Pain At The Pump
Three years ago was the last time that gasoline was approaching $5.00 per gallon.TPP took a look at energy policy early on. We deemed it a matter of national defense. We also predicted that once the gasoline crisis du jour resolved itself, the price of a gallon would be significantly more than before the crisis, but people would accept it gladly because the temporary price spike was ridiculously high. We were right. History is in the process of repeating itself, and our government is responding like the confederacy of dunces that they are, again. Stupidity is repeating itself.
A quick review - in July 2008, the average price for a gallon of regular gasoline nationwide was $4.11. In July of 2007 the price was $2.95, in July 2006, $2.92 (source: consumeraffairs.com). In July of 2005 gasoline was averaging $1.97 nationwide, July 2004 - $1.75 (source: Bloomberg.com).
2003 is considered the year that "all the trouble started" - when then President Bush made a detour from Afghanistan and declared war on Iraq - thus destabilizing oil prices. However, in the 10 year period preceding the invasion of Iraq, gasoline prices, with certain short term spikes and dips was relatively stable at the $1.65 - $1.75 range for regular unleaded. This is average retail US and does not take into account individual state sales taxes and special formulations (source: US Department of Energy gasoline price survey).
For context we need to compare the price of crude oil to see a correlation in the movement of retail prices.
-July 2009 - $67.00 per barrel – 2.97 per gallon
-July 2008 - 134.44 per barrel – 4.11 per gallon
-July 2007 – 71.71 per barrel – 2.95 per gallon
-July 2006 – 67.98 per barrel – 2.92 per gallon
-July 2005 – 52.57 per barrel – 1.97 per gallon
-July 2004 – 34.30 per barrel – 1.75 per gallon
-July 2003 – 26.90 per barrel – 1.66 per gallon
(Source: US Energy Information Administration)
We can see from the data that the gasoline pricing does follow the wholesale crude price. What cannot be explained so easily is the price spike, falling out of trend in 2008. As referenced the MSM declared the start of the gasoline "crisis" with former President Bush’s adventure in Iraq. We can see that for the duration of 2003 to 2005 prices had a steady increase, but not a war spike. The increases were due to a decrease in crude supply due to the Asian tsunami of 2004 and the destruction of US oil refining capability following Hurricane Katrina in 2005.
Increases in demand for oil from China (in a mass modernization push for the Olympics), India (due to the boom of the Indian economy during the Bush years) and the former eastern block nations as consumerism took root in former communist countries contributed to prices climbing.
Even with the restoration of supply and production facilities a new baseline in price was established by this increased demand for crude by the developing nations. This is born out by the data from this year where the pricing of gasoline correlates with the data from previous years pricing. Still 2008 is a pesky blip on solid data.
The most logical assumption is what always drives prices up – uncertainty about supply – and those evil free-marketeers, the speculators. In essence, what a speculator does is look at the facts, the likely scenarios to arise from them, and then bets on a scenario to emerge. This is the free market in action - how one can maximize profit in an uncertain world. Though it has a bad name, it is how department stores project how many of a hot fashion item they will sell, or what fad will catch on. Those who calculate right make a ton of money. Those who calculate wrong wind up with a warehouse full of "pet rocks".
In 2008, the security situation of the oil supply was in doubt – a war was being fought in Iraq (major oil producer). It threatened to expand into Iran (even bigger oil producer). The situation in Lebanon and Gaza was threatening to involve most of the other oil rich Arab states. Venezuela (one of the US biggest oil suppliers) was in the process of nationalizing the oil companies. Russia was flexing it’s energy power by intermittent cutoffs of natural gas and oil to Ukraine (and by doing so, threatened the supply to Europe). China and India were both increasing their demand exponentially. It looked like a perfect house of cards waiting for an inopportune breeze to blow by. That breeze came and blew with the speculators. All of the conditions of 2008 have become even more unstable in 2011.
