Jerry Taylor and Peter van Doren illustrate, not only are speculators not gouging us at the pump, but speculation is what helps maintain volatility in the oil markets.
This is not a case of avarice; it's a case of dealing with market forces, mainly those of supply and demand. I'll start with demand first because that will be easier. When demand for a good or service increases, price increases. That is what is going on with world demand for oil. The biggest geopolitical factor in the demand for oil is China. Since Deng Xiaoping opened its doors to trade with America in the late 1970s, China has experienced massive GDP growth. China's accessibility to technologies has soared in recent years. As a developing nation of over 1.3 billion citizens, its demand will inevitably increase. As such, price of oil is going to increase. India is also following suit. And we all know that America's demand for energy isn't going to be abated.
Knowing that demand isn't going to decrease anytime soon, maybe supply can bring some relief. Remember those "pesky" speculators? They are reacting to what is going on in Libya. Although Libya is only responsible for 2% of the world's oil supply, what speculators are potentially anticipating is that these uprisings reach other nations such as Saudi Arabia or Nigeria, who supply much larger percentages of world oil than Libya. The increase in prices essentially is a "geopolitical risk premium" that acts as a compromise that takes into factor both scenarios of a tranquil dénouement and absolute disaster. If all goes well in that region of the world, we should see a decrease in gas prices later within the year.
But why wait for a potential scenario to play out in Northern Africa or the Middle East? Isn't there something we can do here in America? Because of the BP accident last year, Obama put a moratorium on oil drilling. This clearly decreases supply of [domestic] oil, thereby increasing the price of oil The House has already passed H.R. 1229 last month, which will uplift Obama's decision to tap into our own natural resources. However, the Senate has yet to vote on the matter as of date.
Obama has made it clear that he wants initiatives that shift America towards "clean energy." By investing in "clean energy," this would decrease American dependence on oil. The issue with "clean energy" is that it is unable to fulfill America's energy needs. According to EIA statistics, renewable energy only accounts for about 8% of America's energy. The cost of creating energy by using renewable, according to the EIA, would be much higher for electricity generation than other sources, especially when capacity factor comes into play. In layman's terms, renewable energy is highly costly and inefficient at producing energy. Also, most of renewable energy comes from ethanol. Ethanol is a subsidized scam which distorts the price of gasoline and increases the cost of food by diverting it towards ethanol, as opposed to food.
I don't expect environmentalist groups to get off their high horse about "clean energy." I don't expect any new drilling endeavors in the Gulf of Mexico or ANWR anytime soon. And I certainly cannot predict what is going to happen to the political stability overseas. Short of the calming of uprisings throughout Africa and the Middle East, I wouldn't expect gas prices to go down.
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