Perspective: Is the price of Oil increasing, or is the value of the Dollar decreasing?

February 23, 2012 | Filed under Economics,Energy,Money | Posted by

An interesting question with huge repercussions.

 

Gasoline Prices Are Not Rising, the Dollar Is Falling

By Louis Woodhill | Forbes

Panic is in the air as gasoline prices move above $4.00 per gallon. Politicians and pundits are rounding up the usual suspects, looking for someone or something to blame for this latest outrage to middle class family budgets. In a rare display of bipartisanship, President Obama and Speaker of the House John Boehner are both wringing their hands over the prospect of seeing their newly extended Social Security tax cut gobbled up by rising gasoline costs.

Unfortunately, the talking heads that are trying to explain the reasons for high oil prices are missing one tiny detail. Oil prices aren’t high right now. In fact, they are unusually low. Gasoline prices would have to rise by another $0.65 to $0.75 per gallon from where they are now just to be “normal”. And, because gasoline prices are low right now, it is very likely that they are going to go up more—perhaps a lot more.

 

Gas prices are LOW?  That was my response as well.  Then again, I’ve previously shown that usage is way down, yet price (in Dollars) is increasing.  We’ve been missing the obvious.

 

[Continued]

…

In terms of judging whether the price of WTI [West Texas Intermediate crude, currently $105.88/bbl] is high or low, here is the price that truly matters: 0.0602 ounces of gold per barrel (which can be written as Au0.0602/bbl). What this number means is that, right now, a barrel of WTI has the same market value as 0.0602 ounces of gold.

During the 493 months since January 1, 1971, the price of WTI has averaged Au0.0732/bbl. It has been higher than that during 225 of those months and lower than that during 268 of those months. Plotted as a graph, the line representing the price of a barrel of oil in terms of gold has crossed the horizontal line representing the long-term average price (Au0.0732/bbl) 29 times.

 

Demand is not driving up the cost of Gasoline, a weak Dollar is.

 

[Continued]

At this point, we can be certain that, unless gold prices come down, gasoline prices are going to go up—by a lot. And, because the dollar is currently a floating, undefined, fiat currency, there is no inherent limit to how far the price of gold in dollars can rise, and therefore no ultimate ceiling on gasoline prices.

Federal Reserve Chairman Ben Bernanke uses a “core CPI index” that excludes food and energy to guide monetary policy. From Big Ben’s point of view, rising gasoline prices are not a problem. For the rest of us, they are becoming a big problem.

 

Gold, it should be noted, is once again on the rise having closed (as I write this) at $1,776/Oz.  Which in turn means gasoline will be rising as well, yet will not be reflected in measures of inflation despite having quite a large impact on household budgets.

 

[Continued]

…

During the 1970s, the toxic combination of a weak dollar, high tax rates, and onerous regulations introduced a new word into America’s economic vocabulary: stagflation. Reaganomics banished this word to the history books. Now, President Obama and Fed Chairman Bernanke are teaming up to give stagflation another try. It is not likely that Americans will like it any more this time around than they did 40 years ago.

 

It would seem the Political class failed to learn that lesson.  Welcome back, Carter.

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  • davidt

     Is the price of Oil increasing, or is the value of the Dollar decreasing?

    Yes.

    • Brucepall

      Ding Ding Ding!  

      We have a winner!

  • Commander_Chico

    It’s both a weakening dollar and increasing prices.  First, the Fed keeps printing money and basically giving it to Big Finance at less than one percent interest.  That money that has to go somewhere.  One of the “somewheres” is the commodities markets.  

    Second, oil in particular is also looking like a good bet because of the coming War with Iran, which will cause prices to skyrocket. That is one big factor raising futures prices now.  Prices at the pump respond to oil futures.

    Matt Taibbi described the interaction between the Fed printing money, the commodities markets and oil:

    http://www.rollingstone.com/politics/blogs/taibblog/wikileaks-cables-show-speculators-behind-oil-bubble-20110526

    http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405

    Also this:

    Speculators? Such as the Federal Reserve and other central banks who have pumped $2 trillion of “liquidity” into the capital markets in the past 3 months just so Italian BTPs don’t implode to fair value and so Europeans can continue living in a socialist “paradise” even as the bankers steal their gold?

    http://www.zerohedge.com/news/nancy-pelosi-issues-statement-soaring-gas-prices

    and this:

    http://www.zerohedge.com/news/guest-post-straw-potentially-breaks-camels-back

    There have been quite a few theories as of late about rising oil prices whether it is a potential war with Iran or seasonal demand. While part of the issue is the supply and demand equation – that does not account for the recent price surge. As the world central banks have turned on the liquidity pumps to support the Eurozone and the U.S. economy; the most logical place for that excess liquidty to go is into highly liquid, highly leveraged, commodity contracts. The rising number, the second highest peak on record, of oil contracts outstanding continues to push prices higher. In turn those higher prices draw more speculation into the market – so forth and so on. That is – until it pops.

    This is good if you are investing in oil and gas related stocks – it is bad everywhere else. As oil prices rise so do the input costs to businesses.