But, we have an anomaly unique to 2011. Crude was trading this morning at $108 and change for a barrel. Gasoline is coming in over the $4.11 price that was cited for July of 2008. In July of 2008, the price of a barrel of crude was $134.44 per barrel. If you do the math, then gasoline today is 19.7% higher than it was in 2008. What explains that? Greedy oil companies? Shady speculators? Lack of supply? Nope. Those are the easy targets. It all comes down to the monetary policy of the Federal Reserve.
We did a piece a couple of months ago on how the phenomenon was starting to be felt in other areas of the economy. Link to What's Going On With Prices? The Fed, as we had explained, increased the money supply in circulation by about 30%. That brings down the value of that currency in the global economy by that same percentage. If we do the math, the potential rise in retail gasoline prices with no change in crude oil prices should be $4.53 per gallon of gasoline. Should the price of crude rise to the July 2008 level, the price of a gallon of gas will be $5.34. Should it rise to or beyond it's high in 2008, five dollar per gallon gasoline will seem like a bargain.
Well, that was boring but necessary – no evildoers, just good old free-market economics. We now can, with a good amount of certainty reflect that the price of gas is indeed, accurate. The fly in the ointment is, what happens the next time it looks like supplies are threatened, or as the Saudis are doing now, production is decreased.?
If we follow the models of the 70’s and 80’s, at the current panic / crisis / shortage / market blip the cost of a gallon of gas will spike to 150 percent of "normal" pricing and then will drift down to a 100 percent overall increase. Following that pattern for this time, and we see gasoline rising from it's starting point of $3.00 per gallon (where it had stabilized following the 2008 spike) to $7.50 per gallon. It will then settle in at a new retail price of around $6.00 – and once again we will be thankful that prices dropped down to reasonable again. But we will be stuck forever with that 100% increase - until the next time it happens. This is a cycle that is coming up on its fifth generation now. How do we avoid the continuing upward pricing?
Again, looking at the last spike, during the Presidential campaign Republicans John McCain and Sarah Palin called for opening up America for new drilling for oil. We all remember "Drill, Baby, Drill!" Basic economics follows that when supply is in question or insufficient, prices rise. When supply is abundant or sure, prices remain stable.
Heated debate was pushed on this in in Congress during July and August of 2008, at which time retail prices for gasoline started to decline. By passage of the bill opening new areas for drilling and exploration on Sept 17, 2008, the retail price of a gallon of regular gasoline had dropped by 30% and world market on crude oil followed suit.
This was without a single extra drop of oil being pumped, or any major change in the world situation. It happened on the promise of availability of a new, stable source of oil being available – in short, market speculation. We have enjoyed the benefit of that promise as the oil companies began preparation for new drilling since the bill’s passage. This strategy was used to the same advantage to counteract the turbulent oil market of the 1980’s. More drilling was encouraged and led to gasoline market stability through the 90’s. There's your answer. Real. Simple. Math.
President Obama doesn't get it. His moratorium on drilling has reversed all of the progress on exploration and drilling, and has destabilized the market. The inflationary pressures the the Federal Reserve and the Administration are pursuing, put additional economic pressure on American families. Saudi Arabia doesn't care if our money is worth less, they will just charge more.
Common Sense Dictates
America is a country that knows what it ought to do, but many times hesitates to do it with regard to preserving its’ national interest. Until plug-in electric, improved battery technology, or hydrogen or alternate fuels are market ready, gasoline and oil remain the lifeblood of our economy. Market ready is defined as being viable for consumer purchase without government subsidy - in short, something people want to buy.
That makes the domestic production of oil a vital interest to the national security of the United States. President Obama is loathe to recognize this fact in front of his face, no matter how hard it yells and jumps. Hostile regimes can put a stranglehold on the United States and it’s allies by cutting off the flow of oil tomorrow. For those of you who haven't been near a news source, there's quite a bit of trouble going on in the sandbox. Most of the players don't like us very much, and they don't really want our money.
