This week I have an I-can’t-take-it-anymore topic: gasoline prices. It is not the gasoline prices that chap me, but the pouting, mud throwing, food fights, whining and probably worst of all the stupid solutions to the so-called problems.
Gasoline is like any other product or service that is a must-have in society and therefore, like electricity and natural gas, consumers feel entitled to all they want at a negligible price. And by the way, why all the hype right now? It’s around $3.50 per gallon. Being an election year obviously feeds the flames and I guess there just isn’t enough other bad news in the world for the 24/7 cable news and internet news world to hype up for ratings.
Products and services for which consumers feel entitled are sold and manipulated by blood thirsty, evil, corrupt, large corporations. A little sarcasm? Not so ironically, the evil and most hated industries are the most heavily regulated: utilities, oil companies, insurance companies, and pharmaceuticals. If oil companies were able to drill willy nilly wherever they want, prices would come down. But Americans don’t want that. If health insurance would be decoupled from employment and people were able to shop for it anywhere in the country and if the tax subsidy were removed, prices would come down. But it has become a right that employers provide it. You’re probably thinking I’m crazy on this because individuals pay way more than large groups. That’s because large groups exist. If insurers had to fight for individuals one by one and there were no large groups the “gouging” of individuals would go away.
We are not hostage to oil companies. We can drive less and people can buy more efficient vehicles. If your vehicle today doesn’t get at least 30 mpg, your rights for complaining about gasoline prices are rescinded. If you have to haul a hockey team, soccer team, or squad of ballerinas I’m quite certain there are minivans that can do the job at 30 mpg. Suck it up.
Politicians, as usual, are more concerned about making political hay from the issue than doing anything about it. The left piles on the populist evil big oil and a few evil individuals like the Koch brothers. The right beats on the President even though domestic production is up. When Bush was in office, high oil prices were the result of his connections to big oil. With Obama in office, the narrative is he wants high oil and gasoline prices.
Then there are completely ignorant talking heads like Bill O’Reilly. As I mentioned in Electric Bills and Waldo a couple months ago, the United States had become a net exporter of refined petroleum products and I said that was a good thing. Oh no! O’Reilly just found this out a couple weeks ago and he is completely incensed. Oil refineries selling their product in markets that have the greatest demand and selling to the highest bidder is a crime, apparently. Exports should be taxed to the gills! Are you kidding me? Nothing makes smoke pour out of my ears more than the political class talking as though the only reason companies exist is to fund the government. They want to set the rules so the private sector company doesn’t make what the politicians think is too much profit, doesn’t move manufacturing overseas, builds factories in the right state, pays the right wages, provides the right benefits and so on, and of course pays enough taxes to the emperor. Ditto O’Reilly.
Next is the narrative of the evil “speculator”. “Speculators” view the market, world events, current prices and futures prices. Most speculators are companies that buy a lot of petroleum products – like airlines. It’s called a hedge against risk. They may believe locking in $3 jet fuel for the next year is a good thing to do in case all hell breaks loose in the Middle East. By the way, this is one of the major reasons prices are high now – because AquaVelvejiad threatens Israel on a daily basis and is thumping his chest over the straight of Hormuz.
Sure there are gamblers in the futures market but they too serve a purpose. They provide liquidity and capital to help the markets work. However, they DO NOT make a lot of money just because oil prices are high as O’Reilly believes. They buy and sell futures and futures options. They can bet the price will rise by buying long or buying call options or bet the price will fall selling short or buying put options. For every winner there is a loser. In whole, it all stabilizes the market although once in a while a house of cards develops and the market collapses and many of those evil speculators get torched badly.
Then there is this dopey accusation: gasoline companies are price fixing. This has been disproven a thousand times. And it is simple common sense – if they are conspiring to fix prices, why not price gasoline at $8? Why does the price go down? Why does it fluctuate at all Mr. Conspiracy?
Causes of rising prices include the aforementioned tensions in the Middle East, and demand from the developing world. But also, many folks don’t realize that the weakness of the US dollar plays a significant role. A year and a half ago in Playing with Fire, I railed against the Federal Reserve’s “Quantitative Easing” (money printing) because it floods the world with dollars and with rising supply there is falling demand and value. This occurred last spring and the dollar scraped along at interim lows as gasoline prices peaked in May and fell into the summer. Gas prices otherwise never fall in the summer, except when somebody is messing with the value of the dollar in a big way. The dollar peaked in December 2011 as gasoline prices hit the lowest prices in a couple years. The dollar has since fallen off and gasoline prices are up. Get it?
The US isn’t going to go bankrupt and it won’t default on its debt. The government will either get the deficit and debt under control or we will inflate our way out of debt. We can effectively lop a couple zeros off our 16 trillion debt and voila, our debt is suddenly only 160 billion old dollars. The downside: a loaf of bread and gallon milk cost $700. A gallon of gasoline: $350. I feel the start of a credit card commercial coming on but I won’t go there.
The fact is, there are many factors that push prices up or down. Like any complex model, it is extremely difficult if not naïve to isolate the effect of one actor. Cleary though, rising world demand, limiting supply, tension in the Middle East, and a weak dollar and a dozen other factors put upward pressure on prices.