The average price for a gallon of regular gasoline is $3.72. This is more than double what Americans paid for it on Barack Obama’s inauguration day.
Exploding fuel prices, along with unemployment stubbornly hovering above 8 percent for the last three years and the national debt increasing by more than $5 trillion during that same period, is one of those metrics that inevitably shapes the public’s opinion of the president. Being an election year, the president’s supporters naturally seek to deflect charges that he has anything to do with the escalating prices at the pump.
“What’s the cause?” Vermont Senator Bernie Sanders asks in a CNN.com op-ed. “Forget what you may have read about the laws of supply and demand. Oil and gas prices have almost nothing to do with economic fundamentals.” Instead, the socialist solon indicts a familiar villain. “The culprit is Wall Street. Speculators are raking in profits by gambling in the loosely regulated commodity markets for gas and oil.”
Sanders blames the deficit on Wall Street. Sanders blames the struggling economy on Wall Street. So Sanders charging Wall Street with inflating gas prices is no shock. But House Minority Leader Nancy Pelosi, House Democratic Caucus Chairman John Larson, and House Democratic Caucus Vice Chairman Xavier Becerra—Democrats, not capital “S” Socialists—have parroted Sanders’ line in recent days. So, too, have members of the Fourth Estate. Brian Williams, for instance, told viewers of NBC Nightly News last week that the issue isn’t about supply or demand, but “the problem is gas prices are largely set by commodities traders, also known these days as speculators.”
In other words, don’t blame the Obama Administration jettisoning the Keystone XL pipeline or its harebrained algae biofuel initiative for energy woes. Blame the rich white guys on Wall Street, i.e., the Republicans. Of course, socialists have been attributing the ills of the world to capitalism long before Bernie Sanders arrived on the political scene. Whether the anonymous scapegoats are “economic royalists,” “unscrupulous businessmen,” or “greedy speculators,” the indictment is always one against capitalism.
Contra Senator Sanders, the laws of supply and demand have everything to do with gasoline prices. Asking people to forget them is an invitation to indulge in a group fantasy. But the laws of supply and demand don’t just concern the petrol half of the equation. A transaction at your local Exxon or Sunoco involves gasoline going into your car, and your money going into the service station’s cash register. Overlooked is this currency half of the exchange. Supply and demand affects price at both ends of the trade, oil and money.
Since the economic collapse of 2008, the Federal Reserve has more than tripled the money supply. This deliberate policy of inflating the currency predated the Obama presidency. But Obama-endorsed schemes such as quantitative easing—the Fed essentially creating vast amounts of money to pay for government operations—have exacerbated inflation.
A better way to think about increased fuel burdens is to grasp that it’s not necessarily the gasoline that is more expensive. It’s that our dollars are worth less than they once were. Money, like widgets, bananas, labor, or any other commodity, is susceptible to the laws of supply and demand. Flood the market with labor, and labor becomes cheaper. Flood the market with blue jeans, and blue jeans become cheaper. Flood the market with dollars, and dollars similarly become cheaper.
A consequence of running huge deficits is to either raise taxes, cut spending, or print money. Barack Obama hasn’t increased the top marginal income tax rate or slashed government spending as he promised. His Federal Reserve has rapidly expanded the money supply. Devaluing currency necessarily escalates the prices of goods purchased with currency. It’s not speculators increasing the price of a gallon of milk, an ounce of gold, or a semester’s tuition. It is, in large part, monetary policy that has done this.
By law, service station owners aren’t allowed to inflate the gasoline supply. But unscrupulous proprietors prime their pumps in just this way. The punishment for diluting petroleum with water or other additives often involves heavy fines and temporary closure of service stations. Just this December, New Jersey cited fourteen stations with selling gas containing octane levels less than advertised. What the government forbids at gas stations is a matter of practice at the Federal Reserve, where they constantly tinker with the value of the dollar. Enforcing honest weights and measures is a legitimate function of the state that the state enforces on everyone but itself.
In the 2008 campaign, Barack Obama faulted the Bush Administration’s energy policies for rising gas prices. He claimed that expensive fuel was proof of “Washington’s failure to lead on energy,” which transformed a “middle-class squeeze into a devastating vise-grip for millions of Americans.”
It wasn’t about speculators then. It’s not about them now, either.
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