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Making Sense of The Skyrocketing Cost of Gasoline

Posted by Larry Doyle on September 17, 2012 7:33 AM |

I guess I could write this morning about the NYSE being fined by the SEC for facilitating front running. I could also offer more commentary on global banking institutions that now seem to realize a little thing called “reputation” actually matters. Perhaps I could offer insight on how the Fed’s recently announced “QE-infinity” is directed as a further bailout of the banks and the red-headed stepchildren commonly called Fannie and Freddie.

But let’s put those topics off for another time. Today, let’s address why your wallet is significantly lighter every time you go fill your vehicle’s tank. 

I paid the outrageous price of $4.39/gallon for regular gas at my local station the other day. I believe the last time I had filled the tank, ten days or so prior, the price was approximately $4.15/gallon.

What the hell is going on? Why is the price of gasoline skyrocketing?

Must be the booming economy, right? What booming economy?

Have families forgotten that schools are back in session and they are taking extended summer vacations?

I think not.

Is there a massive fuel leak somewhere that is not being reported? Doubtful, or otherwise it would be utilized to further castigate George W. Bush.

More saber rattling in Iran? Certainly no more than the usual.

So, how do we make sense of the skyrocketing cost of gasoline? What is pushing the price of petrol so high so that more and more people will decide to stay at home?

Perhaps I should not write “what” is pushing the price so high but rather “who” is pushing it so high.

Do you recognize this man to the right?  

I have no doubt that the quantitative easing programs pursued by the Federal Reserve under the leadership of Ben Bernanke are the forces at work driving the cost of gasoline ever higher. In fact, by committing to flush the economy with $40 billion/month on an open ended basis (the QE-infinity announced just last week), I would be surprised if we do not see $5.00/gallon in the foreseeable future. Is $6.00/gallon out of the question? Certainly not.

The Fed’s QE1 and QE2 programs more than doubled the size of the Fed’s balance sheet. With QE-infinity now announced along with an accompanying commitment to keep the Fed Funds rate at the current 0% until at least mid-2015, the Fed is now on the record in its commitment to print money like it is going out of style. The value of the dollar was immediately hit after the Fed’s announcement and long term interest rates actually moved higher in anticipation of a pickup in inflation. The price at the pump is an immediate indicator of this reality.

While Bernanke and his fellow Fed governors are easy targets on this front, make no mistake, his predecessor Alan Greenspan also deserves very real blame for this current fiasco. The charlatans in Washington masquerading as our political leaders while they collect their booty from a wide array of special interests instead of protecting the public interest also share in the blame.

Very simply, we need no other reminder than the cost of gasoline to appreciate that the Federal Reserve and Washington have FAILED America.

Navigate accordingly . . . and in doing so, you may think about riding a bike or buying a good pair of walking shoes.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Angelia

    I was a little disappointed with this article. I was hoping for some real insight. You point to Washington in general but offer no theories, facts, figures, or explanation as to why the Fed moves have affected gas. That is what I am interested in learning. I want to know an indepth WHY. My theory focuses much more on price manipulation and greed. I’ve noticed since the crash that drops in gas seem to magically appear in time with certain quarters in which the government wants to see pushes in spending (ie the christmas spending season… remember the drop last December and summer holiday time…with the price drop this past June). And let’s not forget the huge sustained drop not long after the crash of 2008. It seems it is time to pay the company their profits after giving us a break and a small boost to the economy (and consumer confidence index). However, I realize that there are more complex issues at hand as well and my theory could all be coincidence. I would really like to learn more about the WHY behind the price increases.

    • LD

      Angelia,

      Our gas at the pump is derived from oil. The oil is traded in US dollars. With the Fed engaged in literally printing dollars (more than doubling the size of the Fed’s balance sheet, and now well on the way to tripling if not quadrupling the balance sheet), the value of the dollars relative to the commodity has plummeted — or looked at from the opposite perspective, the commodity has significantly increased in price relative to our currency.

      The Fed’s balance sheet has more than doubled in the last three plus years and the cost of gas has more than doubled as well. The correlation is striking. The same could be said for selected other commodities as well.

      For more on this topic, the WSJ writes this morning,

      But near-zero interest rates—especially when inflation is running a couple of points higher—are as bad for those of us still in our working years.

      Thrift—that is, work and delayed gratification—is both a personal and societal good. It is supposed to allow us to be self-sufficient in future years, support older generations now, and finance the great engine of progress that has been the American economy. But why save when common instruments such as savings accounts, money-market funds and CDs guarantee that you’ll lose out to inflation?