There is no fleet of alternate energy vehicles at the ready to step in, and will not be for several years at best. It is absolutely in our best interests, and in the interest of the stability of the free world that the United States remains a well-oiled machine while these new technologies are developed.
We therefore maintain that a the most urgent part of energy policy in this country is to make use of our own resources. This gives us the best buffer against nations that would do us harm. When the new technologies are market ready, we can go back and cap all of the oil wells. Until then, common sense requires us to drill.
RLB
Categories: National Security, The Economy, political leadership, Energy
Tags: American interests economy energy policy national security
i wonder if people know how much of it goes to state and fed taxes....as well as local.
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very nice , this is a good explanation, of market forces even Ole' Mr. Chiu Obama's energy Czar said just recently that is was supply and demand, when a few years ago it was all bush doing it what a crock ! and now with the FED tampering with the money supply it will continue to rise and the political class especially the radical eco left will continue to demonize BIG OIL!!
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Yet the silence is deafening. I remember Bush being raked over the coals at this point. Just goes to show you who owns the loudest voices in media.
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Paid $4.21 this morning. It's almost 50 miles to work, and a fill-up is just under $90. I make a good living and this sucks. I can't imagine how people who are having trouble getting by are handling this.
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Crude oil peaked at about $150.00 / bbl in 2008. By my numbers, if it goes that high again, and factoring in the 30% devaluation of the dollar, that places a gallon of gas at $5.96. Going with the same math, oil would have to hit $190.. / bbl to break $7.50 as the price of a gallon of gas. There would have to be a lot of things go wrong for that type of a price spike occur. I don't fault your math, but the $7.50 does not seem likely to happen.
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or the dollar could be devalued again.
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I absolutely see $7.50 gas. The entire Mideast is on fire, and like it says - most of the people likely to win don't like us and don't want our money. They want a caliphate, and the easiest way to get it is to cut off our oil. The whole country would come to a grinding halt. The economy would fall off a cliff. It's hard enough stretching dollars at $4.00. It's not like Venezuela is going to help us out. We need to be drilling.
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I'm not justifying the current policy, butoil is a global commodity. We get most of our oil from Mexico, Canada and domestically. Arab oil accounts for about 18% or what we consume. Venezuela and Africa account for just a small part of what we use. African oil goes primarily to Europe, which is why England and France are screaming bloody hell. I think that part of the reason that Obama made nice with Brazil last month was so that we could use them as a primary supplier, and start replacing Arab oil. Ideally we should be drilling for our own, but Obama doesn't want to do that. I think Brazil is his form of domestic drilling.
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Haven't commented in along time, but I have to jump in here. Contracting out our drilling to Brazil adds on to our costs. Brazil is going to make a profit, which is fine, and then there are transportation costs. Domestic drilling keeps the profits here and lowers transportation costs. Then there is the big benefit - the JOBS that would be created here. That's the only thing on anyone's mind right now, and Obama jerks around with anyything but. Lift the moratorium!
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I hate to point this out, but you say that this is what happens over and over. The price starts out in one place, shoots up 150%, and then goes down to double the price that it was before. If that is a consistent pattern, doesn't that reek of price manipulation? Shouldn't each crisis be more random in the numbers? Then, if there is price manipulation, someone or something has to do it. That's something to think about.
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$4.23 today - $70.00 for the fill up. Kstowe has a point. Prices rise over time, but not double and then stay flat for a long time, then do the same every time that there is a significant rise in price. It just looks funny.
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Really? A conspiracy to set prices? Who would be the evil guy running it? Dick Cheney? Monty Burns? Come on!
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To address that more respectfully, it would be a hard thing to put together. Oil is a global commodity, so all of the producers would have to cooperate to set prices. It has never happened in human history that the number of countries that export oil have cooperated for anything but a short time. It would be a United Nations that worked model. Nations act in their own self interest.
