8 Ways the Bush Administration Has Caused the Oil Price Boom

When George W. Bush was sworn in as President in January 2001, the price of oil was approximately $28 per barrel. By coincidence, 2001 also saw the US import more oil than it produced domestically for the first time in its history. In hindsight, perhaps this was an omen. During the tenure of his administration, oil prices have skyrocketed to $130 per barrel, and some analysts have predicted that the price could ultimately settle at $250 or $500, depending on the time frame. Conspiracy theorists and cynics would correctly point out that the Bush family and administration insiders have profited from this rise. Even Bush supporters would have to concede that the administration has contributed to, if not actively encouraged, the record run-up.

From fiscal policy to energy policy to foreign policy, the Bush Administration has committed one gaffe after another, and the futures markets have been quick to react, with devastating economic consequences. At the same time, there were isolated instances in which the Administration appeared to be working to relieve prices, and these efforts should be acknowledged as well. In doing so, the net effect of his presidency can be distilled from the sundry other factors that weigh on oil.

  1. Weak Dollar: While President Bush and his coterie have echoed the "Strong Dollar" policy of the Clinton administration, the Dollar’s performance has been anything but strong under Mr. Bush; it has depreciated 37% against it chief rival, the Euro, over the last eight years. While the factors which weigh on currencies are as numerous as those which affect the price of oil, the policies of President Bush have been disastrous for the Dollar. Record-low interest rates, a surging trade deficit, and ballooning national debt have shaken investor confidence in the Dollar, causing the currency to rapidly lose value. While the relationship between the Dollar and the price of oil is tough to pin down, the commodity and the currency are 95% correlated. One explanation is that investors have moved into commodities because they provide a hedge against inflation and the falling Dollar. On the other hand, it could just as well be that oil is driving the Dollar, and not the other way around. According to Goldman Sachs, an investment bank, "commodities [oil] are moving for their own reasons and the dollar is caught in the slipstream." The truth is probably that there is two-way causality. This is basically a fancy way of saying that one would expect that a weak Dollar would encourage foreigners to charge more for a given quantity of oil, but more expensive oil would then weaken the US trade imbalance in the short-term, causing the Dollar to depreciate further. In this way, strong oil and a weak Dollar reinforce each other. Regardless of the nature of this relationship, the weak Dollar (for which the Bush Administration bears some responsibility) ensures that America pays more for oil than other countries. As most oil contracts are still denominated in Dollars, the price of oil is relatively higher in terms of Dollars, compared to other currencies.
  2. Foreign Policy: The Bush Administration’s aggressive foreign policy has also contributed to the surge in oil prices. When the USA invaded Iraq in 2003, the justification was that Saddam Hussein was harboring weapons of mass destruction, and secondly, that he was oppressing the citizens of Iraq. Conspiracy theorists snickered, believing instead that the war was related to oil. In hindsight, it looks like they were right, especially since the the first priority of US armed forces upon entering Iraq was to assume control over Iraqi oil production. While those directly involved in the planning of the Iraq war have yet to come clean about their true motives, Alan Greenspan and Henry Kissinger have separately implied that the war was blatantly aimed at Iraq’s vast deposits of oil. Regardless of whether this is true, the US presence in Iraq should have ultimately stabilized Iraqi oil production, right? Not exactly. In fact, a full five years have passed since the initial invasion, and oil production is still hovering around 2/3 of pre-war output. This is especially unfortunate because Iraq is one of the only major oil producers that (would have been) is in position to increase output. As if this were not enough, the ongoing US military effort requires 3 million gallons of imported gasoline per day to sustain its operations. Disregarding the cost to taxpayers- estimated at $1 Billion per week due to the army’s unique fuel specifications- this means that the net effect of the US military effort has been an increase in demand for oil and a decrease in supply. One expert has speculated that if not for the Iraq War, the current price of oil would probably be closer to $40.
  3. Overseas Supply: Let’s now focus the spotlight on the supply side of the equation, specifically overseas supply. The top suppliers of oil to the US, in order of decreasing importance, are: Canada, Saudi Arabia, Mexico, Nigeria, Venezuela, and Iraq. Conspicuously absent from this list is Iran, with which the US has refused to trade for a couple decades. Given President Bush’s thinly veiled ambitions to go to war with Iran, it doesn’t look like he will lift these sanctions before he leaves the White House. Returning to the list, oil production in Mexico and Canada is subject to capacity constraints, and production in Nigeria is highly variable due to political instability. The situation in Iraq was covered already, which leaves Saudi Arabia and Venezuela as the two most viable candidates to increase oil exports to the US. Hugo Chavez, the flamboyant President of Venezuela, has suggested that despite certain ideological disagreements with President Bush, he would be willing to dialog with Bush anyway. According to Chavez, however, his requests have been repeatedly rebuffed. With regard to Saudi Arabia, with whom the President has a longstanding personal and business relationship, the situation is more nuanced. Mr. Bush has repeatedly lobbied Saudi Arabia to raise output, but thus far has secured only token increases. The US Congress has become especially disenchanted by the President’s lackluster efforts, and is debating whether or not to sue OPEC to achieve what he single-handedly could not. Analysts echo their frustrations by pointing to the myriad of trade deals thatPresident Clinton signed with OPEC members while he was in office.
