Wednesday, April 18, 2012

Gas prices: Obama and Iran

I don't get out much mainly because I don't have any money and I'm introverted, thus I don't care that much about being around a lot of people I don't know. But the high price of gas is a pretty strong deterrent for me and obviously everyone else in this country. Sometimes I feel like just driving around for a bit and walking around a store. But I don't drive unless I really need something.

That leads me to this Juan Cole piece about how the Obama administration's policy towards Iran affects gas prices:

Frum is likely correct that there isn’t that much speculation involved in trading oil futures nowadays. While 10% or 15% of the price of petroleum may derive from traders building the Iran crisis into futures contracts (which isn’t really speculation), mostly petroleum is high because demand is exceeding supply. Otherwise there should be a lot of petroleum just sitting around in depots, which is not the case.

But Frum then went on to say that there were two ways Obama could affect the price of petroleum. He could release some American reserves of petroleum, and he could offer more clarity on his Iran policy.

And this is where Frum went off the rails. Obama cannot reduce the price of petroleum simply by being clearer on his Iran policy. In fact, it is the clarity of that policy that is contributing to high prices. A more vague and ambiguous policy is what might calm the markets.

Obama’s Iran policy is to visit crippling sanctions on Iran and to attempt to impose a financial embargo on the sale of Iranian petroleum. If you are an oil futures trader and you hear that, you might well conclude that Obama is trying to take Iranian petroleum off the market. You would be right. Guess what: less supply, assuming constant or increasing demand, equals higher prices. So you’d build that into the futures bids. And that would cause gasoline prices to rise or stay high.

Even if Obama took Cole's advice gas would still be really expensive. And that's because of the basic supply and demand issue. We should take Cole's advice on Iran for the sake of both gas prices and Iran/US relations in general. But gas prices will continue be a problem until we develop alternative fuel sources and bend the demand curve.

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