What should we do about gas prices?

How do we solve the current problem of high gas prices?  Who solves the problem of high gas prices?  Are taxes a part of the problem?  Is the President to blame?

Several years ago, 1999 or 2000, when gas prices were topping $1.60 a gallon, then presidential candidate, Texas Governor George Bush said the president “must jawbone OPEC members into lowering prices.”

How’d that work out?

Admittedly, I criticized President Bush on that statement, and the resulting huge increase in gas prices ($4 per gallon) that curiously increased between elections, and dropped at election time.  So is the President to blame?  Was George Bush to blame?  Is Barack Obama to blame now?  George Bush deserved criticism for his statements and lack of knowledge about gas prices, if you recall, he didn’t even know the price of gas was almost $4 a gallon when a reporter asked him about it at one point during his presidency, but the president wasn’t and isn’t specifically to blame per se.

I’m sure I could find blame, and I guess if we had another president like Teddy Roosevelt who took on corporate crooks, the president could be a solution, but the problem is Wall Street investors buying oil futures as a short-term investment, not the president. 

Can you name one product that drives our economy as much as the cost of gas?  Not only do prices of products rise with the price of gas, but if I spend $40 more dollars on gas each month, with profits going to a foreign company, that is $40 less I am spending at local businesses that create jobs.  That means I’m not buying a pizza at Casa Nostra in Lakeville or taking my wife on a date to go see a movie at the Lakeville Movie Theater.  It means I’m not buying as much fresh locally grown produce at the grocery store, or splurging on a steak at Kowalski’s.  It means I wear my shoes longer and let me hair grow out a little more between cuts.  

Should a resource that dictates the economic success or failure of small businesses, and our country in general, as much as oil and gas do, really be an item that makes Wall Street investors rich?  When Wall Street traders think oil prices will increase, they bid more, increasing the price of oil.  So as we pay more and more, oil companies, many of them foreign, who have no significant additional costs to produce a barrel of oil, make more and more money.

I guess there are two solutions.  Drilling more won’t work, first it won’t stop speculation, and second we already have a glut of oil.  OPEC is slowing down drilling because they can’t sell it all.  So, we can work to either eliminate the use of oil and gas, or we can begin regulating investment in oil futures to some degree.  I don’t know whether either would work.  I doubt we would see a big decline in gas prices, after all, how often do we see gas prices go down 20 cents in a day like they go up?  It’s business, and it is not likely.  But regulation on oil speculation that limits gambling on oil would at least make our gas prices dependent on supply and demand rather than based on Wall Street profits.  Well, that is until radical governments take over the entire Middle East and cut us off completely…

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4 thoughts on “What should we do about gas prices?”

  1. GOOD OBSERVATION : Drilling more won’t work, first it won’t stop speculation, and second we already have a glut of oil.

    DrillMore,DrillNow is a campaign slogan … the price is set on a world market … do you know who is drilling in America’s Gulf (hint … think Brazil, Norway, etc.)

    Did you know that America’s largest importer of oil is Canada … and did you know that Canadians pay more per gallon than American drivers (plus Canada imports a ton of oil for its east coast)… oil is a global commodity … the price will be set by the world markets, not by how much America produces.

    That said, Congress could do two things to help the consumer … remove the tariffs on ethanol (Brazil wants to export to us … and yes, that’s the same Brazil that is drilling in the Gulf) … the second thing would be to end the subsidies for ethanol production. Republicans general tout the Free Markets theory, yet it was John Kline who authored legislation mandating 10% ethanol usage by 2010.

    The lesson that people should have learned from the stimulus program was to replace your inefficient equipment … accept the fact that gas will increase over time, but if you get 20 mpg yesterday, but can get 30 mpg tomorrow, that will help negate the cost increase.

