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Holding Hands

Mises Daily: Friday, May 06, 2005 by

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Did you see President Bush and the Saudi Crown Prince holding hands early last week in Texas? The Houston Chronicle labeled this "culture shock" as much "hand-wringing over hand holding."

The White House quickly pointed out that nothing should be read into this public display of affection. Bush was helping the Crown Prince send a message to Saudis, to whom the hand holding would convey a message of friendship between the two heads of state. It was a political favor, meant for Saudi consumption.

If so, then their meeting served their individual purposes. The Crown Prince got to emphasize his government's warm relations with a super-state. And Bush got to deflect some of the blame for record-high nominal gasoline prices that have eaten away at the vaunted political capital he accumulated following last November's election.

Indeed, Bush got to plead that high gas prices are mostly due to supply reductions from Saudi Arabia (and, by extension, OPEC). The stakes are huge. If the table nearby is any indication, the economy is likely to suffer from the gas price rise—an event that does not bode well for any holder of public office.


Source: Oil prices from Energy Information Administration (EIA), U.S. Department of Energy. Crude Oil Prices 1861-1999 from British Petroleum. Available online. Real GDP from Federal Reserve Economic Data (FRED) database of the Federal Reserve Bank of St. Louis. Available online.

Blaming OPEC has been in political fashion for over three decades. Unfortunately, rising gasoline prices are more complicated than simply the fruits of a successful cartel.

Economic theory tells us that successful cartels sow the seeds of their own destruction. The reasons are twofold: success makes cartel-members' temptation to cheat too great and attracts non-cartel members to enter the market. Blaming OPEC may have political virtues, but it is not intellectually honest. There are several other factors that are not getting out.

One important factor is that rising gas prices are simply a cost of war, one that many on Mises.org warned against in early 2003 when the Administration was making the case for an offensive invasion of Iraq. Today, the war seems to be over, but the occupation is proving more costly. Its financing has been mostly off-budget, depending partly on monetization by the Fed.

The result has been a general increase in prices across the board. If you supported the war, then you can take heart that you are paying for it in terms of a lower real income and in a redistribution of wealth to those groups connected to the warfare state. And if you didn't support the war, then you can take heart in receiving a lesson of modern democracy.

The war has also contributed to rising gasoline prices by destabilizing the Middle East. There is less oil leaving Iraq today than under Saddam. This supply-side effect counters any benefit the Saudis offer by increasing production. Therefore, it is hard not to wonder if the reduced supply actually is occurring on purpose. It may reflect the policy goals of the Administration.

After all, Vice President Richard Cheney called for higher gasoline prices on a Meet the Press interview during the summer of 2000. In the summer of 2001, Bush stated his intellectual and moral support for higher gas prices as necessary to promote energy conservation, as reported in David Frum's book, The Right Man (p. 65):

[Bush explained that] every year from the early 1970s until the mid-1990s, American cars burned less and less oil per mile traveled. Then in about 1995 that progress stopped. Why? He answered his own question: Because of the gas-guzzling SUV. And what had made the SUV craze possible? This time I answer. "Um, cheap energy?" He nodded at me.


 

 A complete economics education: $50

Bush's war against the SUV appears to be working, if General Motors' stock price is any indication, but it is based on old ideas. The Left has long urged higher domestic gasoline prices as a way to end Americans' love affair with the automobile and promote usage of public transportation. If Frum's account is true, then the Bush Administration energy polices are Leftism Revisited. They simply may be working as intended.

But they might come back to bite him. With the world's economy growing at a faster rate than the U.S.'s, and with significant (and much desired) advances in property rights and free enterprise occurring in places like China and India, and with many economic trends favoring the Southern Hemisphere, now is no time for political intervention in the price system. The consequences of such policies are more severe in a world that now has a legitimate competing currency in the euro and that produces with freer labor markets and lower tax and regulatory burdens.

Such a world will demand more oil. Let oil prices rise and attract a greater supply of both oil and substitutes. Let's not intervene in ways that drive them up ever higher as a matter of policy. The difference between the two responses is the difference between Power and Market. The stakes are much more important than a picture of two men holding hands.

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Christopher Westley teaches economics at Jacksonville State University. See his Mises.org Daily Articles Archive. Send him MAIL. Comment on this article on the blog.