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Why Oil and Gas Prices Are High

The price of gas is a touchy subject these days and everyone has their own theories about it. There is one perspective we aren’t hearing very much about:

World supply and demand is a factor in gas prices, but the U.S. consumption of fuel (which is roughly 25% of world consumption or more) has dropped by millions of gallons since last year and yet prices continued to rise significantly. Some people are trying to lay the blame directly on environmentalists or “big oil” for high gas prices. While these are possible factors (especially the latter) other key factors in high gas prices are the weak dollar/inflation (aka the Federal Reserve), the current wars we are in, and the likelihood of the U.S. starting more wars in the near future. The wars cost our country over 400 million dollars a day. To cover the massive war spending costs money is printed out of thin air by the Fed. This increases the money supply and devalues the dollar, causing inflation. Next time you are filling up your tank remember you are also paying the War Inflation Tax.

One other point: I’ve heard various news outlets (actually Fox is the one I know of for sure) say things like “high gas and food prices are causing inflation”. Silly Fox, inflation is when an increased volume of money results in the loss of the value of that money. Inflation causes high gas and food prices, not the other way around — get it right!

OPEC: Dollar Decline Could Lead To $170 Oil
06-28-2008
Bloomberg

June 28 (Bloomberg) — OPEC President Chakib Khelil predicted that the price of oil will climb to $170 a barrel before the end of the year, citing the dollar’s decline and political conflicts…

Political pressure on Iran and the depreciation of the U.S. currency have caused a surge in oil prices, Khelil said. New York- traded crude has more than doubled in a year and touched a record $142.99 a barrel yesterday on the New York Mercantile Exchange.

OPEC ministers generally say that oil output is sufficient, even as Saudi Arabia, the biggest producer, pledged to pump an extra 200,000 barrels a day next month to calm the market. “The market is completely supplied,” Venezuelan Oil Minister Rafael Ramirez said yesterday. Libya announced possible production cuts, calling the market oversupplied.

The rising cost of crude is not linked to supply, Khelil said today. “There is more than enough oil in the market to meet the international demand,” added the OPEC president…

Declining Dollar

“The decisions made by the U.S. Federal Reserve and the European Central Bank helped the devaluation of the dollar, which pushed up oil prices,” Khelil said.

Oil may extend gains if the ECB boosts rates on July 3, further weakening the U.S. currency. The dollar has declined 15 percent against the euro in 12 months.

GASOLINE IS NOT GOING UP!

By Paul Proctor

May 17, 2006

NewsWithViews.com

For the first time in my life, I put $70 worth of gas in my car. It wasn’t premium and my tank wasn’t empty. Many around the country are experiencing the same kind of shock at the pump and really don’t know why. As a result, everything else we purchase and/or consume on a daily basis is rising accordingly because it is made and moved with oil – the lifeblood of today’s economy. Consequently, whenever the cost of doing business increases, for whatever reason, a chain reaction begins and spreads across the financial world like an economic tsunami, leaving the consumer to suffer in its wake.

Economists call it “inflation” while the government calls $75 a barrel oil a “shortage,” blaming higher prices on terrorism, the war effort, “peak oil,” not enough new drilling and not enough new refineries to turn it all into gasoline.

Some say that skyrocketing fuel prices are simply the work of greedy oil company executives, while others claim it is OPEC’s greed. Still others tell us it is all those environmental regulations that liberals imposed on refineries over the last several decades that ran up the cost of producing gasoline and discouraged the building of new and more eco-friendly refineries to meet the growing global demand.

Then there are those who say it is largely because of the high taxes we pay at the pump that petrol has become so expensive, while politicians declare that the perfect response to it all is to raise taxes on oil companies, as if they wouldn’t in turn pass that increase on to the rest of us. Some answer, huh?

Society’s problems don’t worry me near as much as government solutions.

What almost no one in Washington and the American media will admit, (and I don’t believe for a minute that they aren’t privy to it) is the dirty little secret behind $3 a gallon gasoline, which is nearing or above $4 in some areas of the country. That is to say, they refuse to address the REAL REASON for our so-called “inflation.”

