Democratic Debate 4/16/08: Are they stupid or do they thing we are?

I was watching the Democratic debate last night between Hillary Clinton and Barak Obama with curiosity to see where they stand on the issues, atleast for that particular debate. One specific issue that really strikes close to home for nearly all Americans had to do with what the candidates would do about the high price of gas.

Below is a transcript as excerpted from ABC News.

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GIBSON: We’re running short on time. Let me just give some quick questions here and let me give you a minute each to answer. What are going to do about gas prices? It’s getting to $4 a gallon. It is killing truckers. People are in trouble, yet the whole world pays a whole lot more for gas than we do. What are you going to do about it?

CLINTON: I met with a group of truckers in Harrisburg about a week and a half ago and here’s what I told them. No. 1, we are going to investigate these gas prices. The federal government has certain tools that this administration will not use. And the Federal Trade Commission, and other ways, through the Justice Department.

Because I believe there is market manipulation going on, particularly among energy traders. We’ve seen this movie before, in Enron, and we’ve got to get to the bottom to make sure we’re not being taken advantage of.

Number two, I would quit putting oil into the strategic petroleum reserve. And I would release some to help drive down the price globally. And thirdly, if there is any kind of gas tax moratorium, as some people are now proposing –

GIBSON: Like John McCain.

CLINTON: Like John McCain and some Democrats, frankly. I think Senator Menendez and others have said that we may have to do something because when you get to $4 a gallon gas, people are not going to be able to afford to drive to work.

And what I would like to see us do is say, if we have that, then we should have a windfall profits tax on these outrageous profits of the oil companies, and put that money back into the highway trust funds so that we don’t lose out on repair and construction and rebuilding.

But ultimately Charlie, we’ve got to have a long-term energy strategy. We are so much more dependent on foreign oil today than we were on 9/11. That is a real indictment of our leadership. I’ve laid out a comprehensive plan to move us toward energy independence that I hope I will have the opportunity to implement as president.

GIBSON: Very quickly, Senator Obama, same thing, but we’ve heard from politicians for a long time, we’re going to end dependence on foreign oil. I just have a quote, “the generation-long growth and our dependence of foreign oil will be stopped dead in its tracks right now.” That was Jimmy Carter in 1979. And it’s gotten a whole lot worse since then.

OBAMA: You’re right and that’s why people are cynical because decade after decade, we talk about energy policy. We talk about health care policy. And through Democratic and Republican administrations, nothing gets done.

I think many of the steps that Senator Clinton outlined are similar to the plans that we’ve talked about. It is absolutely true that we’ve got to investigate potential price gouging or market manipulation. I have strongly called for a windfall profits tax that can provide both consumers relief and also invest in renewable energies.

I think that long-term, we are going to have to raise fuel efficiency standards on cars because the only way that we’re going to be able to reduce gas prices if we reduce demand. You’ve still got a billion people in China and maybe 700 million in India who still want cars.

And so, the long-term trajectory is that we’re going to have to get serious about increasing our fuel efficiency standards and investing in new technologies. That’s something I’m committed to doing. I’ve talked about spending $150 billion over 10 years in a Manhattan project to create the alternative energy strategies that will work, not only for this generation, but for the next.

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Why is it that hardly ever in the news media is there any linkage made between the current price of gas/oil and the current value of the US Dollar? While there are numerous things both Obama and Clinton said regarding the current gas price crisis, I’ll not digress from the topic at hand.

Hillary’s solution of releasing oil from the strategic reserves really isn’t a solution as the current high price (in US$) per barrel of oil is more linked to the devaluation of our currency than it is driven by shortages of supplies.

Because globally, oil is traded in US$, when the currency exchange rate of the dollar depreciates in comparison to other global currencies, it takes MORE US$ to purchase the same global items. Not just oil. As the dollar value increases against Asian currencies, for example, the goods from Asia become ‘cheaper’ from a dollar perspective, and cheaper on the shelves in stores. As the dollar value decreases against Asian currencies, it takes more US$ to buy the same goods even though the actual ‘global’ price of the goods has remained unchanged.

