I’ve always enjoyed writing about commodity prices, especially oil; mascot of the global economy. In fact, my last two articles on this very blog were about gasoline, so you should read them (one and two). Because this is going the be THE topic of the general election, I thought I’d really go to town on it.
Let’s take an in-depth look at why gasoline is so expensive. Faithful readers may find some of this repetitive, so I’ll try to be extra redundant for the new people as well.
If you watch cable news (God help you), you’d understand that “tension in Iran” is driving up crude prices.
Oil prices spike on Iran export halt. Is $4 gas next? (CNN)
Oil at 9-month high after Iran cuts supply (CBS News)
”Roiled by the specter of Iranian oil cutoffs, gas prices are rising at a record pace, crossing the $4-a-gallon threshold in some parts of the country” (Chicago Tribune)
”Iran’s recent warnings of a disruption in the global oil trade have pushed the price of a barrel of domestic oil to more than $103, a six-month high and up about 34 percent since September.” (New York Times)
Of course, this is all nonsense.
The government, and their “free press” always blame mideast tension for rising gas prices. (I’ll save the conspiratorial tone for another time, but this blame-game started right after we abandoned the gold standard in the 1970s.)
Let’s take a stroll down “Recent Memory Lane”:
Libya Turmoil Equals Higher Gas Prices for Consumers (ABC News, 2011)
Crisis in Libya Raises Fears of Skyrocketing Oil Prices Causing Pain at the Pump (FoxNews, 2011)
Impact of turmoil in Libya to show up at U.S. gas pumps (Seattle Times, 2011)
Let’s keep going:
“Oil rallied late Thursday, settling more than $5 a barrel higher, as traders reacted to talk of further turbulence in Iran” (CNN Money, 2008)
”Oil futures rebounded Friday on unease over Middle East stability” (USA Today, 2008)
Oil briefly rises above $92 a barrel on Mideast tensions, supply worries (Boston Herald, 2007)
”Oil prices surged to a new record high today… responding to escalating violence in the Middle East” (U.S. News, 2006)
”Oil prices hit a new intraday high near $76 a barrel Thursday in a market agitated by escalating violence in the Middle East” (New York Times, 2006)
…a liiiiiittle further back:
Crude Oil Prices At a 6-Month High On Mideast Worries (New York Times, 2002)
For some perspective, at the start of the Iraq War in 2003, a barrel of oil (WTI) was $28. It now costs more than three times that, despite Iraq producing more oil than before the war. Did unrest in Libya, a country which produced about 2% of the world’s oil cause global crude prices to triple? Or did “threats” from Iran do that? Maybe the economy falling off a cliff somehow tripled demand?
This is all nonsense. You’ll notice mideast tensions only ever seem to cause prices to rise. They never fall when the tension subsides. In 2007, when Iraqi oil production surpassed prewar levels, and things were relatively calm, oil was again THREE TIMES the price ($90) as before the war.
Let’s take a look at the past 10 years of oil prices:
You’ll find it looks REMARKABLY similar to this:
Is anyone on cable news arguing that tension with Iran is driving up the S&P 500? Because that makes just about as much sense.
Oil is responding to the same monetary policy that is manipulating stock prices; all courtesy of the Federal Reserve. Current events may cause short-term spikes, but the trend line is clearly headed UP. You might say it looks like this:
That red line, as you can see, is the M2 measure of money supply.
It does a pretty tidy job of explaining price increases without having to get into hysterics over potential Iranian missile strikes.
Meanwhile, at the pump, gas prices are about as low as they’re going to get. The supply of gasoline is so high, and the profit margin so razor thin, that refiners are opting to add on the immense cost of shipping so they can get rid of it overseas.
That’s bad news for us! As you can see, exports are skyrocketing; partly because domestic demand has nose-dived:
This graph, in conjunction with the monthly export one, shows us that we have excess supply and rising prices. The only two possible explanations are (1) that it’s the result of inflation, or (2) it’s part of an illuminati conspiracy by evil oil barons to export gasoline at a loss just to hurt the working class!
If you think it’s the second option, then congratulations; you are Arianna Huffington.
In Los Angeles right now, 87 octane is averaging about $4.00/gallon (observationally). Since that is a record price for this time of year, why would Exxon NOT want to sell more gas here? Because their domestic costs have also risen and $4 gas isn’t as profitable or appealing as it used to be. It’s higher than it used to be, but it’s not actually a high price in real terms. That’s how inflation works.
Despite everything you’ll read, this current price spike is only partially related to Iran. If I can pat myself on the back, I’ll remind you that I called - exactly - the recent uptick in gas prices late last year as the result of an inflationary European bailout package from The Federal Reserve. I’ll conclude my victory lap by also recalling that Paul Krugman referred to that action as a “non-event.”
Anyway - how can we get lower gas prices? Well, my fellow residents in California should consider that the state taxes each gallon 35.7¢. Plus 18.4¢/gallon for the Highway Trust. So, while gas might cost YOU $4/gallon, it actually costs $3.459/gallon. I wouldn’t mind shaving 50 cents off that has nothing to do with the actual cost of gasoline. (But, I forgot, Californians all love to pay high taxes.)
And don’t think that Chevy Volt is going to save you - the price of electricity is going up, too!
Damn you, Iran!!
….the price of everything is going up! Mo Money, Mo Inflation. This is the result of deficit spending, central bank asset purchases, and quantitative easing. The problem isn’t instability in the Middle East - it’s instability in Washington.
See you in traffic!
UPDATE: I forget to tell you, there are ways to protect against rising prices. You can buy ETFs in oil and gasoline futures. IEO and UCO are two examples. As oil goes up, you’ll make money on these shares, which will counteract the price at the pump. If oil goes down, you may lose money on them, but then gas prices will be less also - so you sort of stay even. It’s a “hedge.” Always a good idea to invest in things you use.
3/17 UPDATE: This post is partially incomplete only because it was published in conjunction with two other posts, one refuting the GOP argument that we need to drill more, and another refuting the liberal argument that speculators are to blame. Read both of those, as well, if you want more on this topic.