High Oil Prices?

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Why are oil prices shooting through the roof lately?  Well, it seems like TV pundits blame everything except the single institution that has the largest influence on what oil is traded at, and that is the Federal Reserve.  Some things might cause brief spikes in the price of oil, like shortages in supply, but the main cause for gas at the pump getting more expensive over time is the Federal Reserve. The real frustrating thing is that TV pundits seem not to have a clue and have not mentioned monetary policy at all.  Left or Right, the mainstream media seems totally clueless.  Bill Orielly had a discussion with Lou Dobbs about oil prices and not only did the two not mention the FED once but, they don’t seem to understand basic economics either.  The conversation went something like Dobbs telling O’Rielly that the oil refined in the United States is being sent overseas.  Well, this should not be surprising considering that oil refining is a highly complex process that third world countries often do not have the industry to refine themselves.  Therefore many countries ship their crude here and when it is refined it is shipped back overseas.  This is not some kind of complex plot where oil companies are taking advantage of American customers.They are simply selling refined oil on the world market at it’s commodity price.  O’Rielly seems to think that there is some kind of price fixing going on because gas is at such a similar price between different gas stations.  This is pretty easy to understand when you realize that oil and gas are not consumer goods like tennis shoes. They are instead commodities like beef, gold, copper, and many other industrial products.  The margins are very small when looking at any commodity because commodities by definition are homogenous, unlike two pairs of shoes that are likely very different.  If you went around town trying to buy gold or silver bullion at different coin shops, you would notice that the prices are pretty similar if not almost exactly the same.  Same is true for industrial metals like copper, the going rate is the going rate.  Additionally, oil, gas, gold, and copper are in a world market, the price of each is nearly uniform around the world, gold costs the same in Shanghai as it does in New York.  Oil, before taxes, has a very similar cost as well.  The real variable here is the dollar. When the dollar loses value, the price of oil goes up.  If you want someone to blame for high gas prices look no further than the Federal Reserve.

 

Some people might say that the government owning so much land and preventing drilling is pushing the price of oil up.  This might be true to some extent, and I would agree that opening up more land for oil exploration would be a good idea but, this does not explain how a gallon of gas used to cost a dime and will now likely be five dollars by summer.  The reason that gas is so high this year should be put into consideration of what the Federal Reserve’s actions have been over the last four years.  The FED has pumped trillions of dollars into the economy but, this has been mostly absorbed by the big banks where they have kept the money preventing it from being pushed into the economy.  We are begging to see the affects of this money as it enters the economy, for food and many other commodities have been inflated up 10% in 2011.  The drive up in the stock market to 13,000 has also been a result of inflation because Wall Street is always one of the first in line for newly printed money.  We are finally starting to feel the beginning of the price inflation that comes about when the Fed doubles the monetary base.  If the economy shoots up to full employment we might even see ten dollar gas but, to be honest we truly do not know because monetary inflation affects different sectors of the economy in different degrees.  Oil, though, is one commodity that is almost always affected by monetary inflation (so is food for that matter, interesting how neither is included in the official CPI).  When oil starts going up in price for long periods of time, it is likely that we will see inflation in other areas as well.

 

In conclusion:

 

The Federal Rerserve is the most to blame for oil prices going through the roof.  Someday the media might catch on to this too but, don’t hold your breath, they have been blaming everything else for 50 years.

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