Of course global demand for a controlled supply commodity like oil causes the price per barrel to fluctuate and over the past few years global demand for oil has grown. Quickly developing nations such as China and India require more oil to fuel their industries and the resulting increase in individual wealth allows more cars to be purchased producing an increased demand for gas. Assuming the slight impact to oil prices attributable to increased global demand moves the price for a barrrel of oil from $90 to $94 (about a realistic 4% change). But if the value of the US$ also drops by 4%, the same barrel of oil would take $98 to buy.

Another way to think of the issue. If oil were priced in Euros instead of dollars, and yesterday you could buy 1 Euro for 1 US$, the price of the example barrel of oil would still be 94Euro or $94. But if tomorrow due to financial changes, the dollar dropped in value by 4%, it would then take $1.04 to ‘buy’ 1 Euro. That barrel of oil now costs $94.00 even though countries that use the Euro for their currency are still buying it for 90 Euros.

The dollar has DECREASED against most major currencies over the past year, probably attributable to the slow-down (i.e. recession) of the US economy caused in part by the housing/credit crunch and the resulting cuts in interest rates by the FED. The charts below illustrate the change in value of the dollar against the Euro and the British Pound.

US Dollar to British Pound Exchange Rate: Past Trend, Current Value and Future Projection

US Dollar to Euro Exchange Rate: Past Trend, Current Rate and Future Projection

What the graphs show is that throughout 2007, the dollar lost value in comparison to the Euro and the Pound. A change of nearly 10% in comparison to the Euro. (Interpret the the charts as it took $1.30 to buy 1 Euro in Mar 2007, and nearly $1.55 to buy 1 Euro in Mar 2008.).

Its logical to assume that in the latter part of 2007 and the first 3 months of 2008, as gas prices went up consumer demand at worst probably leveled off, and likely decreased. Personally, we plan our trips better in an attempt to reduce our trips to the gas station. Therefore if change in demand was flat, the increase in the cost of oil can be attributed to the decline in the value of the dollar.

Solutions:

Releasing more oil into the market can only impact the price of gasoliine if the prices are being driven by supply not meeting current demand. Further, it can only reduce the price of gas if one assumes that refineries converting oil into gas have any additional capacity to produce more gas. That doesn’t appear to be the case.

To truly and significantly do something proactively in response to the gas prices today, government can only really focus on increasing the value of the dollar. As the value of the dollar comes up, the relative price per barrel of oil will come down to its real true market value. The government can also reduce the reliance on imported oil by opening up new areas for drilling — however the benefits are somewhat limited if that oil is priced at world pricing. Restoring the value of the dollar is probably a long duration effort. Balancing the budget, equalizing the trade deficit are things I understand effect the value of the US$.

One issue I’ve read about before attributed high gas prices (and somewhat related to Obama and Hillary’s reference to market manipulation) have to do with our refinery capacity. When the global supply of oil is sufficient, the next point that effects prices becomes ability to produce enough gas to meet demand. New refineries haven’t built in years, maybe decades. Refineries are owned by the petrol companies who are obligated to generate as much return on investment to their share holders as possible (these are for-profit companies!). Refiners aren’t going to be financially motivated to increase capacity if the next result is lower prices, and lower profitability of the product. But that is a different topic for a different day….

What I truly don’t understand is WHY the public isn’t given complete data and information about these and other topics (global warming, economics, war on terror, etc.). Mass media seem to tend towards over-simplifying very complex issues and unfortunately the masses seem to take what they get as Gospel. Oil and gas prices are NOT simply driven only by supply and demand. Other factors like valuation of currency play a big part in the pricing structures. Similarly, global warming isn’t simply a result of human CO2 production, yet that is the story put forward and swallowed hook line and sinker by the masses. Ditto the war on terror, and specifically the war in Iraq. Again, different topic for a different day, but the war in Iraq was NOT entered into solely to address WMDs as the media, politicians present and the masses believe.

-Trystero2008

Tags: Barak Obama, Clinton, consumers, democrat debate, dollar devaluation, gas prices, Hillary Clinton, Obama