Skip to comments.High Gasoline Prices and the 2012 Recession, Part II
Posted on 10/28/2012 8:09:06 PM PDT by NaturalBornConservative
Artificial Demand ::
Real demand is not artificial. We should resist as much as possible the notion of providing things that are not actually demanded by anyone. ~ American Consensus
- By: Larry Walker, Jr. -
The price of any product or service is normally determined by two variables, supply and demand. In economics, prices rise as demand increases, as supply decreases, or a combination of the two. Its only when supply keeps pace with demand that the price of gasoline stabilizes or declines.
Since we know that the worlds population is increasing, not decreasing, more gasoline production is constantly required, not less. It doesnt take a rocket scientist to figure that out. Thus, the only way to reduce gasoline prices, in the face of rising global demand, is through greater production. Yet, U.S. oil production has been on the rise since 2009, while demand has declined. So, why is gasoline stuck above $3.25 a gallon?
Was there suddenly a great demand for solar panels, biofuels, windmills and electric cars in 2009? The answer is no. Do cars and trucks run on solar panels and wind turbines? The answer is no. Yet, the 2009 stimulus set aside $80 billion in deficit financing to subsidize politically preferred green energy projects, which had little or no demand at the time. In fact, there is little demand for such products today. What the world demanded in 2009 is the same thing it demands today, more gasoline. So why is the federal government involved in providing things that are not actually demanded by anyone?
According to the Energy Information Administration, global oil consumption declined slightly in 2008, 2009 and 2010, while global supply has kept pace with demand (see chart above). In 2010, global supply actually exceeded demand, but as of 2011, the latest statistics available, world demand set a new record of 87,421,000 barrels per day, up from 83,412,000 in 2010. Yet global supply has kept pace with demand. So why have U.S. gasoline prices climbed by more than 90% since January 2009? The answer doesn't involve oil supply and demand, it has to do with the decline of the U.S. dollar.
The purchasing power of the consumer dollar has declined by 24.3% since 2001 (see chart below). The dollar actually strengthened for a brief 5-month period, from September 2008 to January 2009, but then quickly resumed its decline having fallen by 8.9% since. And what happened to the price of gasoline during the five-months that the dollar strengthened? It declined dramatically, from $3.72 a gallon to $1.64 (see Part I).
What caused the dollar to decline? The U.S. monetary base, the total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves, has increased by 324.2% since 2001. The money base grew from $616.7 billion in 2001, to $2.6 trillion as of September 2012. You can see in the chart below, that $256 billion of this increase occurred between January 2001 and September 2008. But from September 2008 to January 2009 the monetary base increased by $858 billion. However, this initial increase actually strengthened the dollar, and was, evidentially, the precise temporary stimulus needed at the time. The only problem with this brilliant strategy was that it wasnt temporary.
Instead of winding down at the end of January 2009, what had been a well timed temporary stimulus was unfortunately doubled. Since then, the monetary base has been jacked up by another $886 billion. Instead of a temporary stimulus, what we wound up with was a permanent doubling-down of the original amount. Is this what the economy needed? What was the result? This time instead of strengthening, the purchasing power of the dollar plummeted.
Thus, by the time Barack Obama was inaugurated, the economy had already received the temporary stimulus it required. How do we know? The proof is the decline in the price of gasoline, to near its historic inflation adjusted norm of $1.73 a gallon (see Part I). But ever since then, the price of gas has risen from $1.88 to $3.65. Thats the proof. What we have witnessed during the Obama Administration has been reckless and unnecessary deficit-financed spending, which not only added six-months to the Great Recession, but has lead to a prolonged period of stagnation.
The Federal Reserve should have started reducing the monetary base in February 2009, but was unable to, due to the Barack Obamas unprecedented $832 billion stimulus plan. In addition, as a result of Mr. Obamas $1 trillion-plus annual budget deficits for the past four consecutive years, instead of being able to control the money base, the Fed has been forced into the unlimited printing of dollars, vis-à-vis QE3.
Based on the current trajectory, what we can expect with another four years of Barack Obama is a continued decline in the purchasing power of the dollar, and higher gasoline prices, in spite of improved U.S. supply and falling demand. The problem with high gasoline prices is they lead to recessions, while lower prices foster economic expansion. The target price for gasoline is the 1992 inflation adjusted price, $1.86 a gallon. The current price is $3.65.
In the midst of the Great Recession, the average price of gasoline only exceeded the breaking point ($3.25 a gallon) for a total of 31 weeks. In contrast, the current price has remained above the breaking point for a total of 86 consecutive weeks, from February 28, 2011 to present. What does that tell you? It leads me to believe that the U.S. is currently in recession. The cause: Inflation due to excessive money printing, necessitated as the result of an $832 billion stimulus, and unprecedented trillion dollar budget deficits due to Barack Obamas inability to govern. Is there a witness?
