Economics

Recently Bill O’Reilly and Lou Dobbs ignited a national debate about rising gasoline prices. Dobbs stunned Fox’s “humble correspondent” by stating on the “O’Reilly Factor” that the main reason for expensive gas in the U.S. is excess “supply” being sold to China and India. That made O’Reilly upset and he spent much of the week blaming the “greedy” oil companies for our woes.

Remember this is Fox News–not the mainstream media. Usually liberals blame the oil companies. However, oil prices are an area where Bill O’Reilly leans left–he really believes the oil executives are “hosing the folks.” He’s believed it for years. He may be partly right.

But I don’t think it’s the best answer.

So why are gas prices are so high, and what can we do about it?

First of all, let’s bring the current administration into the equation. When Barack Obama took office in January of 2009, the average price of gas was $1.85 (seems like an eternity ago). Today prices are closer to $3.85 (depending on your region and state taxes)–a 120 percent increase.

In his Saturday, February 25 radio broadcast, the president said there was no easy answer to the problem and blamed Republican complaints as gimmicks: “We know there’s no silver bullet that will bring down gas prices or reduce our dependence on foreign oil overnight,” he said.

The president suggested that the Republicans have only one answer: drill. But earlier in the week he scoffed at that suggestion: “You know that’s not a plan, especially since we’re already drilling. It’s a bumper sticker.” One journalist wryly commented, “Speaking of bumper stickers, remember ‘Yes We Can!’ Mr. President?

Indeed we do.

After filling up the car this weekend–$45 for three-quarters of a tank–I’ve done some research on rising gas prices. Here’s what I’ve found, with a special eye to the bigger picture.

SHORT TERM PROBLEMS

First, let’s look at our immediate predicament. In February 2012, we have record price levels and a threat of four of five dollars a gallon costs hitting us during the summer months.

Why?  Here are what most experts say:

1. Gas prices tend to rise every spring in anticipation of increased demand during the summer driving vacation season. As a result, gas prices hit $3.50 a gallon by February 15, two weeks earlier than in 2011.

2. Global demand is raising the price of crude oil— It stands at $109 a barrel. This accounts for 55% of the price of gasoline. Distribution and taxes influence the remaining 45%. Usually, the latter items don’t change much, so that the daily change in gas prices primarily reflects oil price fluctuations. Right now there is growing demand in the developing countries of Asia (India and China) and the former Soviet Union. Their populations are rising out of poverty, and buying cars and heating oil in record amounts.

3. Commodity trading fear – Oil prices are set by commodities traders who buy and sell futures contracts on the commodities exchanges. These are agreements to buy or sell oil at a specific date in the future at a specific price. Commodities traders can create a self-fulfilling prophecy by bidding up oil futures prices. Once this starts, it can create an asset bubble. In April 2011, fears about unrest in Libya and Egypt sent oil prices up to $113 a barrel. In May 2011, as oil prices dropped, gas prices stayed high. Why? Commodities traders were concerned about refinery closures due to the Mississippi River floods. In February 2012, concerns about a potential military action, by either Israel or even the U.S., against Iran caused high oil prices.

4. Lower US consumption – Oil consumption in the United States is down 15% this year (we’re driving less and experiencing a warm winter). Usually this is a good problem that lowers prices, but this year it was so severe that it led to problem number five.

5. Refinery shutdowns and shake-up – This is probably the most unusual and significant short-term reason for higher prices. On February 23, Bloomberg reported that the U.S. had lost 5 percent of its oil refining capacity in the last 3 months. Over the past year, refineries have faced a squeeze. Prices for Brent crude have gone up, but demand for gasoline in the U.S. is at a 15-year low.

That means refineries haven’t been able to pass on the higher prices to their customers. As a result, companies have chosen to shut down some refineries rather than continue to lose money. This month, two large refineries outside Philadelphia shut down: Sunoco’s plant in Marcus Hook, Pa., and a Conoco Phillips plant in nearby Trainer, Pa. Together they accounted for about 20 percent of all gasoline produced in the Northeast.

