Energy & Entrepreneurs

Trend in Prices at the Pump

by Raymond J. Keating

Pulling into New York gas station recently, I looked at the prices, and sarcastically said, "Thank you, Ben Bernanke." I could've mentioned Barack Obama, members of Congress, and state lawmakers as well.

Let's first take note of the trend in gas prices. Back in July 2008, of course, the average price at the pump peaked above four dollars per gallon. The credit and economic meltdown in subsequent months saw the average price of gas drop to just below $1.70 per gallon by December 2008.

Since then, the price has climbed unevenly, though unmistakably higher. For example, over the past two years, from the second week in January 2009 to the second week of this month, the average price of gas increased by 74 percent, with much of the increase happening from January 2009 to January 2010. After staying rather steady for the first nine months of last year, the average price increased by 15 percent since September.

Of course, the price at the pump has tracked the price of oil closely. And again since mid-September, for example, the price of a barrel of oil has increased by 22 percent.

Looking ahead, the U.S. Energy Information Administration warned on January 11 that gasoline prices could top $3.50 per gallon this summer, and might exceed $4 by September. In terms of annual averages, the EIA is looking for $3.17 this year and $3.29 in 2012. Those averages compare to $2.78 last year and $2.35 in 2009.

Understanding that these are only projections, and that many factors can influence prices, what policy issues come into play?

The question with the Bernanke Fed is: How loose monetary policy is, and what's the corresponding impact on inflation, inflation expectations, and the value of the dollar? In fact, the Fed has expanded the monetary base at an unprecedented rate since September 2008, and the risks regarding inflation and the value of the dollar have had and will continue to have a key effect on the prices of oil and gasoline.

At the same time, the Obama administration has persisted with and expanded restrictions on domestic energy production, including slowing the pace of issuing offshore drilling permits, and blocking access to offshore resources in the eastern Gulf of Mexico and along the Atlantic coast.

And of course, added into the mix must be the federal and state taxes at the pump. New York imposes the second highest gasoline taxes in the nation (with only California's higher). In turn, New Yorkers pay among the highest prices for gasoline among the states.

So, while various factors impact the price of oil and gas, including economic growth and energy demand, governmental policies rank among the major influences. If policymakers shift to sound monetary policy, roll back taxes, and remove regulatory obstacles and restrictions to energy production, then it's no secret that consumers, including small businesses, will see benefits in terms of enhanced energy affordability.

Until then, again, thanks to Ben, Barack, and many in Congress and the state legislature for those higher pump prices.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.