Understanding Oil

Oil prices have gone from being a pain to something so bad they're threatening many people's ability to survive. A lot of people have solutions ranging from cutting taxes on oil to making the government do something - anything - to help ease the pain. I wrote this to help people better understand the cause and effect. Many are arguing that the costs are demand-driven, but that's not true. Every time gas prices rise, I see fewer and fewer people at the pumps. The demand theory would indicate an increase in customers as prices rise, or at the least, the number of customers holding steady.

Cause #1 is INFLATION. A lot of news outlets don't tell you this or only mention it in a nonchalant manner, but it is the #1 reason for oil prices being what they are right now. In fact the devaluing of the dollar is easily greater than any real increase in the price of oil. As the dollar devalues, it takes more dollars to buy oil on the world market. From the outside observer's perspective, you see oil prices rise when in fact it's not rising and it's the amount of dollars needed to buy it rising it due to the dollar being worth less.

What's causing inflation? the credit/mortgage meltdown, of course. Too much money in the economy is a seldom-mentioned reason too as the war spending is injecting more money to pay for the war through the sale of bonds than the economy really needs. On top of that, the European Union has been trying since it's inception to make the Euro to be the world-standard currency, so it is propping up its currency relentlessly. It's not as much as the dollar devaluing worldwide as it is against the euro, which is apparently now it's basis of comparison. The dollar is still strong against the peso, yen and everything else except the Euro. BUT the dollar has bene viewed as the world's standard currency for generations now, and the EU never considered the economic consequences of replacing one world standard currency with another. That's why other countries are effected by the dollar's devaluing against the Euro.

Another more-or-less reason is refinery capacity. We haven't built a new refinery in this country in over 30 years now, while the population (and demand) has obviously grown since then. All of ours are running at 100% capacity, so even if we get more oil, it all gets bottle-necked at the production level. We can't build more because oil companies simply don't want to. The costs are enormous and it takes many years before there's a return on the investment. it also doesn't help that environmentalists don't want more refineries built, and sue to stop them at every chance they get beause refineries can be polluters.

But why is it affecting food prices so badly while other goods haven't raised prices yet? It's a simple answer: delivery costs. Durable goods can be trucked in once a week, once a month, or once every few months. Food is trucked in multiple times daily every single day. Because of that, food always gets effected by higher gas prices first since food uses a hell of a lot more gas to deliver it.

But why has diesel gone from being the cheapest gas to the most expensive? As ridiculous as it sounds, the cost of gas effects the cost of gas. All the tanker trucks that deliver gas to the stations are diesel. When gas prices rise, truck drivers have to charge more for the delivery, which in turn means higher prices at the pump for the next truck driver filling up, who in turn passes that along in a cycle that's hard to get out of. Because of that, diesel bears the raised prices of all types of gas and all types of gas bear the prices of raised diesel prices. But overall I think that effect is marginal at best. Economically, diesel is more important than any other type of gas since it's used on most forms of ground-based delivery vehicles. Because of that, I think a lot of diesel prices are what they are just because they know they can charge anything for it.

What are the solutions? The simplest economic answer to combatting inflation is to take money out of the money supply. Buying back bonds with de-valued dollars would both save taxpayers billions and reduce inflation. But the best solution is the one solution that's impossible right now. War spending means the creation of more bonds to pay for the war, and as long as there is a war, there will be the creation of more bonds and the injecting of more money into the economy to further devalue the dollar. Buying back bonds at a time when they're looking to unload as many as possible isn't gonna happen even though it is the best solution.

Another solution is to either cancel or call in bonds made to loan out money to other countries. Face it: Europe is never going to repay the US for the cost of rebuilding after World War 2. Mexico is never going to repay the US for the cost of treating it's citizens illegally in the US or for all the aid we send them every year. Countries like Israel and many in Africa, Asia, and South America will never repay us for our aid either. Yet we keep paying countless billions for bad debts that will never be repaid. Why? The US taxpayers probably sit on more bad debt than the rest of the world combined. the US either needs to call it in so the bonds behind those debts can be retired, or needs to write off those bonds as losses so we can quit paying on those losses.

The fuel tax won't help. For one thing, hard-left politicians who actually like the gas prices as a means of forcing us out of our SUV's and trucks and into small econo-hybrids will never vote to approve a reduction in the gas tax. Besides, lower gas tax = lower price = higher demand = higher price. Lowering the gas tax would get you back to the price where you started within days as that effect would definitely be demand-driven.

Raising wages and salaries would help too, but that is also an impossible answer. With more comapnies avoiding career workers who climb the ladder to big paychecks, hire illegals or people from other countries who work for less money, and thanks tot he market meltdown are just flat-out laying off people due to poor sales, it's not possible.

So, I conclude that the best solution to end the high oil prices and help the economy recover from the recession is to end the war in Iraq. That is not a political decision as I leave my political beliefs out of it, so I will not take sides with anti-war activists in this. Normally a war helps the US economy grow and in the past (WW2) it even helped bring us out of the great depression. But this one is different because of the damage in the credit-mortgage markets making it so much harder for individuals to recover. It takes YEARS to recover from a bad credit score brought on by a credit card company or mortgage lender who decided to raise variable interest rates for one reaosn or another, so any positive effects of the wartime economy are lost on a bad credit market causing inflation.