PAIN AT THE GAS PUMP

Dr. Chuck

Eric Bolling and Sarah Palin hosted an interesting special on Friday the 13th about the price of gasoline and its  effect on the economy. Eric Bolling then presented his “top secret” plan for immediately lowering gas prices. He had been talking about the plan for some time, saying that he wanted to present it to President Obama, who didn’t respond to his request.

The price of gas, up over 100% since the president took office, has not only affected our driving habits (to work, school, etc.), but has decreased our disposable income. Prices of stuff that we normally buy have increased considerably. Just about everything we produce in this country is put on trucks for delivery to us consumers. The government says that inflation is 2.65%, and does not present a problem. We who have been to the store lately know better. The commodity food price index is up over 32%. Coffee is up 70.29%. for the year, 10.8% over the last month. Wheat is up 62.5% for the year and 6.4% over the month. Beef is up 38.65% for the year and 8.5% over the past month. The inflation rate for things we buy is estimated to be 27.67 %. The price of oil has a lot to do with it.

Eric Bolling then gave his “top secret” plan for reducing the price of gas. He recommended that the margin for purchasing oil futures be increased, but failed to describe the role of margin and merely defined it as a “down payment.” Margin is primarily responsible for the collapse of the stock market in the 1920s and the housing crisis of 2007, and is worthy of a future newsletter.

The margin for a contract of 1,000 barrels of oil for early 2013 delivery is now $6,210. At today’s price of $102 a barrel, it comes to $102,000 and a margin of 6.4 %. An increase of margin in the oil market would get rid of the small speculators who shouldn’t be there in the first place. Speculator-driven increases in oil, which comprises about 65% of the price of gas at the pump, would be moderated. Mr. Bolling also recommended that Congress exercise more control over EPA regulations and we open up more drilling in the United States.

President Obama on April 16 offered his solution for gas prices. He would spend $53 billion to hire “oil police” to seek out and punish speculators who drive prices up. He also holds to the belief that the U.S. has only two percent of world oil resources. No further comment here.

Speculation is based on Rational Expectations, my favorite economic theory. If speculators expect oil prices to rise, they will invest in oil, increasing demand and driving price up. If they do not expect price to rise, they will not invest or will “go short” and drive demand and price down.

The other side of demand is supply, which is subject to unrest in the Middle East. So what’s new? There has always been unrest there and always will be. While the president holds to the “two percent” belief, oil professionals maintain that more than two trillion barrels of “undiscovered resources” exist in the U.S. That’s more than exists in Saudi Arabia. Opening up these resources may not lead to gas prices of the fifties, but will give us rosier expectations, provide stability, and make us independent of those who hate us in the MidEast and the thug in Venezuela.

For additional discussions on these subjects, see Issue 14 and Issue 21 in my latest book on market economics, All You REALLY Need to Know About Economics.

Chuck Holmes, Ph.D.
Your Common Sense Economist