Although many of the aforementioned theories given, play, in varying degrees, a role in those “rising prices,” they are not at all the cause, but only the effect; and as many of us already know, treating symptoms does not constitute a cure.

The dirty little secret is this: Gasoline is not going up. It is the dollar you buy it with that is going down; and it has been going down in value for a very long time because it is just government issued paper with numbers printed on it and nothing physical in storage anywhere to back it up. What’s more, the dollar is now going down faster than ever.

Paper money used to and was supposed to signify what was being held in reserve by a country’s financial institutions in the form of gold. That all began to change here in America in the early 1900s when our country was manipulated into a fraudulent financial scheme called “fractional reserve lending” where bankers secretly met and determined in their cunning and arrogance that they could and should print as much paper money as gullible people were willing to borrow, regardless of how much gold was kept on hand to back it up.

Paul Craig Roberts, Chronicles Magazine.org, 6.10.08

How to explain the oil price? Why is it so high? Are we running out? Are supplies disrupted, or is the high price a reflection of oil company greed or OPEC greed? Are Hugo Chavez and the Saudis conspiring against us?

In my opinion, the two biggest factors in oil’s high price are the weakness in the U.S. dollar’s exchange value and the liquidity that the Federal Reserve is pumping out.

The dollar is weak because of large trade and budget deficits, the closing of which is beyond American political will. As abuse wears out the U.S. dollar’s reserve currency role, sellers demand more dollars as a hedge against its declining exchange value and ultimate loss of reserve currency status.

In an effort to forestall a serious recession and further crises in derivative instruments, the Federal Reserve is pouring out liquidity that is financing speculation in oil futures contracts. Hedge funds and investment banks are restoring their impaired capital structures with profits made by speculating in highly leveraged oil future contracts, just as real estate speculators flipping contracts pushed up home prices. The oil futures bubble, too, will pop, hopefully before new derivatives are created on the basis of high oil prices.

There are other factors affecting the price of oil. The prospect of an Israeli-U.S. attack on Iran has increased current demand in order to build stocks against disruption. No one knows the consequence of such an ill-conceived act of aggression, and the uncertainty pushes up the price of oil, as the entire Middle East could be engulfed in conflagration. However, storage facilities are limited, and the impact on price of larger inventories has a limit.

…Understating inflation makes real GDP growth appear higher. If inflation were properly measured, the United States has probably experienced no real GDP growth in the 21st century.

Williams reports that for decades political administrations have fiddled with the inflation and employment numbers to make themselves look slightly better. The cumulative effect has been to deprive these measurements of veracity. If I understand Williams, today both inflation and unemployment rates, as originally measured, are around 12 percent.

By pumping out money in an effort to forestall recession and paper over balance-sheet problems, the Federal Reserve is driving up commodity and food prices in general. Yet American real incomes are not growing. Even without jobs offshoring, U.S. economic policy has put the bulk of the population on a path to lower living standards.

The crisis that looms for the United States is the loss of its world currency role. Once the dollar loses that role, the U.S. government will not be able to finance its operations by borrowing abroad, and foreigners will cease to finance the massive U.S. trade deficit. This crisis will eliminate the United States as a world power.

From Enigma Curry’s blog:

The value of oil hasn’t changed at all — instead, the value of our dollar has tanked. The value of oil, relative to gold, has sat unchanged since 2000 (and even well before that). This means that if you got your paycheck in gold instead of dollars you’d still be paying the same price for gas as you were a decade ago.

Many are claiming that speculators are causing the sharp increase in prices. This idea of course ignores what the speculators are speculating on, which is the continuation of a falling dollar, the Iraq War (its impact on oil prices, and its relationship to the declining dollar) and the looming threat of a war with Iran which would further impact oil prices. Whatever minimal effect speculators may have, the root cause of high gas prices is still the falling dollar and the wars.

