Why are gas prices so high?

[Guest Cerebus]

Since Stephen Joseph is our resident economist, I was wondering what he thought of this article.

 

The Real Reasons For Your Pain At The Pump

U.S. policies have caused the dollar to fall, leading OPEC to hike prices

 

John Kerry has blamed President George W. Bush for soaring gas prices, faulting him for not putting more pressure on OPEC and for being slow to pursue energy independence. Bush has shot back in his campaign ads, ridiculing Kerry's previous call for a 50 cents hike in the federal tax on gas. Kerry wants to invest more in advanced technologies, such as fuel cells.

 

Bush is pushing for more tax breaks and regulatory waivers for domestic oil and gas drilling. Yet in all this public debate, hardly anyone is talking about what is probably the most important reason behind the current runup in oil prices -- the weak dollar.

 

Those who recall the first OPEC oil shock in 1973 will remember the central role played by the weak greenback. In the period from 1971-73, the U.S. ceased being able to maintain the Bretton Woods system of fixed exchange rates, with a dollar pegged to gold at $35 an ounce. Dollar devaluation ensued, followed by floating exchange rates. For OPEC, this reduction equaled a huge cut in revenue, because oil is priced in dollars. Since OPEC is a cartel, it has a fair amount of pricing power. Dismayed by the lost income and irritated at Western support for Israel in the 1973 Arab-Israeli war, the OPEC nations decided, for the first time, to use that power to extract a large oil price increase. The U.S. economy suffered accordingly.

 

FAST FORWARD 30 YEARS. The dollar has again lost a large part of its value (over 40% against the euro since 2002, and more than 20% against the yen). For oil-producing countries, this equals another enormous revenue loss, and they are raising prices to make it up. Indeed, if oil were priced in euros, OPEC's revenue per barrel would not have taken a hit. In addition, as in 1973, Arab nations are less than thrilled with Washington's Middle East policies. Once again, gasoline prices are soaring.

 

Is it fair to blame the cheap dollar on the Administration? It is, and here's how the dots connect. First, the Administration's tax and budget program hasn't produced enough purchasing power for ordinary people. Despite one month of good job growth, median wages have not kept pace with inflation. Consumer and business debt are high, and the economy is not generating enough jobs and consumer buying power. The economy also suffers from a chronic trade imbalance that is increasingly structural. With fiscal policy exhausted, the Federal Reserve has had to come to the rescue with very cheap money. Extremely low interest rates, of course, yield a weaker dollar.

 

That can be laid at the Administration's door for another reason. Countries with irresponsible fiscal policies find that their currencies lose respect in global currency markets. As budget deficits have gone skyward, confidence in the dollar has gone down. Some foreign exporters, Toyota Motor Corp. (TM ) for instance, choose to absorb the exchange-rate loss and take an earnings hit rather than lose U.S. market share. Others, such as purveyors of fine French wines, have raised dollar prices. But the oil cartel is a special case that is able to engineer its prices -- indeed, that's the definition of a cartel. Gasoline, unlike French wine, is a necessity with no near substitute. Most consumers just absorb the increase because they have to.

 

Some observers have contended that the high price reflects refining bottlenecks or increased global demand. Despite increasing demand from China, overall oil consumption is projected to go up only about 2% this year. The main culprit is OPEC's manipulation of the price of crude, most recently with a 4% production reduction, which in turn reflects the cheap dollar. March and April are months when home heating costs decline and the expenses of summer air conditioning and vacation travel have not kicked in yet. Other things being equal, energy prices should be enjoying a seasonal decline.

 

How will this all play out politically? The connection of soaring prices at the pumps to the cheap dollar, the Bush tax reductions, and climbing budget deficits may be obscure to the average voter. But it doesn't matter if most voters miss it, since they tend to judge incumbent Presidents by a visceral response: Is the economy good or bad for me? High gas prices are one more reflection of an economy that still feels bad for millions of Americans. That can't be good for President Bush.

[Guest Agent of Oblivion]

This still boils down to OPEC being crooks.

[Stephen Joseph 0]

U.S. policies have caused the dollar to fall, leading OPEC to hike prices

1) Our dollar remained very strong compared to other countries, specifically the EU and Asia. With their economies recovering, our position to their currency must relatively decline (exchange rate parity conditions). Our economy has not taken a hit to the degree other’s had, and it is commonly known that economies that are weakly performing catch up faster than economies which perform relatively better (more room for improvement, useful in production possibilities questions.Strike 1.

John Kerry has blamed President George W. Bush for soaring gas prices, faulting him for not putting more pressure on OPEC and for being slow to pursue energy independence. Bush has shot back in his campaign ads, ridiculing Kerry's previous call for a 50 cents hike in the federal tax on gas. Kerry wants to invest more in advanced technologies, such as fuel cells.