    • http://pulse.yahoo.com/_W6UJJOM4PP4XLSBG6N4LROVSQE Retired Military

      and we can thank your bud Obama for both

      • Commander_Chico

        Obama has no power, he’s like the Wizard of Oz.  “Pay no attention to the man behind the curtain.”

        The power of money rules.  The Fed, Big Oil, Big Finance and the Merchants of Death can all roll over Obama like a bug.  When they say “jump,” the Congress and Obama say “how high?”

        If you think there’s any difference between Bush I, Clinton, Bush II and Obama’s puppet show, you’re deluded.  Well, maybe Bush I and Clinton had some of the appearance of competence.

        • http://www.rustedsky.net JLawson

          He actually has more power than you give him credit for.  When he gives a signal of artificial constraint in one market (as in the cancelling of permits after the Gulf Oil spill) and has a Sec. of the Interior (Salazar) who tightened the rules on domestic drilling and cancelled a number of projects, the effect would be pretty plain – “Don’t count on being able to drill, because the rules change with the tides.”
           
          Funny how that works.  Say something is allowed in a press briefing, and then quietly make it impossible – it looks like you’re supporting both sides.  THAT is how you get votes!

          • Commander_Chico

            I don’t know about other drilling, but a temporary moratorium on Gulf drilling and some rule changes after the Horizon disaster seems prudent.  

          • jim_m

            It was also ruled illegal but the admin has virtually kept it in place by slowing permitting to a crawl.

            The law doesn’t matter to barry and his coconspirators.

          • http://www.rustedsky.net JLawson

            Why?

            They penalized the entire industry, due to a process failure by one driller.  The oil rig caught on fire, to be sure, but the firefighting effort flooded the rig and caused it to collapse (if I recall the final report properly) causing it to break off the drill pipe and opening a gusher.  If they’d been careful about the firefighting, in my opinion there was a good chance the rig would have stayed afloat, and the pipe intact.  Spewing oil, yes, and burning - but with the blowout preventer blocked from closing that was a better option.  It’s a lot easier to fight a fire on the surface and get control of the oil there than cut off a ruptured pipe a mile underwater.

            And ‘temporary’ from the government becomes darn near permanent.  You can find plenty of bureaucrats eager to issue a ‘stop’ order – but getting a consensus that it’s okay after that order’s been issued is another thing entirely.

          • Commander_Chico

            You might be right, that sounds like the opinion of an expert.

          • http://www.rustedsky.net JLawson

            This is a bit of a slog, but interesting.

            http://www.oilspillcommission.gov/final-report

            Been shovin’ paperwork a long time, and dealing with administrative procedures that seem more designed to keep anything from happening than anything else…

            Saying ‘No’ to drilling means nothing will happen you might have to take the blame for later. Saying ‘Yes’ – and something happens – means you’ll be on the hook for it. Better to study it to death and let the next office-holder approve it. That way, you’ll be spotless.

            Of course, it’s a bit difficult to get things done – but that’s not really important, is it?

            (Which might explain why there’s the saying “It’s easier to get forgiveness than it is to get permission.” I wonder just how long it’s going to be until the regulatory agencies collapse under their own paperwork.)

        • http://profiles.yahoo.com/u/YSM6XGIY2CLRQKYDB746ZVVUUI Texas Accountant

           Commandante,

          I disagree.  The Fed was “printing money” by purchasing U.S. Treasuries.  The Fed’s actions may not be attributable directly to our President, but remember Clinton’s dismay at the power of the “Bond Market Vigilantes.”  When the Federal Reserve is buying the government debt, there are no “Bond Market Vigilantes.”  Therefore, the government (Executive & Legislative Branches) can spend money and take us deeper in debt. 

          • Commander_Chico

            True, monetizing debt removes a constraint on spending for Obama and the Congress, but that’s still the Fed buying the debt and expanding the money supply.

            And Treasury debt is not responsible for the money created by lending to Big Finance at less than 1%.

          • jim_m

            Tex is right.  The Fed has done mostly prinitng of money to buy debt ane they are buying debt because no one else will.  obama and his boot lickers may believe that they can go on borrowing money from China but even China has its limits and we are reaching them. 

            As to the money we lend the banks, I have not seen a single story about how we are printing money to do so.  I have seen many on how we are printing money to finance (ie monetize) additional debt.

          • Commander_Chico

            Lending to the banks at interest rates of less than 1% is effectively printing money.  When the Fed lends money, where does the money come from?  Right, out of nowhere.  Macro 101.

          • jim_m

            No it isn’t.  Printing money is printing money.  Yes, lending money at low rates effectively expands the money supply by transferring money from the Fed to other institutions, but it is only lending money and that has to be paid back. 

            Priinting more money more or less permanently expands money supply and has a far more detrimental effect on the value of that money.

          • Commander_Chico

            When I say “printing money” I don’t mean Bureau of Engraving and Printing, printing.  I mean expanding the money supply.

            But if I lend you money at 0,5% and you can easily lend it to home buyers at 6%, commodities traders at 8% or even credit card holders at 25%, that’s a pretty sweet deal, isn’t it?

