You’ve likely noticed that gas prices just increased sharply. Which politician gets blame?
In the spirit of current election year rhetoric, many Americans are likely to think that this is the most important question they can ask … at least until the news media feeds the voracious-yet-superficial American media consumers yet another morsel of feigned controversy to get them worked up about. And it’s easy to get worked up about rising gas prices. We all pay them, and the price increases glare visibly at drivers constantly in the form of signs at their local gas stations.
Americans have enjoyed ever-dropping prices for gas for nearly 2 years. Why the recent increase? This time it’s because of the Federal Reserve. The Fed, concerned still about the sluggish economy, wants to make money easier for Americans to borrow. So instead of sticking with their original plan announced back in December to institute four increases in the interest rate in 2016, on March 16 the Fed informed the public that there would be only two. This change caused the U.S. dollar value to drop in comparison with many foreign currencies.
This means that American gas companies buying a barrel of OPEC oil with American dollars now have to spend more of those American dollars to buy that same barrel of oil. These American gas companies pass on their price increase, in the form of U.S. currency, to the public.
It seems to be a time-honored American tradition to credit your favorite politician when gas prices drop, and blame your least favorite one when gas prices rise. However, the reason gas prices started dropping from two years ago in the first place is that American oil companies, responding to American consumers tired of OPEC’s habit of manipulating gas prices by deliberately reducing oil supply, began drilling in earnest on American soil for more non-OPEC oil. OPEC, in response, fearful that the American economy could be actually no longer be dependent on OPEC-supplied oil, began flooding the American market with greater oil supply than the demand. Greater supply than demand always equals lower prices.
OPEC’s strategy has worked. American oil companies no longer can drill for profit. It’s at least a temporary side benefit to American consumers, as gas prices dropped. However, it’s also caused the economies of Midland-Odessa Texas and other oil-dependent areas, accustomed to feast or famine, to go from abject feast in 2013 to abject famine in 2016. Drilling companies and all their associated subcontractors, formerly dependent on revenues from high gas prices, found themselves from really high demand for their product to almost none. Many of these companies have gone out of business. A hotel stay in Midland that in 2013 cost about $400 per night today will set you back about $120. Unfortunately, this recent gas price increase will not help Midland, Texas and other cities dependent on oil production for jobs and economic growth, since the increase is not tied to oil supply.
There are many reasons economist have questioned whether the Federal Reserve hurts or helps the American economy. The main reason to question the Fed is simply their rather arbitrary control over accessibility of American currency. Americans today can now see the results of Federal Reserve policy each time they see the price sign at the gas station change.