Oil Rally Topped Dot-Com Craze in Speculators’ Mania Bloomberg, 6.13.08

Senate told speculators causing oil madness Salt Lake Tribune, 6.07.08

George Soros and Gerry Ramm joined others in delivering the same message last week to the Senate Commerce Committee. Rampant speculation has helped spur out-of-control crude oil prices, which neared $140 a barrel Friday.

In the measured tones of high finance, Soros, whose hedge fund by some accounts made $3 billion last year, talked about a ”speculative excess” and warned that the run-up in oil prices could drag the United States into a recession.

…Ramm, the president of the Inland Oil Co. of Ephrata, Wash., was a bit more plain-spoken.
”Excessive speculation on energy trading is the fuel that is driving this runaway train in crude oil prices.”

Others testifying said speculation by investment banks, hedge funds, institutional investors and others may be responsible for more than half of the skyrocketing price of crude oil. The Federal Trade Commission and the Commodity Futures Trading Commission, they said, have failed to investigate.
Gasoline should cost about $2.25 a gallon, and everything above that is ”funny money” largely tacked on by speculation and manipulation, testified Mark Cooper of the Consumer Federation of America.

”The speculative bubble in energy commodities has cost households about $1,500 over the past two years in increased costs for gasoline and natural gas,” said Cooper, estimating that the total cost to the U.S. economy has been more than half a trillion dollars.

World has enough oil reserves, says BP boss The Guardian, via the Raw Story, 6.11.08 “I am certainly not a subscriber to peak oil (theories).”

Related info: Inflation Tax and Dollar Devaluation: Paul Confronts Bernake


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8 Responses

  1. […] at Daily Liberty Research did a nice post on driving factors of oil prices with an interesting collection of articles, including the late June reporting that “OPEC […]

  2. […] at Daily Liberty Research did a nice post on driving factors of oil prices with an interesting collection of articles, including the late June reporting that “OPEC […]

  3. […] at Daily Liberty Research did a nice post on driving factors of oil prices with an interesting collection of articles, including the late June reporting that “OPEC […]

  4. “Inflation causes high gas and food prices, not the other way around — get it right!”

    If you define inflation as the increase in overall price levels, as most economists do, then high gas prices do actually cause inflation.

    What you’re saying is that increases in the money supply (which you define as inflation) increase price levels, which is not always the case. For example, in a quickly growing economy, small increases in the money supply won’t increase price levels.

  5. I’m not sure where you get the idea that “most economists” define inflation as “the increase in overall price levels”. These must be Fox News economists that you are referring to?

    The very definition (look it up) of inflation is: “a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency.” Every credible thing about economics I’ve ever read says the same thing.

    Obviously if the price of a commodity that virtually everyone has to use on a regular basis such as gasoline goes up (primarily due to inflation), then prices for other things will go up as well as that expense is passed on. This is the result of inflation.

    The cause of inflation is our devalued currency. One of the first and most noticeable places the devaluation of our currency hits us is in the price of oil — because of our huge reliance on world markets, the exchange rates inherent in those markets, etc. Inflation is far less of a problem (in the shorter term anyway) for things bought and sold within our own borders and/or when only U.S. dollars change hands.

    You are mostly correct in saying that “in a quickly growing economy, small increases in the money supply won’t increase price levels.” Sadly, we have neither a quickly growing economy nor small increases in the money supply occurring right now in this country. Instead we have rising prices due to inflation.

  6. […] or Depression LikelyRevolution March in D.C., July 12, 2008CNN: Another Depression Could Be ComingWhy Oil and Gas Prices Are HighNaomi Wolf at the Revolution MarchAlarmist Climate Change Myth Continues To UnravelMore From the […]

  7. Moves by the CFTC to try and regulate the oil trading market and prevent the kind of speculation which has seen crude oil prices rise from $30 per barrel back towards $70+ this year took an interesting twist yesterday when it was announced that the weekly COT data would now include new details on the aggregate holdings of the big Wall Street dealers, hedge funds and other financial participants. COT data is a useful market sentiment tool but as many of the market participants both hedge and speculate it has become increasingly difficult to analyse. According to the CFTC the new format will be making its debut next Friday.

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