Obama does not understand basic rules of economics

Here is an excerpt from a report from the French news agency AFP:

"US President Barack Obama blamed oil "speculators" on Tuesday for soaring gasoline prices that risk weighing down the US recovery and could dampen his 2012 election hopes.

"It is true that a lot of what's driving oil prices up right now is not the lack of supply. There's enough supply. There's enough oil out there for world demand," Obama said at a campaign-style event not far from Washington.

"The problem is, is that oil is sold on these world markets, and speculators and people make various bets, and they say, 'you know what, we think that maybe there's a 20 percent chance that something might happen in the Middle East that might disrupt oil supply,'" he said.


So, is Obama correct? Is the rise of oil prices due to speculation? Are their evil fat cats who are stealing money out of the hands of the poor around the world by their nefarious schemes to drive up oil prices? the simple and clear answer is NO! Oil prices have been going up since Obama became president. In the first months of Obama's term, the price of a barrel of oil was about $38. That low price was the result of a sharp decline in demand for oil around the world due to a world wide recession. think of it this way, unemployed people drive less since they cannot afford the gasoline. Businesses that sell less have less need for fuel since they are doing less. As the world began to recover from the recession and the world economy began to grow again, the demand for oil recovered a bit. At the same time, the lower oil price discouraged some drilling in certain parts of the world so the supply did not go up any further. All of this led to a gradual rise in oil prices from their depressed levels at the start of 2009.

Of course, two other things happened that made quite a difference as well. The first event was the oil spill in the Gulf of Mexico. The immediate reaction from Obama and the Obamacrats was a hysterical directive to stop all offshore drilling. Imagine, every other country with oil off of its shores was drilling, but the USA stopped. There are billions of barrels of oil off of US coasts, but Obama said to stop. To this day, deep water drilling offshore has not recommenced because Obama has prevented the issuance of drilling permits even after two separate courts have ruled the actions of the federal government illegal. (Just imagine what the press would have done if Bush had blatantly disregarded rulings by a federal court.) The result of the stoppage of drilling off the US coast has reduced world oil production by just under one percent. for most commodities, such a decline would have little effect, but oil is produced from sources that do not get turned on and off; once a well is drilled, it just keeps producing. That means that a 1% shortfall builds up over time and eventually has a major effect on the price. So, Obama's folly in preventing the US from drilling off shore has driven up the world price of oil.

The second event that has caused oil to spike so high is the decline of the US dollar. Oil is priced in dollars when it is traded around the world. As the dollar declines in relation to other currencies, the price of oil rises. Buyers in Europe or Japan have seen price rises but no where near as large as those in the US. The fall of the dollar is tied in great measure to the creation by the Federal Reserve of hundreds of billions of extra dollars during its quantitative easing 2 and earlier programs. The oil price inflation comes in part from that government action.

We then get to the question of whether or not there are speculators who drive up prices. There certainly are investors who buy and sell oil; these folks, however, mostly buy and sell oil futures. They are not interested in buying actual physical oil which has to be stored and handled. If a hedge fund decides to buy oil, it would much rather buy a contract for delivery of the oil in six months or a year. That purchase is just a paper transaction; no oil is delivered and none needs to be dealt with by the hedge fund. The actual oil that is refined into gasoline, however, is produced from oil purchased on the spot market. In other words, the refinery is not buying oil for delivery in six months, it is purchaseing oil for delivery today. Speculators are just not in that market. while there is a relationship between the futures and the spot prices, it is a not infrequent event for the spot price to move in one direction while the futures go the other way.

What all of this means is that Obama's blast at speculators is an attempt by Obama to cover up the true reality as to why oil prices have soared, a reality where Obama and his minions get much of the blame. Since Obama is a president who frequently blames the rich for problems, his attempt to foist his own problems off onto the scapegoat of speculators is not surprising. It remains untrue, however.