Newt's Despicable Gasoline Price Promise

Newt Gingrich imagines he can command the law of supply and demand.

Former House Speaker and current Republican presidential hopeful Newt Gingrich has promised voters that gasoline will be $2.50 per gallon after he becomes president. In fact, Gingrich thinks he may even be able to get the price down to $1.20 per gallon. "His promise to go the moon is easier to achieve," says Michael Lynch, president of the oil consultancy Strategic Energy and Economic Research. "We may see $2.50 per gallon gas again, but not because of anything that any president does." Gingrich's pitch is attractive to consumers who are confronting pump prices that average $3.83 per gallon and which are expected to go even higher later this year. Why doesn't Gingrich promise free daily ice cream and cake for everybody while he's at it?

Sadly, Gingrich has apparently gotten some traction among voters with his specious promise. After all, who does not hate high gas prices? A recent Washington Post/ABC News poll reports that two-thirds of Americans disapprove of how President Barack Obama is handling the gasoline situation. In addition, only 38 percent approve of his energy policies, down from 55 percent in August 2009.

Why are gasoline prices going up? It's simple—because oil prices are going up. The price of crude oil accounts for about three-quarters of the price of a gallon of gasoline. Taxes account for another 12 percent or so; refining is about 6 percent; and transportation and distribution is another 6 percent. So what accounts for the higher price of petroleum? Again, it's simple: demand and supply.

Gingrich and others point out that actual U.S. consumption of gasoline is down by 7 percent since 2008. Cars are more efficient and people are driving less due to the slack economy. In addition, domestic crude oil production is up and gasoline inventories are ample. So why are prices still going up? 

Since the impersonal forces of demand and supply are not sufficiently evil, consumers and their politician enablers cast about seeking malefactors to blame for their pump pain. Enter the speculators. Taking a page out of the usual playbook, President Obama ordered the U.S. Justice Department to "reconstitute" the Oil and Gas Price Fraud Working Group to look into possible criminal behavior and misconduct in oil markets.

Of course, this is the same working group that the president established last spring to investigate the role of speculative malfeasance in higher gasoline prices at that time. Gas prices later dropped over the summer and the working group never issued any reports. It's all a bit of policy theater designed to distract the plebes and deflect blame from the administration. As it happens, a report by the Federal Trade Commission issued in September of last year noted that while there has certainly been a huge increase in speculative interest [PDF] in oil futures, the FTC could find no clear link between a bigger futures market and higher oil prices.  

While Obama engages in another round of policy theater, would-be President Gingrich says that he can cut the price of gasoline by opening more federal lands and offshore areas to drilling; allowing the construction of the Keystone pipeline from Canada; and popping the speculative bubble by releasing crude from the Strategic Petroleum Reserve.

While it is true that the Obama administration has ruled out drilling on vast areas of the federal estate, the number of oil and gas rigs operating in the U.S. has nonetheless increased markedly in recent years. Indeed, it is not surprising that as the price of petroleum soared so too did the number of drilling rigs. The oil and gas rig count has increased to more than 1,900, up from around 700 [PDF] in 2000. As an historical note, the total number of U.S. oil and gas rigs peaked at more the 4,500 [PDF] in 1981.

The president was also a step ahead of the former House speaker since he opened the spigot to release 30 million barrels of crude from the Strategic Oil Reserve last summer in an effort to drive down gasoline prices. However, the price of gasoline had already begun falling from its peak in May. It's true that last year Obama blocked construction of the Keystone pipeline, which would have begun transporting in 2013 more than 400,000 barrels of oil per day derived from Canadian oil sands. Adding more supply certainly tends to put pressure on prices, but this still would have only increased daily global supplies by less than one half of 1 percent.

Gingrich has also argued, "We've seen an explosion of opportunity in natural gas through drilling. The result is the price of natural gas has dropped from $8 per 1,000 cubic feet to under $3 per 1,000 cubic feet." He then reaches the conclusion: "You apply that same principle to oil—you would actually lower the price of gasoline below $2.50. I would be very cautious at $2.50. It would be down in the $1.20 range."

Until recently the prices of natural gas and oil have moved in tandem, but fracking shale gas has so increased the supply of natural gas that the result is a dramatically lower price. Once sold on long-term contracts linked to the price of oil, more and more natural gas is purchased in spot markets. However, this delinking of natural gas from oil prices occurred in the U.S. largely because natural gas can be transported largely to the domestic market. Gingrich ignores the fact that oil is traded and its price set in the global marketplace. So unlike natural gas, the relevant supply and demand situation is international, not domestic.

While Gingrich is right that domestic demand for oil is down, global demand is up. In addition, global crude prices start rising when global spare production capacity begins to drop below the threshold of 3 million barrels per day. Spare capacity prevents and cushions price shocks. During the 2008 price run-up to $147 per barrel, global spare oil production capacity fell to as low as 1 million barrels per day. 

If Gingrich wants to lower oil prices, perhaps he should stop his saber-rattling against Iran. "If there's an effective diplomatic outreach here that pushes back the prospect of a military confrontation with Tehran, we probably have something on order of $20-$30 a barrel geopolitical risk premium that could drop out of the oil price very dramatically," wrote Tim Evans, energy analyst at Citi Futures Perspective in New York in the Financial Times. Oil consultant Lynch agreed. "The recent run up the price of oil is almost completely the result of concerns about losing Iranian oil or Iran attacking shipments in the Strait of Hormuz," he says.

The coordinated boycott of Iranian oil being spearheaded by the United States is increasing uncertainty in the global oil market. An attack on Iran to stop its nuclear program would clearly disrupt oil supplies. There is not enough current spare global production capacity to make up for the loss of Iran's 3.5 million daily barrels of oil. Lynch believes that as the Iranian situation drags on, crisis fatigue will set in among oil traders. He also points out that global production capacity is increasing. Thus Lynch predicts that the price of crude will likely drop back to $90 per barrel and the price of gasoline to around $3.25 per gallon by the end of the summer. 

Lying to voters about his power to command the law of supply and demand is as close to despicable as anything I can imagine. Well, actually not. But it's still pretty despicable. 

Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.