One month ago, the Economic Cycle Research Institute (ECRI), the same organization which successfully predicted the last recession, and which over the last 15 years has gotten all of its recession calls right while issuing no false alarms, declared that the U.S. is in recession. In an article entitled, The 2012 Recession: Are We There Yet?, ECRI stated, Back in December, we went on to specify the time frame for it [the recession] to begin: if not by the first quarter of the year, then by mid-2012. But we also said at the time that the recession would not be evident before the end of the year. In other words, nine months ago we knew that, sitting here today, most people probably would not realize that we are in recession and we do believe we are in recession.
The policies of Barack Obama didnt deliver us from the Great Recession, they prolonged it. The $832 billion stimulus plan merely created an artificial demand for U.S. dollars, and is directly responsible for re-inflating the same imbalances that existed prior to the recession. How can we tell whether or not were better off than we were four years ago? Well, heres whats different today. We are more than $16 trillion in debt, 25 million Americans are either unemployed or underemployed, instead of reducing the money base the Federal Reserve is printing more money to purchase mortgage-backed debt on an unlimited basis, our tax and regulatory structure is mired in uncertainty, we are suffering from a foreign policy meltdown, and the price of gasoline has remained over $3.25 for a record 86 consecutive weeks.
The Obama Administration has done everything in its power to hide the truth from us, but were just not going to take it anymore. Americans can take a lot, but one thing we wont tolerate is government officials who try to deceive us. The federal government can easily manipulate unemployment statistics, since the numbers are basically made-up anyway, but it cannot so easily engineer the price of gasoline. To do so would entail releasing oil from the Strategic Petroleum Reserve, which is in place to mitigate national emergencies, not sway elections.
Four years of Barack Obama's policies solved nothing. We are currently teetering somewhere between back where we started from, to worse off than we have ever been. And with a looming fiscal cliff, another four years of Obama will only make things worse. America cant take another four years of trifling rhetoric, high gasoline prices, or another government-prolonged recession. Its time to wash our hands of the Obama Administration, and time to turn toward mature, experienced, and responsible leadership. You know what time it is!
A lie hides the truth. A story tries to find it. ~ Paula Fox
Weekly U.S. All Grades Conventional Retail Gasoline Prices | U.S. Energy Information Administration
The 2012 Recession: Are We There Yet? | Economic Cycle Research Institute
The Malaise of 2012 | Part IV
High Gasoline Prices and the 2012 Recession, Part I
Manipulation 101: The Real Unemployment Rate
OK, a whole lot of taxpayer (actually China borrowed) money was blown on useless green schemes...
and this does WHAT to the cost of gasoline, which kept on running, for all practical purposes, exactly the same fleet of cars it had?
This says refinery issues to me, and a problem that is so bad that no refinery wants to break ranks and sell cheaper.
And in what proportion did the dollar get stronger/weaker? Not by that much. It would have been obvious in the prices of other things too.
Little if any of the $6 trillion borrowed over the last 4 years came from China, most of it has been monetized by the Fed. None of it came from taxpayers, because we have been running trillion dollar plus deficits since 2009.
U.S. demand for gasoline has been on the decline since 2007, and U.S. supply has increased. So it’s not exactly the same fleet of cars (i.e. 14.7% U-6 unemployment, etc...).
Global oil supply has kept pace with global demand.
So I say the problem this round is excessive government borrowing and spending to fund green schemes, as well as other waste. Green schemes only represented about 10% of the stimulus, but that’s still significant, since the funds could have been used to promote new oil refineries or pipelines. And where did the money come from? Mainly the Fed and commercial banks, not China.
OK, so anything substantive gleaned from your narrative is that there is less demand pressure on gasoline, not more.
And the dollar has not fallen in purchasing power by anywhere close to half its value.
The puzzle remains unanswered, again except for... fear.
The price of all goods declined by 3.0% during that 5-month period. U.S. demand for gasoline fell by about 2 million barrels per day between 2007 to 2009, while U.S. supply ticked up by about 1 million barrels per day. This also contributed to the price decline, but wasn’t the sole factor. Yet, U.S. oil demand hasn’t increased at all since 2009, while U.S. supply has ticked up by almost another 1 million barrels per day. So how would you explain the 90% price rise, which was the original question?
