Gasoline prices are rising. There seems to be no end to the almost daily increases. At week end, the average US price of a gallon of regular gasoline was almost $4.00. For many, this is an ugly slap in the face. For others, it is another sign of the vanishing American dream.
There are some important lessons, however, wrapped up in this situation.
First, most of us do not have a clue how the price of gasoline is established in the first place. We show up at the gas station and there is a price on the machine. Pay it or go without. But, how did it get so high?
We are told that the price of gasoline is rising, due to this reason or that. The simplest answer is to look at oil prices. The higher oil prices rise, voila, higher gasoline prices go. While this is basically true there is much more to the story.
For example, supply and demand can explain rising oil prices. Oil producing countries deliberately determine how much oil is available. Consuming countries, on the other hand, buy oil to fuel their autos and their economies, and in this process determine how much oil is wanted. It should be no mystery that with China and India both growing rapidly with about 3 billion people combined (compared to 300 million in the US), they are putting the dominant demand on the supply of oil.
So, demand exceeds supply, prices go up.
Second, the commerce of oil is done in US dollars. That means that the oil price is set in dollars. Today with the US dollar shrinking in value versus other currencies, the oil producers as well as the speculators who deal in oil futures, think the true price of oil should be even higher reflecting a weakening dollar.
OMG. Does this mean that the weak US economy, huge deficits and debt, and “quantitative easing” (the Fed’s creating more dollars thus diluting and weaken those dollars already in circulation) might have an unwanted effect on oil prices?
Third, We hear the US can fix this problem by just drilling in our own land and seas. Drill baby drill. Wrong. Experts have explained that while there are still oil reserves available, it would take years to develop these reserves. This is not a today solution.
But even more to the point, the price of that oil would reflect what ever the rest of the world was paying for oil. Why? Because any US oil explorer would be a fool not to take the best price for his product.
Fourth, gasoline prices are killing us. While this is certainly how it feels, why is it that in Europe and Japan gasoline prices are over $10 a gallon? Are those people all dead? The answer is that in most other modern industrial countries, extra taxes have been added to refined products such as gasoline for many years already in order to discourage consumption. Public transportation, smaller cars, and more selective use of private autos can be seen in the habits of people living in these countries.
So let’s come full circle and look at how American politicians (and the media) are dealing with this. There is almost no reference to the impact of a weakening dollar. There is no mention of what others pay comparatively to the US. There is no national support for mass transportation or for higher fuel efficiency. There is no national policy on alternative energy.
The argument we hear goes like this. This is America. We are spread out (look at our geography) and our citizens depend upon the car (remember the horse). They should be free to make their decisions and should not be forced to buy cars they do not want or pay higher gas taxes they do not feel they need. Let’s develop America’s reserves and life will be good.
There can be nothing better for the US than rising gasoline prices. If these prices keep rising, a crisis will eventually emerge. In times of emergency, reason usually sees the light of day. It is mind boggling why we must wait for that crisis when the facts are already clear and well known.
So let’s think about this one more time. Ten dollars a gallon there and four dollars a gallon here. Hmmm. Either we should stop whining or better yet, we should sharply increase the Federal tax on gasoline.
Read more of Jack’s work at Regaining the Center