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So why are gasoline prices going up?

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Today oil hit $110 a barrel and the national average cost of regular per gallon reached $3.246.

Now, I’m not an economist; I only play one at S&R. But like most of you in the U.S., I watch those gasoline prices ratchet higher and higher, and I’m ticked off. How come they’re going up so fast? How come they’re so high? And why isn’t someone explaining this to me?

I wish the press would spend more time telling me why prices are climbing. Yes, the press appropriately stresses the consequences of record gasoline prices on those who cannot absorb the increases. But it too often fails to point to the bad guys (we all need someone to blame, right?). Somebody’s gotta take the fall for this, many of us think.

As an S&R colleague said, “As the dollar falls against other currencies, it takes more dollars to buy anything imported unless retailers are willing to eat their margins in order to keep the price steady. Oil is mostly imported.” Does this mean that demand is not driving the increases, but speculation is?

BusinessWeek today provided John Wilen’s excellent explainer. Wrote Mr. Wilen:

The dollar weakened throughout the day Wednesday, setting a number of new lows against the euro and attracting new buyers to the oil market. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is weak. Many analysts believe the dollar’s decline is the reason crude futures have surged to new records in 12 of the past 13 sessions, despite the fact that crude supplies have risen 10.2 percent since early January. [emphasis added]

Lessee if I’ve got this right. Oil stocks are increasing relative to demand. That means we have supply increasing a tad faster than demand. In my Econ 101 world, that circumstance should drive down oil prices. But they’re going up. BW says that’s caused by speculation: oil futures have become “more attractive to foreign investors when the dollar is weak.”

(Is this where us little people at the end of the price-increase chain begin screaming, “Speculators are screwing us to make money off our pain!”?)

“It’s almost like people are worried they’re going to miss the … train,” said Linda Rafield, senior oil analyst at Platts, the energy research arm of McGraw-Hill Cos., of investors’ dollar driven enthusiasm for oil futures.

So why’s the dollar falling? I’ll leave that for commenters who understand this better than I do. But apparently the Federal Reserve has a role. Says BW:

In part, the dollar is falling in anticipation of another interest rate cut by the Federal Reserve next week. Lower rates tend to weaken the dollar.

Would that the cable and networks news programs do stories beyond the economic pain at the pump, as real as that is. Those stories are easy to do: Take a crew to a gas station, point a camera at someone filling up an SUV or a minivan and paying $80 and ask: “So how do feel about it?”

Instead, I’d like to see more stories that routinely explain the factors that account for increased oil prices at the well head and gasoline prices at the pump. I’d like terms explained, like oil futures and weak dollar and falling dollar. I’d like to know what petrodollars (and petroeuroes?) are and how they influence the U.S. trade deficit. I’d like to know why as trade deficits increase as we buy more oil, the dollar continues to slip.

How about telling us how the Fed’s setting of interest rates affects prices at the pump? How does U.S. policy at home and abroad impact currencies, trade deficits and oil prices?

MSN’s Jim Jubek has a helpful primer that explains some of the relationships and terminology. He wrote it in 2004, so its numbers are dated. But it’s a beginning for those of us dissatisfied with so many drive-by, pain-at-the-pump press accounts of higher gasoline prices. As for those who believe a conspiracy by the oil cabal to screw us lies behind gasoline price increases, please read my September 2006 account of the many factors influencing oil prices.

If what we’re told by the daily press is mostly we hurt because gasoline costs so much instead of why we hurt, then we won’t have the information we need to demand better public and foreign policy.

Now, surely the nation’s journalists have all the training in economics they’ll need to do this. And surely their employers, the corporate-owned media, will spend sufficient money to provide that training …

xpost: Scholars & Rogues


Written by Dr. Denny Wilkins

March 12, 2008 at 7:52 pm

Posted in Uncategorized

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