|
 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?
First off,
the U.S. government has no authority whatsoever to determine to whom a
company may or may not sell. This concept should be absolutely clear to
anyone with at least a casual allegiance to free markets. In particular, the
U.S. Constitution makes it explicit that export duties are prohibited.
Furthermore, energy extracted from the ground, and produced by a private
enterprise, is no more a public good than a chest of drawers that has been
manufactured from a tree that grows on U.S soil. Frankly, this point from Mr.
O'Reilly comes straight out of the Marxist handbook and in many ways mirrors
the sentiments that have been championed by the Occupy Wall Street movement.
When such ideas come from the supposed "right," we should be very
concerned.
But apart
from the Constitutional and ideological concerns, the idea simply makes no
economic sense.
In 2011 the
United States ran a trade deficit of $558 billion. For now at least America
has been able to reap huge benefits from the willingness of foreign producers
to export to the U.S. without equal amounts of imports. China supplies us
with low priced consumer goods and Saudi Arabia sells us vast quantities of
oil. In return they take U.S. IOUs. Without their largesse, domestic prices
for consumers would be much higher. How long they will continue to extend
credit is anybody's guess, but shutting off the spigots of one of our most
valuable exports won't help.
In recent
years petroleum has become an increasingly large component of U.S. exports,
partially filling the void left by our manufacturing output. According to the
IMF, the U.S. exported $10.3 billion of oil products in 2001. By 2011, this
figure had jumped nearly seven fold to more than $70 billion. How would our
trading partners respond if we decided to deny them our gasoline?
Keeping more
gasoline at home could hold down prices temporarily, but how much better off
would the "folks" be if all the prices of Chinese made goods at
Wal-Mart suddenly went up, or if such products completely disappeared from
our shelves because the Chinese government decided to ban exports that they
declared "belonged to the Chinese people?" What would happen to the
price of energy here if Saudi Arabia made a similar decision with respect to
their oil?
But most
importantly, limiting the ability of U.S. energy companies to export abroad
will do absolutely nothing to improve the American economy. As a result of
our diminished purchasing power, American demand for oil has declined in
relation to the growing demand abroad. Consequently, we are buying a
continually lower percentage of the world's energy output. Consumers in
emerging markets can now afford to buy some of the production that used to be
snapped up by Americans. If U.S. suppliers were limited to domestic
customers, then prices could drop temporarily. But what would happen then?
With the U.S.
adopting a protectionist stance, and with gasoline prices in the U.S. lower
than in other parts of the world, less overseas crude would be sent to
American refineries. At the same time lower prices at home would constrict profits
for domestic suppliers who would then scale back production (and lay off
workers). The resulting decrease in supply would send prices right back up,
potentially higher than before. The only change would be that we would have
hamstrung one of our few viable industrial sectors. (For more about how
diminishing supplies could exert upward pressures on a variety of energy
products, please see the
article in the latest edition of my Global Investor newsletter).
Mr. O'Reilly
can spin this any way he wants it, but he is dead wrong on this point. It is
surprising to me that such comments have not sparked greater outrage from the
usual mainstream defenders of the free market. To an extent that very few appreciate,
America derives a great deal of benefits from the current globalization of
trade. Sparking a trade war now would severely reduce our already falling
living standards. And given our weak position with respect to our trading
partners, such a provocation may be the ultimate example of bringing a knife
to a gun fight.
Rather than
bashing oil companies, O'Reilly, as well as other frustrated American
motorists, should direct their anger at Washington. That is because higher
gasoline prices are really a Federal tax in disguise. The government's
enormous deficit is financed largely by bonds that are sold to the Federal
Reserve, which pays for them with newly printed money. Those excess dollars
are sent abroad where they help to bid oil prices higher.
For years,
mainstream economists argued that as long as unemployment remained high, the
Fed could print as much money as it wanted without worrying about inflation.
The argument was that the reduction in demand that results from unemployment
would limit the ability of business to raise prices. However, what those
economists overlooked was the simultaneous reduction in domestic supply that
results from a weaker dollar (the consequence of printing money).
I have long
argued that neither recession nor high unemployment would protect us from
inflation. If demand falls, but supply falls faster, prices will rise. That
is exactly what is happening with gas. The same dynamic is already evident in
the airline industry. Fewer people are flying, but prices keep rising because
airlines have responded to declining demand by reducing capacity. Since seats
are disappearing faster than passengers, airlines can raise prices. At some
point Americans will be complaining about soaring food prices as much more of
what American farmers produce ends up on Chinese dinner tables. Because the
Fed is likely to continue monetizing huge budget deficits, Americans are
going to be consuming a lot less of everything, and paying a lot more for
those few things they can still afford.
Peter Schiff is CEO
of Euro Pacific Precious Metals, a gold and silver dealer selling reputable,
well-known bullion coins and bars at competitive prices. To learn more,
please visit www.europacmetals.com or call (888) GOLD-160.
For the latest gold market news and
analysis, sign up for Peter Schiff's Gold Report, a monthly newsletter
featuring original contributions from Peter Schiff, Casey Research, and other
leading experts in the gold market. Click here to learn more.
|
