> ## Content Index
> Fetch the complete content index at: https://www.smdp.com/llms.txt
> Use this file to discover other available public pages before exploring further.

# What a difference a year, or two, makes
- URL: https://www.smdp.com/what-a-difference-a-year-or-two-makes/
- Published: 2006-05-03T15:00:00.000Z
- Updated: 2026-10-24T23:59:08.000Z
- Author: Guest Author
- Tags: Opinion, Santa Monica, #archive-import

*By GUEST COMMENTARY BY ROGER SWANSON*

Editor’s note: This guest commentary originally appeared in the Aug. 7-8, 2004 edition. Now, oil is about $72, or 180 percent higher.

Why are oil prices so high? Based on historical data, prices today are relatively low at $40 per barrel of crude oil and more than $2 per gallon of gasoline compared with other periods. Today’s price equates to the 1991 high of $60 in current dollars. Here are some reasons for high prices today.

OIL DEMAND China’s rapid economic growth has exerted significant pressure on oil producers. Further, the U.S. economic recovery — driven by both fiscal and monetary policies — exerts significant pressure on world supplies. The U.S., with 5 percent of the world population, consumes 25 percent of all oil produced.

That pressure would have been even greater if the U.S. had not improved its energy efficiency since the early 1980s, driven by a shift from a manufacturing to a service economy and automotive efficiency standards imposed after the oil shocks of the 1970s.

CONSERVATION, OR THE LACK THEREOF Rather than focus on conservation, George W. Bush looked at the supply side only. Bush refused to consider any change in fuel economy standards for the auto industry, any application of passenger car standards to SUVs which are classified as trucks, or any change in truck standards. To address the demand side would have taken political courage.

U.S. STRATEGIC RESERVES Because of potential supply problems, the U.S. Energy Department is adding to the already high demand by continuing to purchase crude oil to fill the strategic petroleum reserves. That action tends to bolster the arguments of the oil traders, who are bidding up future price contracts.

OIL SUPPLY: OPEC AND MAJOR OIL PRODUCERS With the exception of Saudi Arabia, other producing countries have a limited ability to increase production. Iraq is not yet stable enough to make a difference in the short-term and Russia is proving to be a less than reliable source of oil.

Further, major oil companies have not increased exploration and development of existing reserves as a result of the current spike in prices. Even if they did, a significant increase would not come to market for at least 12 to 18 months.

CURRENT SUPPLY PROBLEMS Recent violent incidents in Saudi Arabia are no mere coincidence. Terrorists now realize that they can inflict major damage on the world, and particularly the U.S., by damaging the oil supply lines. Oil traders are betting on higher future prices and are buying future contracts — one of the primary reasons for the increase in prices. Oil trading defines spot market pricing (i.e., oil not fixed by long-term contracts), which ripples through the system to the pump.

AIR QUALITY RULES The U.S. has incredibly complex air quality rules. This means that gas produced for one market may not be usable in another. The logistics of both transport and storage create local shortages that drive prices up in some areas, and cause storage problems and lost production in other areas. This situation exists because the EPA has standards that are less stringent than state and local standards.

DEVALUATION OF THE DOLLAR Since the end of 2001, the dollar has declined 27 percent against the euro. As a result, the European buying power of OPEC producers, for example, is 27 percent less today. So, Saudi princes need more dollars to pay for the same new European Mercedes than they did before. The recent decline in the dollar’s value has occurred primarily because of monetary and fiscal policies, as well as the trade deficit.

MONETARY POLICY The Federal Reserve governs monetary policy in the U.S. The policy can be expansionary, like low interest rates, or restrictive, like high interest rates.

With low interest rates in the U.S., investors buy non-dollar denominated securities from countries paying higher rates. As a result, the demand for U.S. Treasuries declines and the demand for euro-based assets increases. That shift in demand means that dollars are sold, thereby lowering the value of the dollar relative to other currencies.

FISCAL POLICY Fiscal policy can increase the national debt or decrease the debt. The recent federal income tax cuts were expansionary. More importantly, the lack of a corresponding cut in government spending was expansionary, as was spending on the wars in Afghanistan and Iraq.

The Bush fiscal policy means that the U.S. will have to borrow heavily in the future, which is viewed unfavorably by monetary markets: Fewer investors want to buy or hold dollars, thereby driving the dollar down relative to other currencies.

TRADE DEFICIT Trade deficits, which also impact currency valuation, similarly exert psychological pressure on others to sell and avoid dollar-denominated securities.

BOTTOM LINE The bottom line is that oil producers would like to see prices increase, including Bush’s friends in the Midland and Saudi Arabia. The net effect: American taxpayers spend more dollars for gasoline with the difference flowing to the friends of the president. This is classic wealth redistribution.

*Originally published in the Santa Monica Daily Press print edition on May 3, 2006.* [Read the original PDF.](https://s3.us-east-1.amazonaws.com/smdp%5Fbackissues/050306.pdf?ref=smdp.com)