The Farce of Rising Gas Prices

When gas prices went up in the 1970s, there were definite geopolitical reasons.

In 1973, the Organization of Petroleum Exporting Countries (OPEC) reduced oil exports. They did this in response to the United States’ support of Israel during the Yom Kippur War. Oil supplies went down, prices went up. Simple economics.

In 1979, Iran had its revolution where they overthrew the U.S.-backed Shah Reza Pahlavi in favor of the Ayatollah. The unrest disrupted oil production and, even after it resumed, the anti-U.S. Ayatollah was in no mood to roll out barrels of oil for greedy Americans. Supply went down, prices went up. Simple Economics.

But, within the span of the past 4 years, there have been two major spikes in oil prices: first, on the eve of the 2008 election and now on the eve of the 2012 election.

Prices are going up despite the fact that Americans are using less oil due to environmental regulations, hybrid cars and people being more conscious of their “carbon footprint.” In other words, demand is down, so why are prices going up?

One explanation is that, while America’s demand is decreasing, the demand of developing countries like Brazil and China is increasing.

This explanation does not cut it. Increases in global demand might push prices upward gradually over the long term. They do not usually create a spike in prices.

A spike in prices indicates some sort of sudden shock or event in oil producing regions that disrupts oil production. This is where the protests in the Middle East or unrest between Iran and Israel could be handy excuses.

For example:

Pro-democracy movements across the Middle East last year prompted markets to speculate that supplies could be cut off. That speculation helped drive up the U.S. gas price from about $3 a gallon on Christmas Day 2010 to around $3.30 last Christmas.

The emphasis is mine.

That is because unrest in the Middle East does not cut it as an explanation anymore. The unrest has yet to drastically reduce the supply of oil on the market. Geopolitical factors in the 1970s reduced the physical supply of oil, causing actual spikes in prices.

What we have now are imaginary reductions in oil supplies. It is the fear of  a reduction of supply, a fear in the minds of the suits on Wall Street.

It goes something like this: over the past 35 years, the wealthiest Americans have gotten much more wealthy. They are so wealthy, in fact, that they have billions of dollars just sitting there doing nothing. Now, in a time like this, you would want them to use that money to create jobs (they are the “job creators”, after all).

This was the fundamental problem during the Great Depression. It was not that money had disappeared, only that it has coagulated at the top, clogging economic activity throughout the country. The aim of the New Deal was to act like a giant plunger, pulling the money from the top through taxation in order to use it to create jobs and get the economy flowing again.

But we live in a post-New Deal, post-Keynesian world.

So the job creators are allowed to sit on gobs of money and do absolutely nothing with it. Nothing, that is, except speculate.

Wealthy people have always speculated. But we live in an age where high volume speculation in commodities like oil is relatively new.

Here is Matt Taibbi:

The issue here, which I covered somewhat in Griftopia and in “The Great American Bubble Machine,” revolves around the influx of speculative money into the commodities markets. Because of various changes to the way commodities were traded — including a series of semi-secret exemptions handed out to commodities speculators, allowing companies like Goldman Sachs to popularize commodities speculation — there was, by the summer of 2008, a cascade of investor money pouring into commodities, mostly all betting on a rise of commodity prices. Much of this might have been due to money flowing out of mortgages and into the “safe” haven of commodities, with exploding energy prices being an unwelcome side effect. While there was less than $20 billion of speculative activity in commodities in the early 2000s, by 2008 that number had jumped up to well over $200 billion, with virtually all that money being “long” money, i.e. bets on a rise in prices. All of that new money turned into a battering ram pushing prices through the roof. We are seeing the same phenomenon this year. (2011)

In short, when you keep financial institutions deregulated and keep taxes low on the super wealthy, this is what you get.

The “job creators” have had plenty of money and room to invest in the people of the United States. Instead, they are investing in commodities. There was a time when the commodities market was just for producers and consumers to protect themselves against the vagaries of dealing in products that rely on nature (oil, wheat, etc.). It was a highly specialized and, therefore, small market, meaning it was relatively stable.

But with the injection of billions of Wall Street dollars, commodities have become as volatile as stocks. When Wall Street gets scared, we literally end up paying the price.

And these are the people that are quickly getting their hands on the education system, from Kindergarten up to grad school. Education futures coming to a commodities market near you.

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4 responses to “The Farce of Rising Gas Prices

  1. Well said…You had me at Taibbi. That guy is brilliant.

  2. interesting that Florida, a hugely important voting block, has its prices through the roof, while here in New Mexico, we’ve hardly noticed, any ideas?

    • It is funny that you mention that. I have heard theories that these things happen at election time to remind the candidates who is really in charge (i.e. the bankers, even the oilmen). It requires the candidates to make promises that will assuage these groups. So it would stand to reason gas prices would be higher in swing states. It would put candidates on the spot. Say the wrong things and watch the markets panic, sending prices skyward.

      It is just a theory and there are many kinks with it. Perhaps it is too conspiratorial. Who knows?

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