So if not a global conspiracy, it would have to be price setting on a national level. That could only be accomplished through a national cartel of oil distributors, which is illegal under federallaw, or by the government. The cartel can't work because of the same reason that the global cartel can't work. Self interest. The government isn't equipped to do it because they have no capacity to keep a secret that big. They can't even keep the small ones lately. Ultimately the market sets the price of oil. If it gets to expensive, people stop buying it and the price goes down to what people are willing to pay.
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I'll go with modoman on this. Demand drives price in this case. There is no actual shortage or supply problem. If demand has people buying at $4,$5 or even $7.50, the price will continue to rise. That is because the demand is there. When demand drops, there is too much gas, so the price drops as a means to get people to buy it. That works for the local gas station, Exxon, and Saudi Arabia. When there is a price spike, demand drives how the final price will be settled. Once demand is steady, there is no downward pressure on prices or suppliers, so they stay at that level. Economics 101.
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Hey, this is a little off topic, but not really. This is the first anniversary of the BP oil fiasco. You were right on that one too. Thanks for the moratorium Big O.
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Dropping the moratorium would be beneficial in a lot of ways - renewed exploration and drilling, and yeah, jobs. It makes economic sense. So does this breakdown. The only people getting hosed is everyone not involved in the government.
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The icing on the cake is the Fed policy tacking an additional 20 - 30% onto the price by devaluing the currency. Nothing like spitting in the face of the American people in the middle of a depression.
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I actually like what that fool Trump was saying the other day. We dump billions of dollars and our soldiers lose their lives in Iraq to this day. We get paid back in oil. We're doing a hundred million a day in Libya, we'll take it back in loaded oil tankers. No more free rides to the Arabs.
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This is insane, and Obama is totally clueless. I heard him the other day tell him to trade in his van for something more fuel efficient. then he came right upto the line of mocking his larger than normal family. I don't know how that moron thinks he's going to get re-elected. Change your policies and the prices will come down!!!
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OK, get this - Obama is in L.A. toniteloading up buckets of money and screwing up the traffic. Here's his latest on the high gas prices. He's going to sick the Attorney General on whoever is responsible for the increase in prices. I'm gonna love to see Holder have Obama arrested, because ultimately, Obama is responsible.
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Sadly once oil prices go back down to some perceived comfortable level, the car companies (especially US big 3) will simply spend their R&D money on bigger suvs, and not non ice technologies. And they'll be all well it's want the people want. and they are partially correct, but also partially to blame for that attitude with the way they market those suv and ice technologies instead of marketing the non ice techs.
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I'm all ready to have this be the 150% peak and settle back in at $3.50 a gallon. This is eating into every other aspect of my life.
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Hi Mike-
I don't think that anyone is arguing against different cleaner cars.I really like the idea of hydrogen vehicles. Electric is starting to make baby steps. The hybrid is actually a good stepping stone. I even think that most people would be willing to use the new technologies if they were useful and affordable. The 2 electrics - the Volt and the Leaf, get 40 to 70 miles to a charge. In city driving, that's great. Everyplace else, not so much. On top of that they cost as much as an entry leave Mercedes, and they are too small for families. That and to charge them up, you need to plug it into the wall and charge it from of what are predominantly a coal fired electric plants. The increased electric use will pretty much offset the "clean" car.
You are right about Americans liking their SUVs and trucks. Toyota and GM, at least, both have hybrids in larger models. They don't get 50 miles per gallon, but what they do get is a lot better fuel efficiency than a regular engine. It's an improvement. Baby steps still get you there.
Government has a place in seeding these technologies, but punishing people for not using them when they haven't been made market ready is a fool's errand. Until they are, we are stuck with gas. Obama has it in his power to get those prices lowered, and he's doing the opposite. That's the frustration.
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We are $1 more per gallon here in California then some places, Remember when we lost in court last month on the Green House Gas Crap and the next carbon tax went into effect. But it was also under $3 in Cheyenne Wyoming last week. There is NO Reason with oil NOT passing $110 a barrel that gas is this high
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try up here in Canada 1.28 a L = 4.84 a Gal
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