The American Dilemma and How We Can Fix It

GAS IS FIVE DOLLARS A GALLON

Once again the price of gasoline is on the rise.  Part of that is the tension developing in the Middle East – Iran threatening to close the Strait of Hormuz – their saber rattling regarding Israel – and that state’s reciprocating with its own.

Although the price of light sweet crude has remained in a trading range, the price of gasoline has risen regularly.  (Today I saw an eight cent increase over the price I paid for it the other day).

The “experts” predict that when we hit the peak driving season this summer, we should expect to pay an average of about four dollars a gallon.  Personally, I did some analysis and think that number could be closer to five dollars.  There are two reasons for my conclusion.

By this summer I believe that the Federal Reserve will again engage in what it calls “Quantitative Easing” – a polite way of saying we’re going to further devalue the dollar.  Since the oil that we consume is denominated in dollars the effect is to raise the price of that oil.  That increase will naturally translate to increases in the price of “derivatives” – that is products that are made from that oil – one of which is gasoline.

Second, the refineries are not making any money based on the price of oil and the current price of gasoline.  As a result they are limiting the production of gasoline and will only increase the amount of their output if they are able to get higher prices for it.  Combine that with the increased demand from drivers and that’s how I arrived at my five dollar guestimate.  I sincerely hope that I’m wrong.

We know that when gas prices increase it drains money from consumers’ pockets and has a negative impact on the economy.  Since consumer spending constitutes two-thirds of the economy you can see the effect that increasing gas prices will have on what is only a poor recovery.

Those are the economic facts as I see them.  Having said that I would like to offer my readers a few common-sense ways to combat the vacuum cleaner that is preparing to suck the money out of your wallet and put it in your gas tanks.

First and foremost, slow down when you drive.  We know for a fact that combustion engines operate less efficiently at higher speeds (burning more gasoline) than they do at slower speeds.  At a time where we should be doing everything to encourage conservation – the Congress currently has a bill pending that would increase the speed limit on national highways from the present 65 to 75.  (That I am on the other side of Congressional thinking is like receiving the Good Housekeeping “Seal of Approval”).

Group your trips to minimize your gas consumption.  A little bit of planning can result in your driving fewer miles, getting your chores done more productively and save you some time.  I have gotten in the habit of asking a few neighbors if they need anything from the store or would like to drive with me when I shop.  One less car covering the same route is one less car burning gas.

While none of us can control the price that retail gasoline stations post for their product, we can control how much of it we consume.  And the added benefit is that we can not only save ourselves money but reduce the carbon footprint we are leaving on planet earth.  That  is reason enough for becoming thoughtful conservationists.

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Comments on: "GAS IS FIVE DOLLARS A GALLON" (6)

  1. grrrr, I really need to get a hybrid soon

  2. Gas prices are a “speculative” science aka total BS. What happened was before 9/11, gas in my area was about $1.47 a gallon. After the Iraq invasion when the price jumped to over double of what it used to be, gas companies saw that people were willing to pay $4 a gallon or more. And now that’s where the price is going to eventually settle at. It’s all a scam.

    • I at least in part agree with you. The scam is that the oil industry is typically the one that spends the most in lobbying to influence our legislators. Could this be the reason that we have failed to develop an intelligent energy policy for more than two decades?

      Please forgive me if I mis-interpreted your statement about gas being a “speculative” science. By that I gather you mean that the price fluctuates and is traded on commodity markets. (If I am wrong I would appreciate your letting me know).

      In the absence of market trading, companies would be free to set the price for gas or any other commodity at their will. Eventually they would find a price point that consumers thought was acceptable and keep the price there without free market intervention. I think the result would be far worse than with the present imperfect system.

      If you have an opportunity I urge you to pick up a copy of Jim Roger’s book, “Investment Biker.” Rogers, now living in Singapore was a student of George Soros (not one of my favorite people). He wrote the book as he and his girlfriend, now his wife, traveled the world on their motorcycles.

      It has been years since I read this so I don’t remember if it was in Ubekistan or Khazakstan -but it was one of the former Soviet Republics when he needed to fill up their bikes with petrol. He was surprised that the price at the pump was only one-quarter of what it was he had seen along their route. The price was madated by the government.

      There was only one problem. The state was in charge of production and refining. Because of the low price they had established they lost money on every litre of petrol they sold and finally stopped maintaning the infrastructure necessary to produce it. As a result there was no petrol available – at the state mandated price or at any other.

      Every “system” has its good and bad consequences.

      By the way, I appreciate the insight that you’ve shown in your posts. Keep on thinking.

      • What I’m getting at it that it doesn’t take much for prices to jump, even if there is no change to the supply or demand. Example, Iran recently threatened to blockade the Strait of Hormuz. They didn’t move ships to carry out the threat. All they did was make the suggestion. And oil markets went nuts for about a day, temporarily driving the price up until they realized Iran wasn’t serious, at least not yet.

  3. I would agree you are correct that there are always over-reactions to “headline events.” That is the nature of human behavior. If you want to investigate how extreme this can get you might enjoy reading Philip Roth’s book, “The Rothschilds” – particularly the section on how, when the Battle of Waterloo was being waged, one of the scions of the house began selling on the London Stock Exchange. Everyone knew that the Rothschilds had better information than anyone else and assumed that Napoleon had won the battle. When the market collapsed, the Rothschilds began buying … and, of course, the news came out that Napoleon had been defeated and the market rebounded. Manipulation at its finest.

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