Bloomberg gives further insight into the refinery problem:

“The U.S. refining industry is being split in two. On one hand are the older refineries, mostly on the East and Gulf Coasts, that are set up to handle only the higher quality Brent “sweet” crude—the stuff that comes from the Middle East and the North Sea. Brent is easier to refine, though it’s gotten considerably more expensive recently. (Certainly another reason for higher gas prices.)”

“Then there are the plants able to refine the heavier, dirtier West Texas Intermediate (WTI)—the stuff that comes from Canadian tar sands, the deep water of the Gulf of Mexico, and the newer outposts in North Dakota, which just passed Ecuador in oil production. These refineries tend to be clustered in the Midwest—places such as Oklahoma, Kansas, and outside Chicago. While the price of Brent crude has closed at over $120 a barrel in recent days, WTI is trading at closer to $106. That simple differential is the reason older refineries that can handle only Brent are hemorrhaging cash and shutting down, while refineries that can handle WTI are flourishing.”

“’The U.S. refining industry is undergoing a huge, regional transformation,’” says Ben Brockwell, a director at Oil Price Information Services. ‘If you look at refinery utilization rates in the Midwest and Great Lakes areas, they’re running at close to 95 percent capacity, and on the East Coast it’s more like 60 percent,’ he says. This is primarily why the cheapest gas prices in the country are found in such states as Colorado, Utah, Montana, and New Mexico, while New York, Connecticut, and Washington, D.C., have some of the highest prices.”

These five seem to be the current culprits. Steve Maley (Tulsa World) writes a good article on ten ways to deal with these problems in the short term. You can read it here.

But there is a much bigger problem we desperately need to solve.

THE BIG PICTURE

First let’s talk about the the destructive power of inflation. In fact, price inflation is such a “normal” and insidious thing that we barely notice it. We’re used to things going up in price. We’ve been told by the powers that be that rising prices are standard fare.

They weren’t normal in America for our first one hundred and fifty years. For a majority of our nation’s history, our currency remained as “sound as a dollar” and prices changed little from decade to decade. Then in 1914 we created the Federal Reserve and on January 5, 1933 we went off the gold standard. For the past eighty years, we have been systematically devaluing our currency.

The greatest decline of the dollar has happened recently. In the past six years, the dollar has decreased in value by 40%. When you hear wind of QE2 (quantitative easing) and other methods that the Federal Reserve uses to manipulate our currency, don’t rush to applaud them.

We are flooding the world with fiat dollars to stave off default and pay for our massive government debt. Remember when a $20 bill seemed like a decent chunk of money? Remember when coins or change were valuable? We hardly keep them or use them anymore.

The inflationary spending of the Fed is practically criminal–and one reason why some Republicans are voting for Ron Paul. He’s one of the few politicians willing to be honest about it.

Think of monetary inflation as a game of Monopoly.  When you “empty the bank” to all the players, you have more money to spend on “Park Place” or anything else–so prices go up. Why? Increased cash in everyone’s wallet “bids” up the value of everything–which devalues the currency. In my brief driving career (1969-2012), monetary inflation has increased gas prices from 25 cents to almost four bucks. That’s a 1600% increase.

We live in a scary time for inflation in America. Food price are up 30%, gasoline 120% in three years, and run-away inflation could be in front of us. But there is a primary reason for inflation. It comes down to a nation’s faith and morals.

America used to be a nation of faith–of forward-thinking, God-believing people. Our faith produced morals, i.e. hard work, financial prudence, self-control, and a greater concern for “posterity” than for ourselves.

Then the Baby Boom and subsequent generations came along. We rejected God’s authority and cast off all restraints on morality–including financial prudence and debt. We became a “consumer” society where meeting my needs was more important that saving for our children. We used credit cards and risky mortgages to fund our immoral (non-right) attitude of living beyond our means. And we elected officials who did the same thing on a federal level.

Faith, morality and freedom produce hope. Unbelief, immorality, and bondage to debt create “uncertainty.” The biggest problem contributing to rising gas prices is uncertainty, i.e. unbelief.

The American people need to turn back to God, restore faith, stop their reckless spending and demand that their leaders do the same. Then, we must elect leaders who have the guts to reign in the Fed, stabilize the dollar, shrink the size of government, pay down the debt, get off the backs of business, protect the environment, and drill bay drill!–for the sake of future generations.

Prudent faith and actions can bring real long term hope–including cheaper gas..