High Gas Prices

This was originally written on April 28, 2011 for my government class, but I’m re-posting it because I feel as though it’s still relevant and is still good information. It deals with the price of gas which is way too high (or low?) Hmm it’s a good read.

We know it all too well. Way too well. That painful and cringing feeling you get as you realize exactly how much money you’ve thrown away when you fill up your gas tank. It seems as though with everyday gas prices continue their climb skyward and the public continues to want to put the blame on someone. For many people, that blame falls on Obama administration. For others, they want to blame OPEC for high prices. And even some want to blame speculators for pushing the price up. In reality, none of these answers are entirely correct, and some can be dismissed entirely. The real cause can be more or less directly linked to the Federal Reserve. To understand this, we must look at why none of the other parties are to blame.

Those wanting to blame the Obama administration for high oil prices clearly don’t have much of a clue as to what’s going on. The Obama administration could do nothing but put a price cap on gasoline which would already damn his reputation for not being business friendly as the very basic principal of price caps violate many microeconomic laws. Some will blame Obama for not providing enough stimulus to support “green energy”. The argument being that if more funds were allocated toward green policy we’d be driving cars that run on less gasoline. Obviously by calling for more green-friendly energy policy it presents the lack of understanding on how technology actually works – it starts at the top, very expensive, and slowly trickles down to a price where the mainstream can afford it. This happens only when the market is ready for such thing to take place, and is not dependent on how much green budget there is or how much carbon tax is collected. Obama can try to tighten the grip on speculators as he recently announced he would do, but in reality, speculators are just a function of what supply and demand is. Due to unrest in many oil-producing countries speculators speculate on the future price of what oil could become. This speculation is done with logic and reasoning and not to fulfill the wallets of a few wealthy investors. Since anyone can get into the market of buying commodities, it’s a wonder more people don’t speculate.

OPEC would seem as a pretty logical cartel to blame, they’re the ones who set all the oil prices right? Well if you believe that we still get most of our oil from OPEC countries then it’s time to do a little more homework. According to the US Energy Information Administration and OPEC themselves, the top two countries that import crude oil into the United States – Canada and Mexico are not members of OPEC. Only six of the top fifteen countries we import oil from are actually members of OPEC. It would be great if we could blame one single cartel for the fall of our pocketbooks, but the truth is that we need to look at the cartel in our own backyard – the Federal Reserve.

The Federal Reserve, often referred to as the FED inflates our dollar by expansionary monetary policy programs such as Quantitative Easing, and Quantitative Easing 2 (QE, QE2). Because these programs in which the FED buys US Treasury bonds are bought with newly printed dollar bills the purchasing power of each current dollar bill in circulation goes down. As each the value of each bill decreases it takes more bills to buy a good. We’re able to see this correlation not only through recent history from easing programs, and incredibly low interest rates, but from the higher than natural rate of inflation over time.

If you had a dime that was minted between 1946 and 1964 the metal in that dime contained 90 percent silver and 10 percent copper. By using the current price of an ounce of silver ($48.07) and a pound of copper ($4.29) and keeping in mind that a dime weighs 2.5 grams, if you were to melt down that dime today, it would actually be worth $3.48. That means if the Federal Reserve didn’t always have expansionary monetary policy and let the economy contract when needed, you would be able to buy a gallon of gas for just about 11 cents. That 11 cents may seem irrelevant, but consider that the price of gas was a historic low at 17 cents per gallon in 1931, you actually see how cheap the price of gas would be if it weren’t for the inflation the federal reserve prints.