          • jim_m

            That’s what I thought you were saying, but expanding money supply that way doesn’t send the same signal to the markets as simply printing a couple trillion dollars like 0bama has had done.

          • Commander_Chico

            But what Obama did wasn’t printing at all – in theory, someone will have to pay that bill.  Call it borrowing from the Chinese.

          • jim_m

            Wrong.

            The fed printed money in order to purchase US government debt.  It was a subterfuge intended to mask the fact that the government could not find a buyer at that moment for $2T in debt and as a quick and dirty way to fund 0bama’s overspending.

            We didn’t borrow it from anyone we simply inflated our currency. 

            Jeez, Chico, you say you read ZeroHedge, have you just missed all their concerns about hyperinflation?  This behavior by the current admin is one of the chief reasons why.  It isn’t the low interest rate policy.

        • http://profiles.yahoo.com/u/EU5DQWQTTHTPO4A4ZYSL3AAV2U Adjoran

           Do de Big Boys pay rent on that space they occupy in your head, Vladimir?

          • Commander_Chico

            Vladimir?  Lenin, Putin, or Nabokov? 

            Have another drink.

        • http://otisthehand.blogspot.com/ OTIS the hand

           In Chico Bizarro World, Obama has no power because all the power belongs to Mark Levin.

    • http://pulse.yahoo.com/_IZ5BM5GNLA54OADSWGSXAMA7SY Jay

      You might want to look more into the oil speculation aspect of your argument.

      Oil speculation in commodities
      2004 – $13 billion

      2009 – $300 billion

      Oil prices
      2004 – $31.61

      2008 – $137.11

      Price for Gas during same timeframe
      2004 – $1.93

      2008 – $4.09

      Without the speculation (such as the Koch brothers holding onto oil) the prices would have been around $60-$75 per barrel.  But since you have such high speculation the price shot up to $80-$90 per barrel.

      • http://profiles.yahoo.com/u/YSM6XGIY2CLRQKYDB746ZVVUUI Texas Accountant

         Speculation is buying (e.g., a futures contract) and then hoping to sell at a higher price.  If the price goes down, you lose money.  If this “speculation” is driving the price up, why don’t we all “speculate” and make money?  It seems like it should be pretty easy, right?  On the other hand, I lived in Houston in 1986 when the price of oil went to $6/barrel.  I was working for an oil company then.  I don’t remember anybody from the federal government running down to “bail us out.”  Do you?

        • http://wizbangblog.com/author/rodney-graves/ Rodney G. Graves

           And it seems the money not going into treasury notes is going into oil, gold, and other high demand commodities.

  • Brucepall

    “2+ Trillion injected into the economy by the Fed in the last 3 months to prop it up.”

    So where is that money going in the economy, and and what effect is it having on the dollar’s value?

    Dang Chico, keep reading and quoting Zerohedge and look what its doing to your world view.

    Who knew you had it in ye?

    Here’s a freebee – bought 10K shares BAA on Monday. Check out the ticker from yesterday.  I think it wants to run some more today.  FWIW.

    Semper Fidelis

    • Brucepall

      Correction:  Actually it was Tuesday… and today is Thursday… 9:25 PM to be precise (but that’s on Guam).  Markets in America open here in about three hours.

      Other PM and commodity stocks I have purchased in the past week:  PAL, GPL, HL, PZG, VGZ, MCP,and NEM.

      I make my living these days as an EVIL speculator!  Just ask, ahem, Nancy Pelosi.

    • Commander_Chico

      Thanks, I am a long time ZH reader.

      I suggest this blog on the metals markets, lots of data with some commentary:

      http://jessescrossroadscafe.blogspot.com/

      As far as speculation goes, I don’t fault anyone for using the market. The problem is that the Big Banks have the Fed in their pocket – printing money for them while the rest of us have to scramble to keep up.

  • Brucepall

    Chico,

    Went to the link… I’m not a chartist, but the Animal’s video (circa 1964) was nostalgic. 

    But rollingstone.com?  Really? 

    Neither are in the Zerohedge league.  But to each his own, I guess.

    Its time to do my Premarket screening on ICE,  check-out the overnight treasuries, and review the European markets.  

    Some folks tell me, “its like watching paint dry” – but it sure beats putting on a suit, running with the rats and working for someone else.

    Semper Fidelis-

    • Commander_Chico

      Bruce, It’s not Rolling Stone, but MattTaibbi, who frequently sources ZH and is a source of ZH postings, they are closely related.

      • Brucepall

        Cmdr Chico,

        So’kay,  Thanks for the H/T… The markets are open.  I’ll look at it later.
        Semper Fidelis-
        Bruce

        ________________________________

        • Brucepall

          Went to rollingstone.com and looked up Matt Taibbi…

          What dribble – and a complete waste of time.

          Chico, on a 10 scale I’d give it a zero.

          • Commander_Chico

            How is Taibbi wrong about oil prices?

  • GarandFan

    The logical liberal solution is PRINT MORE MONEY!

    • Hank_M

       That’s all we have left now that our national debt has reached 101% of GDP.