2) Kerry is right (I said it) that government investment in alternative technologies is the appropriate measure for the government to take. However, this process is already occurring, and will occur without Kerry’s proposed 2005 fiscal stimulus. There exists a lag time between any government stimulus and its observed effects. Alternative technology is predicted to break the envelope into commercial production heavily around 2006. Ball 1, Strike 1. Moral: Bush’s team didn’t do enough, but doing something now is pointless. It would only serve to overinvest, which helps no one.

Bush is pushing for more tax breaks and regulatory waivers for domestic oil and gas drilling. Yet in all this public debate, hardly anyone is talking about what is probably the most important reason behind the current runup in oil prices -- the weak dollar.

3) The runup in prices has nothing to do with trying to make money off of exchange rates. More later

 

Those who recall the first OPEC oil shock in 1973 will remember the central role played by the weak greenback. In the period from 1971-73, the U.S. ceased being able to maintain the Bretton Woods system of fixed exchange rates, with a dollar pegged to gold at $35 an ounce. Dollar devaluation ensued, followed by floating exchange rates. For OPEC, this reduction equaled a huge cut in revenue, because oil is priced in dollars. Since OPEC is a cartel, it has a fair amount of pricing power. Dismayed by the lost income and irritated at Western support for Israel in the 1973 Arab-Israeli war, the OPEC nations decided, for the first time, to use that power to extract a large oil price increase. The U.S. economy suffered accordingly.

3a) Error, big time. Correlation does not equal causation. These events were correlated, but one did not cause the other. Strike two, and a bad one at that

 

FAST FORWARD 30 YEARS. The dollar has again lost a large part of its value (over 40% against the euro since 2002, and more than 20% against the yen). For oil-producing countries, this equals another enormous revenue loss, and they are raising prices to make it up. Indeed, if oil were priced in euros, OPEC's revenue per barrel would not have taken a hit. In addition, as in 1973, Arab nations are less than thrilled with Washington's Middle East policies. Once again, gasoline prices are soaring.

3) Stamp your feet, but again this is wrong. If the dollar devalues, it simply takes more dollars to buy foreign goods. OPEC isn’t raising its price in response to the dollar devaluing, the dollar’s devaluation causes Prices here to rise. The author fails to mention the same thing happened in the EU, and that their prices are MUCH higher compared to our relative price even with the current increases.

 

Is it fair to blame the cheap dollar on the Administration? It is, and here's how the dots connect. First, the Administration's tax and budget program hasn't produced enough purchasing power for ordinary people. Despite one month of good job growth, median wages have not kept pace with inflation. Consumer and business debt are high, and the economy is not generating enough jobs and consumer buying power. The economy also suffers from a chronic trade imbalance that is increasingly structural. With fiscal policy exhausted, the Federal Reserve has had to come to the rescue with very cheap money. Extremely low interest rates, of course, yield a weaker dollar.

4) Actually, its 4 months of good growth. Inflation, aside from energy prices, is non-existent. This really irks me. Greenspan came out 2 weeks ago and said “Energy Crisis—Bah~! We’re hardly as dependent on energy as we were back in the 1970s.” And he is right. Wages do not adjust automatically since its done by contracts and yearly review processes…so no wonder why wages haven’t adjusted yet…the review process is in JUNE for most firms. Low interest rates do not make for a weak dollar. Low interest rates encourage investment, which allows our country to grow. Low interest rates and low inflation is good! High interest rates mean shit in the face of inflation,just as East Asia. Strike three.

 

That can be laid at the Administration's door for another reason. Countries with irresponsible fiscal policies find that their currencies lose respect in global currency markets. As budget deficits have gone skyward, confidence in the dollar has gone down. Some foreign exporters, Toyota Motor Corp. (TM ) for instance, choose to absorb the exchange-rate loss and take an earnings hit rather than lose U.S. market share. Others, such as purveyors of fine French wines, have raised dollar prices. But the oil cartel is a special case that is able to engineer its prices -- indeed, that's the definition of a cartel. Gasoline, unlike French wine, is a necessity with no near substitute. Most consumers just absorb the increase because they have to.

5) Irresponsible fiscal policies are not the sole cause of exchange rate fluctuation. It’s all about perception, expectation, and other opportunities. Just because money is flowing elsewhere is not an indictment of our system. Is the budget deficit a problem? Yes, but not for the reasons the author states

 

Some observers have contended that the high price reflects refining bottlenecks or increased global demand. Despite increasing demand from China, overall oil consumption is projected to go up only about 2% this year. The main culprit is OPEC's manipulation of the price of crude, most recently with a 4% production reduction, which in turn reflects the cheap dollar. March and April are months when home heating costs decline and the expenses of summer air conditioning and vacation travel have not kicked in yet. Other things being equal, energy prices should be enjoying a seasonal decline.

