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Why Gas prices are so high

March 19, 2012

Recently I received a link on Facebook to a opinion article by Robert Reich on “the real reason gas prices are high.”  Now Mr. Reich is a very well known economists, teaches at a private college, and spent many years working for Mr. Clinton as the Sectary of Labor.  When he writes it tends to be well thought out and based on facts, from a certain point of view.

Mr. Reich is not infallible.  In fact he is, self admitted, very partisan and very dedicated to an economic theory that has been shown to fail if followed over a long period of time.  So when Mr. Reich blames the rise in gas prices solely on “the failed polices of the regressive GOP’s blocking for rational well thought out Wall Street reform”, a bit more than a grain of salt might be needed.  Mr. Reich blames “speculators” for causing the price of gas to go up.  Nothing else, well other than the “regressive GOP” and its talk of war with Iran.

Now, blaming speculators for high prices is about as rational as blaming surfers for high waves.  Mr. Reich would have us believe that if the GOP had not blocked the passage of the Dodd-Frank Act…oh, wait, it did pass,…then speculators would be prohibited from speculating on the future price of commodities.  See, in his theory, all prices are distorted by someone buying future goods today at a price they think it will be less than what it would cost if it was bought then.

Quick aside on what speculation is.  Person A grows onions.  Person B thinks that the weather this summer will be hot and dry and won’t be good for growing onions.  So Person B offers Person A a deal.  Today onions cost $0.99 a pound, Person A just planted what will grow to 15 pounds of onions and if the weather is hot and dry will get 10 pounds of growth for sure, maybe more.  Person A is offered $1.09 per pound for ten pounds of onions in August. Person A now has the money, but owes Person B ten pounds of onions in August.  August rolls around and it was hot and dry and onions are selling for $1.99 a pound.

Now, note that what is produced is not affected by what Person B buys.  B just buys the goods before they are grown hoping the price will go up in the future. Todays price is not affected by what Person B is paying for August delivery.

So, speculators are not driving up todays prices, at best they would be driving up June and July’s prices by paying oil producers money today for oil tomorrow. By giving producers money now, they can buy new equipment and storage space and increase production which will lower prices over the long run.  Speculators even out prices.

But why are the speculators buying?  Simply because they feel there will be less supply in the summer, and if they buy now, they can sell it at a higher price then.

Mr. Reich wants to blame the GOP presidential candidates for this fear.  He blames the “falling over each other to call for the bombing of Iran and Syria”.   While it is true that three of the four GOP candidates are doing this, he ignores that Mr. Obama has not only called for bombing Iran, but has imposed economic sanctions, trade embargos, flown drone spy planes over Iran, demanded the UN allow him to order the bombing of Syria, and informed Israel that the US would not take action if they did.  Far more war talk than any of the GOP nods.

This is a main cause of the higher prices, Obama’s war push.  But it is not the only cause, here are a few more that are just as hard on your wallet:

Japan shut down its 73 nuclear reactors and replaced the electric generation with oil generation.   Germany is in the process of doing the same.  This increases demand.

The US EPA under Obama’s direction has been fining oil refineries in the US for failing to upgrade places to reduce CO2 emissions.  Why have they not upgraded the refineries? The US EPA has blocked upgrades by denying permits.  The EPA and other environmental groups have also prevented all new refineries from being built in the US since 1978.

The fines have gotten so bad that three major refineries on the East Coast have been shut down and won’t be started back up.  This reduces the amount of gas being made, reducing supply.

Summer requires special limited run blends of fuel.  The US EPA mandates that each metro region has a special blend of gas, ethanol and other oxenginators.  This means smaller production runs, increased storage and shipping costs, as well as higher costs due to tracking.  Further reducing supply.

India has increased the number of cars owned by citizens by 20% in the last three years.  Increasing demand.

China has seen economic growth “slow” to a mear 9% a year, while in the US Mr. Obama is excited to see growth of 2%.  This slower growth means more oil is needed to run trucks, make goods, and people are buying cars there too.  Increasing demand.

The Federal Debt has increased by $5,000 billion over the last four years.  The Federal Reserve has increased the amount of money by over $3,000 billion.  Each dollar of new debt and increased money supply means that the dollar you hold is worth just a bit less.  For example, in 1960 you could buy a gallon of gas for $0.25, one quarter.  Today that very same 1960 quarter would buy $5.09 cents of gas.  This is the main reason you see higher prices, and not just on fuel, the inflation tax

The government has a policy of raising your cost of living at 3% a year, meaning in five years you will see a 15% reduction in what you can buy with a dollar from today.  This means that Mr. Obama’s government is hoping to raise the price of gas in five years to $4.35 a gallon.

This does not bother Mr. Reich, he sees it as a good thing.  Why if your money will buy less next year, you won’t save it but instead will buy stuff today with it.  You will borrow money today and pay it back with less valuable money next year.  Mr. Reich loves to point out that the economy won’t turn around till people see their home values increase back to what they were before the crash so they can borrow against that value and go out and buy stuff. (because that worked so well in 2007)

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