Something about Oil...

If you drive down the 405 Freeway from Los Angeles towards Orange County, you will invariably see a large American Flag draped over a industrial expanse. Among the smoke-stacks, economizers, tubing, flaring, iron and steel is a oil refinery. These refineries take in oil from Alaska and refine to use in various products that range from plastics and nitrogen-rich fertilizers to gasoline or diesel for your car. This is how the business of oil becomes the business of American (and Californian) consumers.

If the price of oil spikes, the cost for nitrogen-infused fertilizers goes up, which leads to an increase in the cost of production for farmers who use that fertilizer, which forces them to charge higher prices for their goods which leads to higher costs at the supermarket. While this may not be the main driver for an increase in food prices (salmonella outbreaks, weather, pests, etc. aside), it is still a way your average Whole Foods or Trader Joes shopper can connect the price of oil to the price of produce.

If a refinery shuts down for maintenance, and the market for the oil that comes from that refinery becomes tight, the price of oil from that refinery will go up. If a bunch of oil refineries shut down for maintenance, then the region that receives oil from those refineries will go up in cost. This will lead to higher prices at the pump, assuming a good portion of that oil is refined for gasoline and diesel.

If an oil producing country experiences social or political upheaval that paralyzes their oil production, then the global cost of oil will rise. The United States imports nearly half of the oil it consumes (in one way or another). If the global cost of oil goes up, the price at the pump will surely be affected.

Each of these situations have occurred in some capacity during the current Administration. The price of oil on the global and domestic market spiked during the Arab Spring (Libya), we are entering a phase where refineries are shutting down for maintenance and higher commodity prices have been a result of an increase in oil prices and the recession.

There are a couple factors that are leading to higher oil prices, which are translating to higher prices at the pump. But, let's look at a parallel economic universe to give you a perspective.

Coal...

Domestic coal consumption has been dropping over the last 5-10 yrs. At the same time, the price of coal has been steadily rising. Demand from Asia (China, South Korea, Japan), South America (Brazil, Colombia) and Europe (Germany) has grown. Traditional sources of coal for the international export market (Australia, Indonesia) have been hit with weather events and supply constraints. So, the US has stepped in to cover the gap. This has led to an increase in the price of coal on the international market for thermal (steam generation for electricity) and metallurgical (steel making) purposes. At the same time, coal companies have been cutting domestic production due to lower demand which has been caused (mostly) by a precipitous drop in the price of natural gas, an alternative to coal power. While the US is far from exporting more coal than it burns, many analysts from major coal companies (Arch, Peabody, Alpha Natural, Patriot, Cloud Peak, CONSOL, Arcelor Mittal, etc) are seeing a robust export market into the near future. Even though domestic consumption is low, production in places like the Powder River Basin is set to increase as more domestic and international partners buy up mine expansions.

Oil...

For the first time in decades, the US has become a net exporter of oil. Demand from developing countries for US oil exports has grown dramatically in the last couple of years. Domestic oil production has increased (instigated during the last Administration), but domestic consumption has gone down. This has been due to the recession and an increase in the average fuel efficiency of autos sold in the US. While we have enough oil to satiate our consumption, the drop in demand coupled with increased exports has led to an increase in price. Refineries are also shutting down for maintenance and moving towards higher cost blends for certain regions (see CA gas prices). And, threats from Iran on closing the Straits of Hormuz are not helping.

The Point: There is no Administration policy that could alleviate the increasing price of oil in the short term. If Obama approved the Keystone XL pipeline tomorrow, the price of oil and gas at the pump would still be high for the short term. Republicans have been criticizing the Administration for what they characterize as overreaching regulations and stalling on the exploration of new oil and gas fields. Putting aside the exploratory well will be drilled in the Arctic in the next few months, if the Administration approved a good amount of onshore and offshore wells, the price of gas would remain relatively high. As long as we are connected to the international market for oil, we will be subject to it's fluctuations. The Administration can do nothing to influence that.

So...why, with all this information in mind, are the Republican nominees blaming the Administration's policies, talking about offshore oil exploration, and promising far-flung dreams of $2.50/gallon gas?

Political gain. Pure and simple. Their assertions are nowhere near the universe where fact resides.

And a point on the Strategic Petroleum Reserves...If the Administration were to release oil from the SPR, it would send a price signal to the market that we are in a dire situation in regards to oil supply. But, we are not. We have plenty of supply. We are just exporting more and consuming less and feeling the effects of the international market.