6) Congrats…I worked in the power industry. The entire side strikes out! Peak load is normally during July because while heating declines, air conditioning is MUCH MORE EXPENSIVE. The highest contract rate for a MWH I dealt with in the winter was 50 dollars…In the summer it was 150. That’s why the California crisis happened…in the summer.

 

How will this all play out politically? The connection of soaring prices at the pumps to the cheap dollar, the Bush tax reductions, and climbing budget deficits may be obscure to the average voter. But it doesn't matter if most voters miss it, since they tend to judge incumbent Presidents by a visceral response: Is the economy good or bad for me? High gas prices are one more reflection of an economy that still feels bad for millions of Americans. That can't be good for President Bush.

7) It’s OPEC. It’s a cartel. High prices induce entrants and people to cheat. Whoop de do, it’ll break. The US has enjoyed prices very much below the world relative price for 2 decades. We could not stay out of equilibrium forever. Is this the fault of the Bush admin? Partly. Bush Sr., Clinton, and Bush Jr. all have to accept some blame for trying to ride a wave forever without providing for the future.

8) /Aside. The Budget deficit only becomes a crisis problem if the interest rates we pay on the debt grow larger than the rate at which the economy is growing. This condition doesn’t hold today, and likely won’t in the near term. Also, since most debt is owed to ourselves, we have internally financed our spending. It’s very difficult to say what the effects will be, though in the world economy it is unlikely that countries will pull out of the archstone economy of the world. We might be trading current consumption for future consumption which might make our generation not as wealthy as we could have been. We might not. I would agree, at some point we need fiscal responsibility…but Kerry’s solutions come nowhere close to fiscal responsibility. What we need is to stop going to war every 5 years, and curb some transfer payment programs. But right now, all signs point to a recovering economy that’s speeding up, and this is good for everyone.

 

So no, this article to me, as an economist, holds no water. It uses some very good points, but ruins them by bad correlations, erroneous half-truths, and a failure to look at events across a span of time

[Stephen Joseph 0]

The mag the guy writes for is very left-leaning...suprise

 

The impetus for founding The American Prospect came from the

conservative ascendancy of the past two decades. During the 1970s and

'80s, many older liberal publications grew tired or ambivalent.

Meanwhile, vigorous, well- financed conservative publications, think

tanks, and communication networks developed. New circumstances required

liberals and progressives to rethink much that they had taken for

granted, but they also required new energy and new institutions with a

strong, positive sense of their own -- and America's -- mission.

[Some Guy 0]

Gas prices are so high because of the taxation on gas. They actually raise disproportionately to the level of taxation. In other words the level of taxation doe not change as the price of gas flucuates but the stations profit margin does. Most stations cannot keep the same % of profit when they have to pay more for gas because the price to the public would be too high. Take away the gas taxes and you take away nearly half the cost to the public. Instead of gas prices nearly $2, we'd be heading towards abotu $1.25, which is still quite affordable.

 

Add that to the fact that OPEC is a union of oil developing countries who artificially fuck with oil prices by either slowing or increasing production and you've got the problem we see now. Seems to me that it might be easier to cut the gas taxes, exploit more of our own oil supply, and tell OPEC to fuck off (in a very diplomatic way, of course).

[kkktookmybabyaway 0]

You all are so st00pid~!!!

 

Prices are high because Cheney wants to build a second home. He used to run Halliburton yhou know...

[Guest MikeSC]

You all are so st00pid~!!!

 

Prices are high because Cheney wants to build a second home. He used to run Halliburton yhou know...

BTW, kkk, I noticed that you failed to mention that the dude who escaped from the terrorists --- WAS A HALIBURTON DRIVER!

 

THEY OWN THE TERRORISTS!!

 

AIEEEEE!

-=Mike

[kkktookmybabyaway 0]

That guy didn't escape terrorists. He was a terrorist.

 

You must have meant, "A terrorist escaped from the freedom fighters in Iraq..."

[Guest Cerebus]

Much obliged SJ.

[Guest MikeSC]

That guy didn't escape terrorists. He was a terrorist.

 

You must have meant, "A terrorist escaped from the freedom fighters in Iraq..."

Sure --- skirt the issue with semantics, hunger Jr.

-=Mike

[NoCalMike 0]

Gas prices are high because Bush's campaign for re-election has been pushed into full gear just yet........

[Guest MikeSC]

Gas prices are high because Bush's campaign for re-election has been pushed into full gear just yet........