      For those of us determined to remain savers, low rates force speculation in commodities like gold or oil that we hope won’t lose too much value against the dollar. Call it the honest-saver’s dilemma. It’s one that unelected central bankers don’t have the right to force on us, no matter how much their models may tell them low rates will goose the market or ease the deflation of the housing bubble.

      That latter rationale is an admission of what serious economists have always known easy money to be: a redistribution of wealth to debtors from savers. Or, as a general rule, from the more virtuous to the less virtuous. This is true when the headline inflation rate is high, but also when it’s merely higher than the predictable return on savings.

      Bernanke and the Fed Repeal Einstein

      • LD

        Angelia,

        Added insights on what exactly the QE programs have done and are directed to do. Thanks to Americans for Limited Government for sharing these insights:

        As CNBC host Larry Kudlow is fond of pointing out, the Federal Reserve cannot print jobs. And based on the past performance of its prior $2 trillion of quantitative easing (QE), it is hard to imagine just how another $480 billion a year of printing money is going to spur a real jobs recovery.

        In its statement, the central bank promised to purchase $40 billion mortgage-backed securities a month and will continue to do so “[i]f the outlook for the labor market does not improve substantially”. In addition it will “undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved”.
        CNBC senior editor John Carney notes that “no other central bank has launched a quantitative easing program with such an explicit link to jobs.”

        Maybe the reason for that is because quantitative easing actually has nothing to do with creating jobs. The major problem with this justification is that there has been no discernible jobs effect brought about by QE1 and QE2.
        How can $1.5 trillion in a vault create jobs?

        Lest there be any doubt, deposits held by Federal Reserve banks on behalf of financial institutions have exploded from $13.4 billion in 2007 to more than $1.5 trillion today. If QE1 and QE2 were responsible for creating jobs, then why is most of it still sitting in a vault?

        But, if one wanted to give the Fed the benefit of the doubt that this quantitative easing might have had a job-creating effect, let us examine the impact of QE1 and QE2. Since Aug. 2007 when the financial crisis is thought to have begun, the Fed has increased its balance sheet from $897 billion to $2.805 trillion today, more than tripling it.

        But since that time, the economy has lost 3.5 million jobs according to data compiled by the Bureau of Labor Statistics. Overall, in this recession, a net 4.3 million jobs have been lost. To be fair, the quantitative easing portion of the Fed’s program did not begin in earnest until Sept. 2008. Up until that point the Fed had mostly been slashing interest rates. But even from that point forward, the economy still has lost 2.9 million jobs.

        In fact, the economy kept shedding jobs until Jan. 2010. By that time, some 8 million jobs had been lost, and the Fed was already $908 billion deep into its $1.25 trillion of mortgage-backed securities purchases. Overall it was 69 percent of its way through its entire round of quantitative easing, or $1.3 trillion out of $1.9 trillion of total monetary expansion measured to date.

        QE2 was still 11 months away, when the central bank decided to purchase another $600 billion of U.S. treasuries.
        If you measure from the bottom of the jobs market in Dec. 2009 through Nov. 2010 when QE2 was announced, a mere 969,000 jobs were added off of the bottom. So at best, the $1.3 trillion of quantitative easing at that point had created less than 1 million jobs. That’s a cost of $1.3 million per job created.

        Since QE2, the economy has added another 3.1 million jobs. But that was from only $600 billion. Why did $600 billion create that many jobs when the prior $1.3 trillion had supposedly created a fraction of that many? Why was there a 17-month lag in creating jobs in QE1 and seemingly none for the much smaller QE2?

        Probably because there is in fact no correlation whatsoever between central bank asset purchases and job creation.
        How did buying mortgage debt create jobs for doctors?
        Going deeper into the numbers, let us examine the sectors that should have most benefited from QE1’s purchase of mortgage-backed securities: construction and financial services. From Sept. 2008 to Nov. 2010 (the entire period of QE1), 450,000 jobs were lost from financial services, and 1.5 million were lost from construction.

        In the jobs recovery off of the bottom, the financial services sector has added back just 103,000, and construction has only added 59,000. If either QE1 or QE2 were supposed to have helped the housing or financial services sectors, by every measure they failed.
        Meanwhile, the tepid jobs growth the economy has seen has been in completely unrelated sectors like health, mining and logging, and education. How did mortgage-backed securities or U.S. treasuries repurchases by the Fed from banks help create jobs for doctors, lumberjacks, miners, and teachers?
        Simply put, they didn’t. Those jobs would have been created regardless of the balance sheets of the banks that sold these assets to the Fed. It is therefore nothing more than a big lie to claim the central bank created them.

