Another George W. Bush legacy: $150 oil
Here's why: Despite rising demand for gasoline, the Bush administration did nothing to increase the Corporate Average Fuel Economy mandate. Their policy was to let the market determine which vehicles Americans want to drive. The result? Detroit built gas-guzzling SUVs with little eye on the future, all but guaranteeing a domestic auto manufacturing base unprepared for the next rise in oil and gasoline prices. That era arrived in 2008, when gasoline bills soared, disposable incomes plunged, and the economy, already stalled by the financial crisis and housing bust, slumped further.
A tax cut that led to debt
The Bush administration's 2001 $1.1 trillion tax cut that favored upper-income groups instantaneously ended the federal government's budget surplus, creating a $250 billion deficit that quickly swelled to $400 billion. The tax cut, tilted toward Bush's political base of the wealthy, virtually guaranteed that broad-based demand would remain soft, and probably fail, in a few years. It did, and the deficit ballooned - hitting about $1.1 trillion, including bank bailout spending, by the time President Bush left office in January 2009. The consequence? Institutional investors pushed the dollar down even more, due to both the U.S.'s worsening fiscal condition, and the decreased attractiveness of U.S. investments.
Further, as the deficit rose, institutional investors began a trend of buying oil futures as both an asset play and as a surrogate currency to protect against a weakening dollar. And the weakening dollar -- once trading at 82 cents versus the euro, now at about $1.43 -- has been a major factor in oil's rising price this decade. Aided also by the leveraging boom, oil soared to a record $147.27 per barrel in the summer of 2008; it plunged with the start of the financial crisis, but has since quickly recovered to about $75, largely on the weak dollar and investors' belief that crude will protect them against future inflation and future dollar weakness.
When President Bush initiated the Iraq War, whose outcome and ultimate impact on foreign policy is still unknown after six years, he did not ask American citizens to sacrifice financially and pay for the war. As a result, another $1 trillion was added to the national debt (including interest), creating even more jitters in institutional investor circles.
Of all the administration's domestic and foreign policy mistakes, going to war without paying for it may prove to be the most economically damaging. It created a mountain of debt that literally guaranteed a weak dollar, putting a floor under oil's price.
Another consequence of the debt-financed Iraq War? The deterioration of Iraq's oil production infrastructure. One "selling point" for the war was the prospect of lower oil prices, assuming an increase in Iraqi production, to more than 4 million barrels per day. Six years into the war, there is no likelihood that Iraq will attain that production level any time soon.
Some skeptics argue the increasing domestic drilling and building more refineries will prevent sky-high oil prices, but this is a ruse: absent conservation, including much higher vehicle fuel efficiency, no amount of drilling will prevent prices oil and gas prices in the U.S. from rising.
Critics further assert that the rise in oil prices was not Bush's fault. But the more than $2.5 trillion in public debt added by Bush Administration, the collapse of the dollar, and the push institutional investors have made into oil as a hedge have made it very clear that today's sky-high oil prices are very much the result of Bush's grand strategy. Similar to the Bush administration's disastrous economic policy, Bush's energy policy was an unmitigated failure.
Oil Analysis: It's hard to believe, but the Clinton administration registered four straight budget surpluses between 1998 and 2001 -- an era when the dollar was strong. President George W. Bush's massive deficit spending ended the budget surpluses and ushered in the weak-dollar–induced era of high oil prices. (The U.S.'s major oil companies, however, have benefited from oil's record-high prices.)
Further, those prices this spring resumed their rise, and until the budget deficit is reduced, they're headed higher. Moreover, if emerging market oil demand increases more than expected as the global economy recovers, oil is headed well over $100, probably toward $150. And the U.S., again -- lacking highly efficient vehicles, an energy policy, or even the sense to pass a tax increase to pay for a $1 trillion war -- will be vulnerable to another oil shock.
Financial Editor Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.