February 29, 2008

Leap Day, or why gas prices are so high

Unless you live under a rock, or use the Julian Calendar, or mark you days under the French Revolutionary Calendar (happy 9 Ventôse CCXVI), you know today is leap day. This is the extra day we tag at the end of February to make the lunar cycles come out even. Like other salary employees, I am working for free today. At least my employer believes I am. My paycheck will not change a penny for the extra day of work. That, my friends, is exactly why I had to pay $3.17 for gas yesterday.

WTF, you ask? Stick with me for a bit and I hope it will make sense. I am erudite on many subjects. I will offer you this disclaimer right upfront, economics is a true weakness of mine. If any of the theories and conclusions I draw are out of line or wrong, please correct me. I have by necessity simplified much of what we will discuss.

By expecting me to work on leap day my employer expects something for nothing. Many taxpayers feel the same way. Every Government project, road, welfare, Social Security, food stamps. Medicaid, the military, you name it, is paid for by taxes. Many who receive services do not pay taxes. Most of us receive more in services than we pay in taxes. That is why our nation is trillions of dollars in debt. the current National Debt is $9,332,824,764,205. That is a whopping $30,650 owed by each and every citizen of this fine nation -- on top of your current credit card or mortgage bills. The good thing is you will not be asked to write a check to the treasury each month to pay your fair share. The bad news is you are paying your share every day.

A great deal of our oil and even some of our refined gasoline is imported. Many things go into the price of gas at the pump, including the cost of supply (hey, the trucks who deliver the gas to your local station run on fuel)refinement etc. The need for more than 20 different blends of gas to meet various state regulations is one factor that drives up the cost. These are all static costs, and as a relative situation have not changed over the past five years. As we all know, the cost of oil has risen dramatically in recent years. We can blame some of the increases on the instability of the middle east. Increased global demand is also adding to the costs. The growing need for fuels from India and especially China is putting a strain on capacities. No matter how much the left leaners of the wold like to pretend, the laws of supply and demand are intractable. If I have an item and you want it it has value. If two people want it it has a greater value. That is the fundamental element of trade.

The real culprit in the recent rise at the pump is the falling global exchange rate of the dollar. In 1999 a Euro was worth $1.17. In 2000 a Euro was worth only $0.82. Now the value of the Euro has increased more than 80%. It will now cost you $1.52 to buy a Euro. Click here for a real economist perspective. The dollar has weakened against every other major currency as well. How does this affect oil prices?

Let us focus on an imaginary oil producer. He produces oil in the imaginary country of Sandistan. He buys supplies, pays his workers, and sells his oil in sheckles. Six years ago things were easy because one Sandistan Sheckel equalled one good old US Dollar. Oil was 100 sheckels/dollars per barrel. For convenience sake that equaled $2.00 per gallon at your local Sinclair Station. Fast forward to today. It takes $1.50 USD to have the same value as a Sandistan Sheckel. Now the price at the pump is $3.00, just to maintain the same profit, etc. Does that scenario sound familiar? How have you gas prices changed over the past five or six years? Look at the chart above again.

Here is a chart showing the exchange rate over a similar period.Notice the trend is in inverse to the oil price chart above. Lower exchange rate = higher gas prices.

Why is the value of the dollar falling? One reason is our huge national debt. Too many people want something for nothing in this country. Too many of our elected officials cannot control the need to spend other people's money. Some of you will blame the tax cuts for the increased deficits. History has shown that lower marginal rates equal increased government revenue. Look that one up yourself. The issue is Congress' inability to control spending. Just like the bank and investors look at your credit rating and debt ratio to determine if you are worth an investment, foreign governments and currency speculators look at the debt and credit worthiness of the US to determine if they should by Treasury Bonds or US Dollars. Our high debt does not make us very attractive.

The situation is made worse by the Fed cuts in the interest rate. Would you invest in US Treasury Bonds at 4% return or in another nation that is paying a 6% return? The sub prime loan situation has put pressure on banks, making them less attractive investments. And so it goes.

Many would say a weak dollar is a good thing. It makes our manufactured goods more attractive for export to other nations. The only problem is we manufacture in the US only a fraction of the durable goods we did two or three decades ago. What do we make now that is attractive to the Euros or the Chinese or the Australians? Our cars and appliances are manufactured for domestic consumption for the most part. The T shirts and shoes and pots and pans and electronics and the goods that make up everyday purchases are all manufactured off shore. We do not have a whole lot the world wants to buy from us. We used to have a surplus of food, but the Government has mucked that up by making it more attractive to produce less (pay to not grow) or to sell to government subsidized biofuel producers. Now we are less and less the world's breadbasket.

What do we do? Well, it is leap year and that means Federal Elections! Do not give something for nothing. The next candidate that promises more government programs, more roads, more free health care more , more, more -- tell them to fuck off. Vote for the lesser of the evils. Look for the candidate that promises change. Make sure that change is less. Look for the guy or gal that claims they will cut spending, control earmarks, try to reduce the debt. Buy American (good luck). Have faith in the economy. If we get rid of the spenders the dollar will strengthen and the price of gas will come down.

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