    Lastly, you are right on the speculators … there is now a monopoly on copper … and if you noticed the price increases in food, look no further than Goldman Sachs and commodity futures … here are a few excerpts from a recent article in Foreign Affairs :
    Demand and supply certainly matter. But there’s another reason why food across the world has become so expensive: Wall Street greed.
    It took the brilliant minds of Goldman Sachs to realize the simple truth that nothing is more valuable than our daily bread. And where there’s value, there’s money to be made. In 1991, Goldman bankers, led by their prescient president Gary Cohn, came up with a new kind of investment product, a derivative that tracked 24 raw materials, from precious metals and energy to coffee, cocoa, cattle, corn, hogs, soy, and wheat. They weighted the investment value of each element, blended and commingled the parts into sums, then reduced what had been a complicated collection of real things into a mathematical formula that could be expressed as a single manifestation, to be known henceforth as the Goldman Sachs Commodity Index (GSCI).
    For just under a decade, the GSCI remained a relatively static investment vehicle, as bankers remained more interested in risk and collateralized debt than in anything that could be literally sowed or reaped. Then, in 1999, the Commodities Futures Trading Commission deregulated futures markets. All of a sudden, bankers could take as large a position in grains as they liked, an opportunity that had, since the Great Depression, only been available to those who actually had something to do with the production of our food.
    Futures markets traditionally included two kinds of players. On one side were the farmers, the millers, and the warehousemen, market players who have a real, physical stake in wheat.
    On the other side is the speculator. The speculator neither produces nor consumes corn or soy or wheat, and wouldn’t have a place to put the 20 tons of cereal he might buy at any given moment if ever it were delivered. Speculators make money through traditional market behavior, the arbitrage of buying low and selling high.
    The money tells the story. Since the bursting of the tech bubble in 2000, there has been a 50-fold increase in dollars invested in commodity index funds. To put the phenomenon in real terms: In 2003, the commodities futures market still totaled a sleepy $13 billion. But when the global financial crisis sent investors running scared in early 2008, and as dollars, pounds, and euros evaded investor confidence, commodities — including food — seemed like the last, best place for hedge, pension, and sovereign wealth funds to park their cash. “You had people who had no clue what commodities were all about suddenly buying commodities,” an analyst from the United States Department of Agriculture told me. In the first 55 days of 2008, speculators poured $55 billion into commodity markets, and by July, $318 billion was roiling the markets. Food inflation has remained steady since.
    The money flowed, and the bankers were ready with a sparkling new casino of food derivatives. Spearheaded by oil and gas prices (the dominant commodities of the index funds) the new investment products ignited the markets of all the other indexed commodities.
    Today, bankers and traders sit at the top of the food chain — the carnivores of the system, devouring everyone and everything below. Near the bottom toils the farmer. For him, the rising price of grain should have been a windfall, but speculation has also created spikes in everything the farmer must buy to grow his grain — from seed to fertilizer to diesel fuel. At the very bottom lies the consumer.
    All the while, the index funds continue to prosper, the bankers pocket the profits, and the world’s poor teeter on the brink of starvation.

  2. One word that is the political third-rail:

    CONSERVATION!!

    In other words USE LESS people

    I am annoyed at everyone that complains of fuel prices, if we just put a similar amount of attention and effort into conservation we could do good things… We have been blessed with low fuel prices for years, just consider what most other countries pay. Heck imagine what the TRUE price of our gasoline (after you factor in the subsidies, environmental impact and wars fought in its name)!

    Note I’m not saying to replace a vehicle, although if a replacement is coming anyhow its vital to make a good decision.

    Simple things like eliminating un-necessary trips, reducing speed and insuring your tires are fully inflated (yes Al Gore was correct that we have an under-inflated fleet on the roads) will make a noticeable difference. If we could convince everybody to take the steps we could actually influence costs.

    Pity that its just Un-American to not use up everything we can get our hands on because we have the “right” to…

  3. There was a letter to the editor by Marc Bordeaux. He was arguing that the only way to lower oil costs was to drill more and that clean energy and conservation were a waste of his tax money. The implication was that there is plenty of oil in the Bakken Formation and that simply drilling for that oil would miraculously lower our prices.

    My investor uncle has money in one of these Bakken Formation drillers. They were bragging in an earnings call about actually making a profit at $70 per barrel. Let me put that in perspective: traditional drilling in West Texas made a profit at $8 a barrel. Extraction prices have increased more than tenfold in the last few decades.

    Few understand “peak oil.” The problem isn’t simply that we’re running out of a resource, but that the higher costs of extracting oil from deepwater rigs and deep sideways shafts are passed on to the consumer. Drilling more does not lower prices. In fact, it increases them.

    When America began importing tar sands oil from Canada, they suddenly became the #2 largest oil exporter to the United States. Our oil prices actually grew. Not only are tar sands horribly polluting, but they cost a ton to extract.

    “Drill Baby Drill” is an expert way to shove your head in the sand and to exacerbate the problem. I’m not saying that we shouldn’t drill, but we definitely should not expect it will automatically lower prices. There must be some way to get this message across to voters without delivering a science and economics lecture.

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