Ray Keating | On July 19, 2013

Photo: Reuters

It can be very entertaining – though at the same time a bit bewildering and depressing – to observe the media trying to explain price changes in the market. And then there are the misguided policies from elected officials and their appointees. It’s all evident in oil prices.

Over the past few weeks, the benchmark U.S. oil price (Cushing, OK, WTI spot price) increased by $10-$12 a barrel, closing at about $106 on July 15.

Why the increase?

Well, a July 11 Wall Street Journal piece emphasized the “easing of bottlenecks in the Midwest,” which “are enabling refiners to ramp up operations and sate the globe’s thirst for fuel.”

Um, wouldn’t that work against higher prices?

The story goes on to say that an unexpected drop on U.S. crude oil stocks have pushed up the price. But again, in the same article, it is pointed out, “Several recently opened pipelines and rail routes are helping oil companies tap into the huge pool of supplies that were previously trapped in the middle of the country.” So, new infrastructure is allowing increased U.S. oil production to reach the market. Again, not sure how this is a source of the increase in oil prices? Did the expanded infrastructure suddenly appear, like manna falling from heaven?

In addition, the International Energy Agency projected last week that oil production from non-OPEC nations would increase and run ahead of oil demand in 2014. Toss into the mix the economic slowdown in China. All of this would work against price increases.

Why have oil prices moved up of late, and remained high for an extended period given the assorted factors expanding supply and limiting demand?

On the recent price move up, the big issue is ramped up uncertainty via unrest in the Middle East/Northern Africa, as exhibited most clearly of late by the happenings in Egypt, especially given the importance of Egypt’s Suez Canal and the Suez-Mediterranean pipeline. But the Arab Spring over the last few years has served to undergird oil prices, by injecting an uncertainty premium.

Also on the longer term price issue, the multi-year, loose money policies of Ben Bernanke’s Federal Reserve have created uncertainty regarding the dollar, therefore helping to boost the dollar price of oil.

Meanwhile, the Obama administration has worked for price uncertainty, and against major positives that have developed in the market. Namely, Obama’s step back from the Middle East/North Africa region has created a void of stability, and helped to increase the uncertainty factor. At the same time, the private sector in recent years has dramatically changed the global energy equation by opening up U.S. production of both oil and natural gas from shale formations. But the Obama administration has worked against domestic production, via continued prohibitions on exploration and development on federal lands and offshore, and the EPA’s general push against carbon-based energy.

It’s a classic case of why markets work, and government does not. Private sector players innovate, invest and respond to market price and profit signals, while government creates obstacles due to misguided, costly policymaking.

Ray Keating

Raymond J. Keating is chief economist for a national small business organization; a weekly columnist with Long Island Business News; a former Newsday weekly columnist; and an adjunct professor in the MBA program at the Townsend School of Business at Dowling College.

Author of numerous books, his latest business and policy books are “Chuck” vs. the Business World: Business Tips on TV and Unleashing Small Business Through IP: Protecting Intellectual Property, Driving Entrepreneurship. Keating also is a novelist, penning a series of Pastor Stephen Grant thrillers.

His articles have appeared in a wide range of additional periodicals, including The New York Times, The Wall Street Journal, The Washington Post, New York Post, Los Angeles Daily News, The Boston Globe, National Review, The Washington Times, Investor’s Business Daily, New York Daily News, Detroit Free Press, Chicago Tribune, Providence Journal Bulletin, and Cincinnati Enquirer.