16A009 Three Cheers for BHO? by Jim Davies, 3/15/2016    

 

In the long-awaited final year of Barack Obama's presidency - which was expected to bring eight years chock full of hope and change - I wondered recently whether his leadership had produced anything worthwhile, to balance against his failure to end the recession and the disaster of his foreign policy. Whaddayaknow: I found one!

Under Obama's inspiring leadership and deft handling of international economic affairs, the price of gasoline has been slashed in half. What an amazing achievement!

Just look at, and salivate over, this chart of gas prices since 1979, published by that great and modest benefactor, Randomuselessinformation:-

Super unleaded in his part of Texas now costs $2.20 a gallon, against $4.40 before Obama took office; and that's in nominal dollars. In constant 1979 dollars, it costs pretty well exactly the same now to fill one's tank as it did in that year; about 80 cents a gallon. BHO's a hero!

If this most welcome price drop had taken place under Bush, he would certainly have taken credit for having put his many connections with the oil industry to good use in our interests. But, most curiously, Obama has not. How modest!

Hold the champagne; there are other reasons he is not claiming credit for this. Here are three.

1. To do so would severely damage his street creds with the keep-it-in-the-ground crowd, who strive desperately to choke off civilization by ending the use of fossil fuels. He and his Democrat comrades depend on that support, so he can hardly boast of having helped increase demand for them by cutting oil prices.

2. Look again at the chart above: in real terms the price of gas fell most steeply during the 1980s under Reagan, from 80 cents to 60 cents a gallon. Then it stayed at 60 cents from 1986 to 2005. So his achievement (if that's what it was) has not yet lowered prices to where they were under his predecessors.

3. The real reason for the recent tumble was action by Saudi producers, probably with Obama's backing and maybe on his recommendation. There was in 2013 no particular excess supply or demand shortfall, so the price reduction had to be a political act, evidently designed to embarrass and hobble Iran, Iraq, Russia, Syria and North Dakota. This bar chart produced by Rystad Energy shows that the Saudis (Onshore Middle East) break even at a rate of $29 a barrel, lowest in the world, while North American shale and oil sands are not profitable until oil can be sold at $62 or $74.

Hence, the Saudis are taking economic aim at their rivals. Nasty, but understandable. And since they do not move without permits from the Leader of the Free World, BHO may be assumed responsible. It certainly helped his benighted policies towards Syria and Russia, gave him negotiating leverage with Iran, and kept his support solid among the environmental freaks. No wonder he isn't boasting about having brought such benefit to the ordinary gas buyer.

How does all this compare to the fuel market in the coming zero government society? - first, there will be a significantly lower prevailing market price for oil as for all other products, because the cost of producing and distributing all products includes the payment of a raft of taxes; property tax, sales tax or VAT, and earnings taxes for employees. Take those away, and competition will cause the sales prices to follow the costs downwards.

Second, nobody will need government permits to search for and drill out oil, so there will be more producers, albeit smaller than those in the current cartel. That variety will also tend to increase competition and so lower prices.

Third, the political factor whereby nation-state producer monopolies affects the prices for which they offer oil will be absent. In the case above those factors caused a decrease in prices; they could just as well (and in the near-term future as in the past, may very well) cause an increase.

In other words, a free market will prevail, and all will benefit. I can hardly wait.

 
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