Energy

Gas prices and the expectations game

Logan Albright Fellow, Prosperity Caucus

With gas prices rising and President Obama’s approval rating falling, many liberal pundits have been quick to point out the illogic of blaming the commander in chief for something that most analysts believe is largely outside his control. It is unfair, they argue, for voters to hold the president accountable for high gas prices, just as it would be to blame him for an act of God such as — oh, I don’t know — a hurricane in New Orleans. President Obama can’t control the supply and demand of oil in the short term, they say, so he can’t control gas prices.

But the price of a product isn’t simply the result of supply and demand; present-day prices are heavily influenced by expectations of future prices. For instance, if consumers (or investors) expect the supply of a product to decrease in the future, they will purchase more of that product today to avoid the high prices of tomorrow. This increase in demand will cause prices to rise in a sort of self-fulfilling prophecy. Conversely, an expectation of lower future prices will cause consumers to delay purchasing a product, which in turn will result in lower prices for that product today.

This is essentially what happens in the oil futures market. Speculators attempt to predict future oil prices, making bets with sums of money so large that they have tangible impacts on global oil prices. Such speculators base their decisions on a wide variety of factors, including the policies coming out of the White House. The president’s words and deeds can therefore have a very real impact on the price of gasoline and other fossil fuels.

President Obama is perceived as being anti-oil, and for good reason. He appointed a secretary of energy who is on record saying that he wants U.S. gas prices to be as high as those in Europe. He imposed a costly moratorium on offshore drilling in the aftermath of the BP oil spill. Most recently, he single-handedly scuttled the Keystone XL pipeline, a project that would have brought a much-needed supply of oil from Canada, relieving to some extent our dependence on anti-American oil producers in the Middle East.

We can argue over the wisdom of such policies and debate whether they would have an actual impact on gas prices, but there is no denying that the president has come to be perceived as anti-oil. And in politics, perception is the only thing that really matters. There is now considerable skepticism over the long-term availability of oil, and the administration’s ambivalence (or outright hostility at times) to expanding our domestic supply only feeds this perception. This, as much as anything else, is the reason for the high prices consumers now face at the pump.

It remains to be seen whether energy prices will affect the outcome of the November presidential election, but by abdicating responsibility for the real-world effects of his statements and policies, the president only highlights his lack of leadership and experience.

Logan Albright is a fellow at the Prosperity Caucus.