Don’t get excited!
That $2.43 is pre-Katrina. Yes it’s true: the sign hasn’t changed in almost 3 years. The price of a gallon of regular in New Orleans right before Katrina (lets say 8/26/05) was $2.439. The lowest price for a gallon of regular in the past 48 hours near the location photographed above was $3.799 according to this site:
http://www.neworleansgasprices.com/map_gas_prices.aspx
If you do the math that comes to a compound growth rate of 17.3%.
Not bad!
If your 401K has been doing that well since 2005 let me know what funds you’re in (probably commodities).
Oil is even better.
According to http://tonto.eia.doe.gov/dnav/pet/hist/rclc1d.htm and the NYMEX website, a future contract on a barrel of light sweet crude recently closed at $127.24.
On August 26, 2005 the same barrel closed at $66.13.
Compound growth rate: 26.7%.
Not as bad as I thought it was going to be.
But then there is oil’s recent charge: price on January 2, 2008 was $99.62.
Again, recently closed at $127.24.
Compound growth rate: 79.9%.
That’s rising about 200% faster in the past 5 months than it did for the 28 month period immediately preceding.
Granted we’re only looking at 5 months of data in the latter case but I wonder, just what in the world is going on here?
Are oil and gas really that much more intrinsically valuable today than they were in 2005?
And what accounts for this recent acceleration in price?
The real/intrinsic/underlying economic value of a particular good or service is derived from the claim that good or service can make on the productive capacity of people because of the value it provides them in their lives. We pay for gas because most engines run on it and we need to get around. That’s what gas was used for in 2005. That’s what it is used for today. We need oil to make gas. That’s why oil and gas are intrinsically valuable. If we needed water to make hydrogen and all engines ran on hydrogen oil and gas would lose much, if not all, of their economic value.
Intrinsically nothing about oil and gas make them more valuable today than they were in 2005: for example, we can’t use them to cure cancer.
So why is the price of this stuff rising so rapidly?
One answer is increased world demand, especially from China and India. Apparently these guys are more into gas guzzling than we are and the price is rising because production just isn’t keeping up. Basic supply and demand.
The 5/31-6/6/08 issue of The Economist has a great article on this fact (pp. 73-75).
There is no doubt that increased demand for oil is a main driver of rising oil and gas prices, especially since 2005. But I don’t think it’s the main cause for the steep rise we’ve seen in the price of oil in the last 5 months: demand increases are real and will raise the general price level in steady increments in the years to come.
But oil prices rising at an 80% compound clip are a result of something else.
What?
My answer: way too many dollars chasing the exact same amount (or even slightly increased amounts) of oil on the market.
If you’ve ever wondered what the cost of deficit spending looks like just go to your local gas station: its written in big block numbers.
The cost of our “stimulus plan” and the Fed’s recent penchant for providing “liquidity” to financial markets and keeping interest rates very low (not to mention the up coming foreclosure bailout or war spending) is flooding the world financial system with dollars that don’t have real economic value (additional goods and services) backing them.
Rather than producing increased goods and services to create economic value and then trading that value (using dollars as a convenient method of exchange) to get the things we need or want from other nations we are in effect, through the US Treasury Bill mechanism, printing more money.
The rate of growth of our money supply is faster than the rate of growth of oil supply and the price of oil keeps rising. To make matters worse, all oil trading is denominated in dollars no matter where it’s done. Oil still has the same intrinsic economic value it had in 2005 or 5 months ago. The United States Dollar does not because we’ve created more money without producing enough goods and services to provide those dollars with a solid economic foundation.
As a result, people around the world are quite rationally demanding more dollars for the same amount of oil.
Result? Rapid price increases.
People say you should focus on the things you can control or have the most influence over. Foreign oil production and increased demand from China and India are not things we have much control over.
We can, however, tighten our money supply, quit spending money we don’t have, and increase the real value of the dollar by saving and investing more and producing top quality goods and services in abundance. The dollar will naturally rise in value and the price of oil will fall (at least the part caused by inflation; the supply/demand matter is a whole other issue).
Even if you don’t agree with my economics, if you want to make some money go buy a bunch of gas and oil and sit around for while. In 6 months you’ll turn a nice profit. Another thing: the way these prices are going up it makes total sense to fill up your tank every time you buy. I know economists will say that’ll drive up the price even more, but hey, by the end of the week the half a tank in your car is worth more than it was at the start of the week. It’s rational to fill up.
What’s not rational is to keep adding dollars to the money supply that have no real underlying economic value and therefore make the price of everything that does have value, including oil and gas, go up.
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The thesis of this article was that the primary cause of the rise in the price of oil was inflation. Given recent bailouts that may in fact be true in the future. However, the historic spike, and subsequent collapse, was obviously caused by speculators pumping money into the commodities markets. Ahhh hindsight.