Newt Gingrich is promising that if elected president, he'll lower gasoline prices to $2.50, or maybe even $2.00, which means that Newt is either lying or knows nothing about market economics.
The global market for crude oil and refined fuels like gasoline and diesel is described as being fully liquid; what this means is that since the product can be shipped to almost any place on the globe, prices around the world are largely linked – an over-supply of product in one area is shipped to meet a rise in demand someplace else. This is why rising demand for oil in China can cause the price paid for oil in Texas to rise, even if that Texan oil is going nowhere near China.
A fully liquid market is the easiest to understand since it operates according to the basic laws of supply and demand. It also means that the market can't be affected by the desires of a presidential candidate. If a refinery in New Jersey can make $3.00 per gallon by selling diesel fuel in New York or $4.00/gal by selling diesel in Denmark, then that fuel is probably headed to Europe. In today's market, the only way for President Gingrich to make good on his promise of $2.50/gal gasoline would be to mandate some sort of price cap.
But there are two problems with this approach: 1) In today's GOP lexicon this would be socialism; and 2) It won't work. Last year, Vladimir Putin mandated a price cap on gasoline in Russia and oil companies quickly started to ship their gasoline instead to Europe where they could get a better price, leading to fuel shortages across Russia.
But muddled energy policy isn't just the domain of presidential candidates. Last week, the GOP-controlled House passed their own energy bill (HR3408) that, among other things, decreed that construction begin on the Keystone XL pipeline from Canada. You may remember Keystone as the controversial pipeline designed to bring oil (actually bitumen, a semi-solid hydrocarbon) from the Oil Sands region of Canada to refineries along the U.S. Gulf Coast. Barack Obama canceled it last month. Republicans are touting Keystone not only as a job-creator, but also as a way to secure oil supplies for America, and now, as a way to bring down high gas prices. Of course, this isn't true for the reasons explained above - Valero, operator of one of the specialized refineries that would receive the Canadian bitumen, has already discussed in corporate documents how the refined gasoline and diesel will be shipped to hungry markets in Latin America and Europe, not sold domestically. To underscore the hypocrisy of the energy security/cheap gas Oil Sands argument, House Republicans defeated an amendment proposed by Rep. Ed Markey (D-MA) that would prevent refined Oil Sands products from being exported.
America needs a comprehensive energy policy to ensure our economic future; what we don't need are grandstanding politicians making promises and passing laws that affect an industry they clearly don't understand.
Photo Credit: Gage Skidmore