Hey Brother, Can You Spare $4.00 for a Gallon of Gas?
Hugh Askew | October 24, 2009 at 01:15 pmby
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Not a large amount. But take that amount times the nearly 200 million drivers in the United States, and it adds up to a half a billion dollars. If the cost of gas holds at that price, in four weeks, 2 Billion dollars will have been spent for gas, instead of paying bills, or making purchases, or saving for the future.
If you haven't noticed, crude oil and gasoline prices are again on the rise. According to the law of supply and demand, prices for crude oil (and by extension, gas prices) should be low, perhaps even falling. Most oil producing nations have reduced production. Millions and millions of gallons of excess crude oil sit in storage tanks and in tankers offshore. Refineries are cutting production, laying people off, and closing facilities to deal with low demand and falling profits.
So what gives? Why are gas prices rising? Is the law of supply and demand being broken? Should someone be arrested?
Actually, the law of supply and demand is in full effect - and at work - on another commodity. That other commodity is the dollar. As more money is printed by the US Government to cover spending, it's value, relative to other money, falls. Each dollar is worth slightly less and it takes more of them to exchange equally for other currencies. The more dollars are printed, the more the value of the dollar tumbles.
In reality, the dollar is worth only what people think it is worth.
The US government is printing hundreds of billions of extra greenbacks. Covering the debt of bankrupt banks, buying up broken car companies, and handing out stimulus money, takes a lot of cash. A lot. At a same time they are throwing money around, federal income tax receipts are down 34%. Other revenue is down as well, the results of a damaged economy.
Because of the growing glut of dollars, and because the people that deal in them aren't idiots, they are getting rid of American money. Gold is popular right now, and the price or that gold is increasing. Some of the increase is due to the increased demand, some to the falling value of the dollar. The Euro and the Yen are very popular as well. Large foreign banks are exchanging their holdings in dollars for those currencies, and the demand for the devalued dollar falls with the rise in demand for the more valuable euro and yen.
So, what does all that have to do with the cost of gasoline?
The oil producers trade in dollars. If however, they use the dollars earned from oil production to trade with countries that use say, the euro or yen, then it takes more dollars to do so, thus more dollars are needed to purchase oil.
Currently, 1 dollar = roughly 1.5 Euro. Oil is above $80.00 a barrel. Oil is probably undervalued at that. Both the Euro and crude oil are rising in relation to the dollar. Taking the Euro into account, crude oil should be nearer $88.00 per barrel, with gas worth close to 25¢ more per gallon.
If things stay as they are even with depressed demand and production, the cost of oil will continue to rise steadily as the dollar falls in value. Gasoline prices will rise along with the price of oil.
What happens if another factor enters the picture? Will commodity traders and investors jump into the oil market with some of the trillions of investment dollars waiting for a rising market? Could their demand drive the market upward? A lot of investors have been sitting on the sidelines since oil demand flattened. Many will be eager to get back in the mix if they smell rising prices.
Much of the rapid increase in oil prices that began in the fall of 2007 and continued through the summer of 2008, was driven by speculators looking to cash in on future demand. Most of them bailed out when the oil market collapsed - after, of course, they triggered the rapid fall of the American economy. If anything made Joe America face up to his overspending and over-borrowing, it was the sudden need for an extra $100-200.00 per month to pay for gas.
Can consumers, already overburdened with debt and falling incomes, afford even a modest increase in gas prices? Each $10.00 a barrel increase in the cost of oil adds more than 20 cents to the cost of each gallon of gas, raises the cost for almost all goods and services, and sends 100,000+ people to the unemployment line. Rising gasoline costs also dramatically depress consumer spending, sentiment, and long-range plans. We simply stop going out as much, cut back on non-essentials, reduce long term purchases, and hold on to what we have left.
Should the rising price of gas outpace the deflationary effects of our moribund economy, we will likely see it become the trigger for an inflationary spiral that could well get out of hand.
Fortunately, the advisors and brokers say that the market will take care of itself, government has inflation under control, and the economy is set to resurrect itself. Unfortunately, these very same people have been very, very wrong before.
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PIM of SPAIN
San Pedro de A, Malaga, Spain
San Pedro de A, Malaga, Spain
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