        Bailing out banks and government
        But none of that matters, since 78 percent of QE1 and QE2 — $1.5 trillion — is simply sitting in a vault. It couldn’t have been creating jobs.

        So, there must be a more plausible explanation for the Fed’s various rounds of quantitative easing. To which, just look at what has been primarily purchased by the central bank: $840 billion of mortgage-backed debt and $860 billion of government debt. The primary beneficiaries of these purchases are not job-seekers, but banks and the federal government.

        The federal government has a borrowing need of about $1.45 trillion annually right now. That money has got to come from somewhere.

        In short, the central bank will be supplying funding to its primary dealers — a fresh $480 billion of mortgage-backed securities from banks a year — freeing up money for those banks to lend to Uncle Sam.

        But one need not take such a domestic view of the Fed’s actions. In fact, of the $1.25 trillion of mortgage-backed securities it bought last time, $442.7 billion of those went to banks overseas.

        $415.3 billion of that went to European banks: $127.5 billion given to Credit Suisse (Switzerland) for the junky securities, $117.8 billion to Deutsche Bank (Germany), $63.1 billion to Barclays Capital (UK), $55.5 billion to UBS Securities (Switzerland), $27 billion to BNP Paribas (France), and $24.4 billion to the Royal Bank of Scotland (UK).

        So, exactly one-third of all purchases the Fed made of mortgage-backed securities in QE1 went to Europe. If the same pattern holds true for its $480 billion annual dose of QE3, another $158 billion will be transferred to these European banks — every year.

        In that respect, QE3 is just another backdoor bailout for European banks so they can afford to continue purchasing their own countries’ debts.

        That is the real truth. Whether it is funding U.S. deficit spending through treasuries purchases or propping up foreign banks to do the same, the public should understand that QE3 has nothing to do with creating jobs, and everything to do with financing failed big government experiments all over the world.

        No argument here.

  • Andrew

    LD-
    One thing (among many) that puzzles me is why the United States exports any oil at all?
    Also, total vehicle miles driven in the U.S. has declined in every year since 2007. So it is not a demand issue. Plus, more fuel efficient cars are in use today than in 2007.
    I buy the QE argument. Trouble is, it is a difficult explanation to make on the nightly news. Much easier to blame tensions in the Middle East.

  • Ron Larson

    Are you west coast?

    You asked “Is there a massive fuel leak somewhere that is not being reported?”. Actually, yes. Sort of. There was the refinery fire at Chevron’s Richmond facility a month ago.

    Inquiry Into Chevron’s Richmond Refinery Could Spark Prosecution, Regulatory Reform

    In California, there are two major refineries areas. For NorCal, there are the refineries in Richmond. In SoCal, there are refineries in El Segundo and Long Beach. Most, if not all, of the oil for these refineries comes from Alaska via ships.

    Bottom line, gasoline production in California has taken a major hit. This was a big fire and rebuilding the Richmond facility is going to take a long, long time. It is old, and the cause looks like corrosion. So they aren’t going to be firing it up any time soon.

    That is why we had the spike in August. I think the rest of the country has decided to follow the price hike California had.

  • Virginia

    Cheap, Larry – in Hana, Hawaii it’s $5.21 a gal for reg.

  • Eddie

    All intervention into an otherwise peaceful economy puts costs on it’s people: taxes, subsidies, caps, floors, inflation, deflation.

    Close the Fed, shrink government down to a justice system.

  • Randy

    Larry, your blog on gas prices hit home, and it’s worse in CA because of higher taxes on gasoline.

    Cost “inflation” is hitting the mortgage business too. Bureaucratic thinking (an oxymoron, I know) thinks that there is no problem than cannot be solved by one more agency and one more set of regulations and the rules that then follow.

    ALL OF THESE THINGS HAVE A COST associated with them. And it’s passed on to the consumer.

    The two moves by Congress and the GSEs is awful. The 2% payroll tax cut is probably going to expire at the end of the year and the poor son-of-a bitch with a new 30 year loan will be paying the extra .2% for another 30 years.

  • LD

    The FT writes this morning,

    Bond investors pushed a key measure of US inflation expectations on Monday to their highest level since 2006, in response to last week’s aggressive policy action by the Federal Reserve.

    Market expectations for US inflation over the next 10 years rose as high as 2.73 per cent on Monday, based on the difference or the so-called “break-even rate” between nominal and inflation-protected Treasury debt.

    That represents the highest intraday break-even rate since May 2006 and near the all-time closing peak of 2.78 per cent from March 2005.