The money pumped into the economy in 2008 was for the financial crisis bailouts, not wasted just to spend money that we didn’t have. The 60% added to the national debt since 2009 has been mostly wasted on things that we didn’t need, and that didn’t address the root causes of the recession.
If my anecdotal evidence means anything, we can reduce demand approximately 10% and save a lot of corn costs by taking the corn out of our cars and putting it back on our tables.
Imagine that a million miles of driving my vehicle (if only!) takes around 45,000 gallons of gasoline.
That same million miles takes about 50,000 gallons of gas, plus about 5,000 gallons of corn liquor, when my gasoline is diluted with vegetable matter.
We would rid the air of that many gallons of pollutants, too, if you are ecologically minded.
Stupid, for everyone but people who get a feel good from burning a renewable resource regardless of the actual outcome, and for big oil and OPEC, which enjoy the price uptick from the artificially increased demand.
Since the value of the dollar is not linked to anything other than the number of dollars in circulation, the more dollars there are in circulation, the less they are worth. Right? So if the monetary base was $616.7 billion in 2001, and now it's $2.6 trillion, then how much has the dollar been devalued? 294%?
I started to break down how the dollar is pegged to the Emirati Dirham at 3.67 per U.S. dollar, and what that means to the price of oil. For example, if the dollar declines by 25%, the cost of oil will rise by 33%; and if the dollar declines by 50%, the cost of oil rises by 100%, but I'll spare you the formulas.
Charles Kadlec has an article in Forbes that sums it up fairly well - The Rising Price Of the Falling Dollar.
"Oil prices are up because the value of the dollar is down. Our common sense hides this source of higher prices because we view the dollar as fixed, and prices as moving... Neither the dollar, nor the price of individual items are fixed."
"... the basic reason for higher energy prices is being overlooked, even though it is right before our eyes: Oil prices are up because the value of the dollar is down..."
"If the dollar had been as good as gold [over the past decade], the price of oil today would be about $20 a barrel, and the price of gasoline would be down near $1 a gallon. Thats right, the lower prices produced by the increase in oil and natural gas production have been disguised by the fall in the value of the dollar."
Most of this supposed superabundance of dollars is being soaked up by banks and the like who stubbornly don’t want to invest them because the investment climate is too punitive and risky. Also this does not explain why gasoline would be impacted in such a proportion while other commonly consumed goods are not.
Sorry your dog does not hunt.
I provided the Fed’s chart showing where the money base stands. I don’t know what you mean by the term “dollars being soaked up”. Where are they? The dollar is a fiat currency, it’s not linked to anything of value so its intrinsic value is based on the number of dollars in print and some measure of domestic economic growth.
The definition of hyperinflation is a large increase in the money supply not supported by gross domestic product (GDP) growth. So if GDP grows by 2%, an increase in the money supply of 2% is justified. But if GDP grows by 2% and the money supply grows by 30%, then the value of the dollar just got crushed by 28%. That’s the basic scenario.
Maybe you’re confusing the price of domestic goods and imported goods. Imports cost substantially more when the dollar declines, than domestically produced goods. With global commodities, there are many variables involved, currency exchange rates, global supply and demand, etc... But I know what I’m talking about. The bottom line is too much money has been printed, with little to no economic growth to justify it.
If you look at the price of the barrel of oil in nominal dollars (i.e. what is called a dollar contemporary with when it was sold) it is not 100% higher than when George W. Bush left office. Last I looked it was only 10% or so higher. So your argument about the cost of imports does not hold for this case either, unless imported Chinese dragon tails or the like are an essential component of gasoline.
Go look at the actual dollar-price of oil then and now, and come back with the references of the fact, not the theory you spout.
My charts are on gasoline prices and the value of the dollar. In what part of my post do you see the word oil? You’re trying to make a point, but whatever it is it’s not related to what was written.
Here, go to www.oil-price.net. They go into much more detail. Yes, the abundance of (fiat) dollars has some to do with it -- those extra dollars, which right now are not in the hands of gas consumers to freely spend but some day may in principle be, adds to the fear factor for refineries. Other things add to the fear factor, like the threat of losing tax advantages and the possibility of a hot, nuclear war in the middle east thanks to Iran.
By the way you were mocking me about my IIRC about oil prices. So go get the facts Jack and then see if my IIRC was all that wrong.
And you also lectured me about the effect of relative inflation on the price of a foreign sourced product. I pointed out in counter to that, that oil itself hasn’t followed the theory you are spouting. That’s possible in part because Middle Eastern oil is vastly cheaper to produce than it sells for. So if a place like Saudi Arabia “sacrifices,” they still roll in the dough and are happy. Islamists are not always devout economists, they have a multitude of international relations agendas.
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