  4. Domestic Supply: Maybe we should cut the Bush Administration some slack, since there is only so much they can be done to persuade foreign oil producers to ramp up production. Let’s turn our attention to the domestic front. According to the Wall Street Journal, "Exxon Mobil Corp. Chief Executive Rex Tillerson chided President Bush for asking Saudi Arabia to boost its production, while not doing more to increase production at home in the U.S., particularly off the coasts of Florida and California." Perhaps in response to such criticism, Mr. Bush has "proposed to the Congress that they open up ANWR [Alaska National Wildlife Refuge], open up the Continental Shelf…" However, the economic benefit of oil exploration in such areas is dubious, even without taking into account the environmental consequences. Two professors at the Center for Energy and Environmental Studies reckon both that the amount of recoverable oil in the ANWR is lower than current estimates suggest and that the oil would be quite expensive to extract. Even if the rosiest forecasts obtain, they predict that oil production in Alaska probably wouldn’t exceed 1% of global supply.
  5. No New Refineries: Refineries represent the sine qua non in the chain that links oil producers to consumers, by transforming crude oil into usable products such as gasoline and heating oil. The profitability of oil refining is represented by the "crack spread," which according to one estimate, "has tripled in the last 12 months." One of the factors behind this increase is a shortage of refining capacity. Unfortunately, not a single new refinery has been built in the US in the last 30 years, a time period that obviously includes the eight years under the leadership of President Bush.
  6. Fuel Economy: Moving to the demand side of the supply/demand paradigm, the Bush Administration has done little to mitigate demand for oil products. Since 2/3 of the oil consumed in the US is used for transportation purposes, it would follow that an increase in motor vehicle fuel economy would go a long way in reducing demand. However, it wasn’t until 2006 that that Bush Administration made any effort to legislate an increase in fuel economy, and even this effort was uninspired. This mandate "only increases fuel economy by 1.8 mpg over 4 years…abandons fleet-wide averages in favor of a sized-based system that will encourage automakers to build larger vehicles with weaker fuel economy standards…and larger pick-up trucks will remain exempt from the standard." Individual states responded to this legislation by circumventing the federal government and enacting their own standards. Instead of embracing these efforts, the Bush Administration called them " ‘an obstacle to the accomplishment’ of the new federal standards" and insisted that its own (lower) standards superseded those of the states. Fortunately, the US federal court system has sided with the states.
  7. Alternative Energy: Alternative energy is being heralded both as the solution to America’s addiction to oil and a strategy to deal with climate change. The only person who has not firmly jumped on the bandwagon is President Bush. While the President likes to boast of his support for the alternative energy sector, the numbers indicate that funding has hardly budged over the duration of his presidency. Now, the Democrat-controlled Congress is moving to punish oil companies that don’t invest in alternative energy by imposing a "windfall profits tax." President Bush is spearheading the effort to block this bill. Republicans have already scuttled a similar bill which would have required utility companies to generate a modest 15% of US electricity in 2020 using renewable energy methods. Instead, President Bush has thrown his support behind ethanol, which, if 2007 was any indication, probably can’t be counted on to lower fuel prices. Not to mention the fact that its purported efficiency and environmental benefits are dubious and that it is contributing to rising food prices.
  8. Speculation: The Bush Administration is known for its coziness with big business. Its economic policy team is dominated by former executives in the financial sector, such as Henry Paulson who serves as Secretary of the Treasury. Despite evidence to the contrary, Mr. Paulson is adamant that expensive oil, albeit unpleasant, is a natural result of changes in the balance between supply and demand. He has firmly ruled out the possibility that excessive speculation has played a significant role. The "Commodity Futures Trading Commission, the government agency responsible for overseeing the trading of energy contracts," evidently disagrees, and "has taken the unusual step of revealing a six-month investigation into possible price manipulation." Led by Democratic Senator Joseph Lieberman, the Congress is also conducting an investigation. Lieberman has indicated that he would like to see Congress ban all institutional investors from speculating in commodity markets, because they are altering the landscape from one based around hedging to one based on investing. He is supported by George Soros, respected investor, who argued that, "Oil is increasing … but the recent rise I think has a larger fundamental speculation and really misconception in the way the institutions have piled in on one side of the market buying these commodity indexes."

One could be excused for cynically suspecting the Bush Administration from actively fomenting the rise in oil prices. After all, this is a president who shockingly opposed legislation which would temporarily suspend filling the American strategic petroleum reserve until oil prices return to earth. Leaked documents, reveal an Administration that is in hoc with oil companies, which are invited to take part in drafting the nation’s respective energy and environmental policies. This is also an Administration whose Vice President famously dismissed conservation as "a sign of personal virtue, but it is not a sufficient basis for a sound, comprehensive energy policy." Hence, it should come as no surprise that as oil prices have climbed (and continue to climb) to record levels, the Bush Administration has stood idly and failed to take meaningful action.