George Bush was being thanked for high oil prices. This is patently ignorant of basic supply and demand, and begs the question of why supplies have been low, or why demand has been higher.
My understanding of this issue is that the oil price is high due to
1. speculation by hedge funds
2. high demand from growing Asian economies
3. high demand from the U.S.
4. refilling of the U.S. strategic petroleum reserve
5. not much elasticity in production capacity
6. a substantial terrorism premium
George Bush has influence on at least 4 of these. There’s not much he can do about speculation and production capacity. The oil majors have not invested in new capacity for years, and even now there is little exploration going on. Believe me, I own an oil driller, and its stock price hasn’t moved in 3 years.
Indirectly the vast U.S. trade deficit is financing growth in China at the price of lower growth in the U.S. Bush has worked on reducing the size of the trade deficit by encouraging domestic savings through the capital gains tax cut. There’s not much else he can do. American companies need to produce goods that Asians want. Bush could try to get China to float the yuan, which has been at an unsustainably high level against the dollar.
Continued high demand in the U.S. is the result of policies that discourage energy conservation. Such as the small business SUV subsidy and the lack of sensible fuel economy standards for SUVs and small trucks. Bush has also allowed the most inefficient and polluting power plants to operate without investing in equipment upgrades.
The most contentious effect of Bush’s policies on the oil price, at least on this board, is the terrorism premium. Clearly the occupation of Iraq has not led to a decrease in international terrorism. One could even argue that it is responsible for the terrorist acts in Saudi Arabia and for the attacks on that country’s oil infrastructure. So far those attacks have not been successful, but if the Saudi oil supply could be only slightly interrupted, the oil price would go through the roof. Recent attacks in June, which didn’t cause a supply disruption, caused a spike in the oil price:
Based on the findings presented above, I would disagree with Bill Mann’s opinion that the high oil price is purely a supply and demand issue. The low elasticity of supply is definitely important. The lack of investment in exploration and of significant energy conservation in the U.S., combined with high economic growth in Asia and elsewhere, have led to a situation of demand growing faster than supply. The Bush administration has some influence over these factors but not enough to lower the world oil prices.
Apart from supply and demand, the terrorism premium is an important factor which is at least partly due to the failure so far to pacify Iraq and to promote significant democratic change in Saudi Arabia and other Arab nations. This has led to an abundance of young, disaffected youth among whom terrorist groups can recruit soldiers. To reduce the premium, a policy change is needed away from unilateral military action and unconditional support of the Saudi regime towards a multilateral approach. It’s easy for Iran and Syria to defy the U.S., but this becomes more difficult if the U.S. does not stand alone.
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