    US Inflation Fears Rise After QE3

  • RB

    There are really no surprises in your article and without taking any validity away from it, I think it is at least sensible to keep things in perspective when speaking of the cost of gasoline. I suppose pain is relative to our own limited experience but as Americans we don’t really have much to bitch about relative to the rest of the world in this regard.

    The U.S. prices for gasoline is among the world’s lowest. We pay less than half of what they pay in Europe and about $1.15 per gallon less than the average world price.

    As of an August 2012 article by Bloomberg, only five nations have less “pain at the pump” than the U.S. and four of those are OPEC countries.

    I am not suggesting your premise is wrong regarding some inflationary cost added to gasoline from some portion of money printing that is making its way into general circulation, only that balanced reporting on an idea should keep things in perspective when possible.

    • fred

      RB,

      Everything is relative.

      You must be an urbanite who doesn’t drive much or use heating oil in your home. If the price of oil/gas were to rise to the level of fuel in Europe, I suspect our economy would grind to a halt, but we should be grateful it hasn’t?

      PLEASE, our government and big oil have been using this comparative price argument as an excuse to generate profits and promote adgendas for years.

      My family lives in the suburbs of the northeast; heating oil for our home now cost $500/tank and gas for my car $50/tank. Normal demand, I use 2-3 tanks of heating oil per month in winter and fill my car’s gas tank 2-3 times per week year round.

      RB, I don’t know how much longer my family can subsidize your carefree urban lifestyle but you better hope we stay put because otherwise your rents, taxes, traffic, etc., is going to go way up!

  • RB

    Fred… I and my family are not responsible for personal choices made by you of where to locate yourself and your family nor are we responsible for the considerable economic costs borne by you based upon those choices, you are.

    I and my family live in So. California and we experience some of the highest gasoline prices, housing prices and property taxes, etc. in the nation. We accepted those challenges knowingly and willingly.

    We do not live some “carefree” lifestyle nor do we personally know anyone who does. We personally chose not to live in very cold areas of the country and made the decision to locate reasonably close to work consistent with decent areas to raise and educate our children, etc.

    While I am definitely not giving any free pass to the government or Big Oil, Life is generally what you make of it and you are responsible for the choices you make. That includes the economic cost of oil to heat your home if necessary in the locale in which you chose to live, as well as the cost of 3 tanks per week of gas by virtue of perhaps living a considerable distance from your work or whatever other logistics are resulting in such steep expenditures.

    Like it or not, we will all eventually be paying rates for energy comparable to the rest of the world. I certainly don’t know the timing or exactly what will bring it about, but regardless of whether it includes price gouging by Big Oil, bad economic decisions by Government that favor Big Oil or even wars over competition for supply, it will eventually come our way. Will that cause our economy to come to a grinding halt as you presently surmise? Possibly, but I seriously doubt it.

    But, it will force dramatic changes in demographics of where and how we work and live, what type of vehicles we drive, etc. That much is reasonably certain, regardless of any of our wishes to the contrary.

    Is corruption commonplace at all levels of government and also in Big Oil? It would certainly seem so, but that has been the case for decades on end now. However, it is only now that we have the Internet so that the regular people like us have a new source of information outside of the mainstream media. Wholly 95% of everything we read, hear or see normally comes from the mainstream media which is controlled by a total of just 6 major corporations. Policies and practices that have been the status quo for decades are finally coming to light and at a far more rapid pace than ever before.

    But will any of it get fixed until conditions absolutely force it upon us? I rather doubt it.

    Until enough Americans are willing to stand up to be counted and to demand an end to the rampant corruption, etc. and speak their minds when and where it counts and do so in very large numbers, before we totally lose all our Constitutional rights to do so, nothing is going to get appreciably better and all of us will continue to have to make our own economic decisions accordingly and live with the results therefrom.

  • fred

    RB,

    Thanks for reminding me that I’m responsible for my choices, I was beginning to blame all the non-current sub prime mortgagees in CA, NV and FLA who continue to influence fiscal and monetary policy to our countries detriment.

    RB, the point I was trying to make was not about personal responsibility and choices but that the price of oil does matter to most Americans and that recent increases in the price of oil threaten the American way of life.

    Try as you might, I still don’t buy your argument that the price of oil has to rise because it is higher in other countries.

    A strong $US policy, more domestic drilling, investment in modern refining capacity, large scale natural gas conversion and increased R&D for alternative energy should help stabilize the price of oil and keep American demographics more stable over the long term.

    RB, I didn’t choose to live in the suburban northeast, I was born and raised here. I do believe, however, that no American should be forced to choose where to live because of excessively manipulated fuel prices.






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