A President’s Control of Oil Prices

A new meme is carefully being inserted into society: that a president generally, and Obama specifically, cannot control oil prices.   Like all good lies there is just enough truth in this meme in order to not make it laughable.  The notion is absolutely true in the short term (Obama cannot make $2.50/gal gas appear overnight, or even in a few months) but over the long term however, a President can have remarkable sway over oil prices.

Who knows where the meme started but it’s just about everywhere now: Bloomberg, CNN, MSNBC, … even some cannabis and psychedelic drug using blogger.  So the idea’s getting around.

Bloomberg wants to blame the oil refineries:

Actually, the President doesn’t have that kind of pricing power. The more likely reason behind the price increase, though certainly less compelling as a political argument, is the recent spate of refinery closures in the U.S. Over the past year, refineries have faced a classic margin squeeze. Prices for Brent crude have gone up, but demand for gasoline in the U.S. is at a 15-year low. That means refineries haven’t been able to pass on the higher prices to their customers.

As a result, companies have chosen to shut down a handful of large refineries rather than continue to lose money on them. Since December, the U.S. has lost about 4 percent of its refining capacity, says Fadel Gheit, a senior oil and gas analyst for Oppenheimer. That month, two large refineries outside Philadelphia shut down: Sunoco’s plant in Marcus Hook, Pa., and a ConocoPhillips plant in nearby Trainer, Pa. Together they accounted for about 20 percent of all gasoline produced in the Northeast.

via Businessweek.

A careful reader will note the the literary slight of hand.  Brent crude is up, demand is down, refiners are stuck in the middle, some have lost money, and thus it makes simple business sense to shut down.  Therefore gas is expensive.  This is a logical fallacy of Ignoring a Common Cause.  This story makes the case that given facts A & B & C & D & E  that  E is the cause of high gas prices.  A refinery shuts down in the Northeast thus making gas expensive in the Northeast.  That’s the “E”.  This ignores high gas prices in the Midwest.  The common cause of high gas prices is “A” — high oil prices.

This is further proved by a piece from the other side of the country:

The oil company BP is zeroing in on a cause for last week’s explosion at its big Cherry Point refinery near Ferndale, Washington. …

The Cherry Point refinery supplies about 20 percent of the transportation fuels for Washington and Oregon. Since the shutdown, gasoline prices in the region have spiked. …
According to AAA, the average price of regular unleaded shot up 23-24 cents per gallon just in the past week in western Washington and Oregon. By comparison, the average price at the pump in Idaho went up by 14 cents in the past week.  Idaho and eastern Washington receive most of their gasoline from refineries in Montana and Utah, which are operating normally.

via Northwest Public Radio.

Yes, oil prices drove up the cost of gas throughout the Northwest, however in the area directly served by the Cherry Point refinery gas prices went up almost twice as much.  With no mention of other factors, it appears the refinery bottleneck is responsible for nearly 1/2 of the total price increase.

Further, back to Bloomberg/Businessweek:

“The U.S. refining industry is undergoing a huge, regional transformation,” says Ben Brockwell, a director at Oil Price Information Services. “If you look at refinery utilization rates in the Midwest and Great Lakes areas, they’re running at close to 95 percent capacity, and on the East Coast it’s more like 60 percent,” he says.

via Businessweek.

So while claiming that shutting down refining operations is that cause of gas price increases it actually turns out that there’s amply refining supply.  The refiners CAN refine more oil into gas; they’re choosing not to because the gas demand is so low that it doesn’t make any sense to make more gas.

One hundred years of economics turned on its head; the Bloomberg argument is that low demand is the cost of high prices.  But this story is not about logic… it’s about advancing the meme that Obama cannot control oil prices.

So let’s just ask, how closely does the price of gas track oil prices?

Wow!  So I guess that closes the question about what’s really causing high gas prices… it’s high oil prices.

So the next question would be to determine if a president can control oil prices.

Well we know what Obama thinks:

Democrat Barack Obama on Friday blamed high gasoline prices on Washington and a political establishment that he says hasn’t stood up to oil companies, his two rivals for the presidency included.

“The candidates with the Washington experience – my opponents – are good people. They mean well, but they’ve been in Washington for a long time and even with all that experience they talk about, nothing has happened,” Obama said in remarks delivered at a gas station. “This country didn’t raise fuel efficiency standards for over 30 years.”

The result, the Illinois senator said, is that consumers are suffering.

“So what have we got to show for all that experience?” Obama asked. “Gas that’s approaching $4 a gallon.”

via CBS News June 18, 2009.

It appears that [candidate] Obama believed that Washington can effect gas prices.  Further, Obama at least used to believe that one such measure for controlling gas prices was to raise the fuel efficiency standard — often referred to as the CAFE (Corporate Average Fuel Economy) standards.  Interestingly, the CAFE standards to which Obama refers are under the direct control of the NHTSA and the EPA, both of which a president has direct control over.

By Obama’s own argument he has some control over the price of gas.