I, personally, blame Bush's tax cuts.

-=Mike

[Guest Choken One]

Anyone discovered low hidden gas stations yet?

 

I did...everyone else around these parts are spending 1.93+...One station about 20 minutes from me...has kept it at 1.69.

 

Apprently the owner hit the lotto awhile ago and doesn't care or something and he makes more money thanks to the lines forming and people coming inside instead of just paying at the pump.

[NoCalMike 0]

Anyone discovered low hidden gas stations yet?

 

I did...everyone else around these parts are spending 1.93+...One station about 20 minutes from me...has kept it at 1.69.

 

Apprently the owner hit the lotto awhile ago and doesn't care or something and he makes more money thanks to the lines forming and people coming inside instead of just paying at the pump.

a couple weeks ago I drove into Oakland for an A's game, and right off the freeway was some gas station advertising free gas. I had just about a full tank already so I didn't stop.

[Shooting Star 0]

You think you guys have high gas prices?here in Dominican Republic one gallon costs 120 pesos

[Guest MikeSC]

You think you guys have high gas prices?here in Dominican Republic one gallon costs 120 pesos

Is that a lot?

 

I surely have no clue what the exhange rate is for a peso to a dollar.

-=Mike

[Slayer 0]

I thought my city was doing fairly decent at 1.70 a week ago, then three days ago it goes up to 1.85, then today it jumps up again to 1.95

 

Given that it seems rare for price to jump radically twice within such a short time period, now I'm slightly concerned

[NoCalMike 0]

I thought my city was doing fairly decent at 1.70 a week ago, then three days ago it goes up to 1.85, then today it jumps up again to 1.95

 

Given that it seems rare for price to jump radically twice within such a short time period, now I'm slightly concerned

It's definately suspicious how much it rises and lowers over such a short time. I mean it would be different if it worked like most products, where every new year, you expect a standard increase and it will be like that for the entire year, but this day-to-day crap is crazy.

[Lando Griffin 0]

120 Mexican pesos = $10.50

[Perfxion 0]

Well be in "rich, rich" fairfield country, NO station is under 2.00 a gallon. If there is a cheap station, it is around 1.95 to 1.99.

[Some Guy 0]

120 Mexican pesos = $10.50

Good God! You pay $10.50 a gallon? Do people, other than Sammy Sosa and Pedro Martinez drive? How the fuck could anyone other than them afford that?

[MarvinisaLunatic 0]

My mother said she got a 7 cent price jump while she was at the pump (started at $1.72 and about halfway through it flipped up to $1.79). She went to argue but the man saidd that it was on a timer and she picked the wrong time to get gas and that she was basically S.O.L.. She paid the $1.79 for the full amount of gas instead of half @ $1.72 and the other half at $1.79.

[EricMM 0]

Are Mexican Pesos = Dominican Pesos?

[kkktookmybabyaway 0]

My mother said she got a 7 cent price jump while she was at the pump (started at $1.72 and about halfway through it flipped up to $1.79). She went to argue but the man saidd that it was on a timer and she picked the wrong time to get gas and that she was basically S.O.L.. She paid the $1.79 for the full amount of gas instead of half @ $1.72 and the other half at $1.79.

Hmm, odd.

 

When I worked at a gas station my manager always manually typed in the price changes into the system. There was no timer...

[Highland 0]

120 DOP = 2.65 USD

 

This sounds a tad more reasonable, I'd say.

[Some Guy 0]

Are Mexican Pesos = Dominican Pesos?

I misread the post. Teh guy originally complaiming was from DR. I assumed they were the same person (didn't bother to check the names) and only saw the pesos to dollars thing. My bad.

[Lando Griffin 0]

Oops. I fucked up. I didn't see Dominican pesos on the conversion site so I went with Mexican.

 

120 Dominican pesos is in fact around $2.68. If people in this country have trouble paying ~$2.00, how can anyone in the DR afford gas? Or are they better off than I think?

[Guest Agent of Oblivion]

We're finally over two bucks. I'm going to start cracking my own petroleum or work on alternative sources of energy.

 

Someone SERIOUSLY needs to invent a damn Mr. Fusion.

[Guest MikeSC]

We're finally over two bucks. I'm going to start cracking my own petroleum or work on alternative sources of energy.

 

Someone SERIOUSLY needs to invent a damn Mr. Fusion.

Bio-Diesel sounds like a cool possibility.

-=Mike

[KingPK 0]

Someone SERIOUSLY needs to invent a damn Mr. Fusion.

Mr. Fusion only powered the time circuits. The engine ran on ordinalry gasoline, always has and always will.

 

Ye gads, didn't you even SEE the third one?