Dan Reed

What’s Going On With Gasoline Prices?

As of this writing, the national average price of gasoline at the pump had risen every day for more than a month.

Ouch!

And while there are some potential signs that the price run-up may just about have exhausted itself, it seems none of the experts being quoted these days can say definitively why gas prices have jumped so much over the last five weeks.

We know crude oil prices haven’t changed nearly enough to explain it. So some “experts” are blaming the unexpected closing of several refineries, especially on the East Coast. Others suggest that speculators are bidding up refined petroleum product prices in advance of the annual refinery changeover to summer blend fuels scheduled to begin happening in March. Still others blame surging demand in China, India and elsewhere. And, of course, there are concerns about tensions in the Middle East. That’s always a good fallback explanation when nothing else seems to make sense.

Unfortunately, none of those situations fully explain why Americans are paying a pocketbook-crimping, lifestyle-altering 51 percent more for gas today than the inflation-adjusted average price over the last 95 years.

So, What’s Going On?

I’m no futures market expert, but my reading of the data doesn’t support the “speculation” meme this time. And there’s always a few refineries offline for this or that reason, so the “diminished refining capacity” theory doesn’t hold up either. And yes, China and India are demanding lots of fuel these days, but they both run mostly on diesel, which shouldn’t affect gasoline pump prices in North America much. And their rate of demand hasn’t changed significantly over the last six months.

In my view, rising gas prices are a somewhat delayed effect the U.S. government’s inflationary monetary policy. The more we print greenbacks – the currency in which oil trades worldwide – the more upward pressure we put on the price of oil, which represents 75 percent or more of the cost of gasoline. Yet, the more astute among you will counter that global oil prices have traded in a narrow band in the $90-range since at least summer, even as the federal printing presses have been running overtime. So why are gas prices rising now, in February, of all months?

Well, the truth is that gas prices in the U.S. aren’t going up JUST NOW. They’re simply returning to the trend line they were on late last summer and during the early fall, before gasoline producers engaged in their annual year-end dumping of gasoline supplies to save on inventory taxes.

Oil companies, like other businesses, have to pay annual state and local inventory taxes, and those taxes typically are assessed on inventories as of Dec. 31. That’s not true everywhere, but it is in Texas and Louisiana, where a huge percentage of the nation’s gas supplies are stored. So in most years beginning in early to mid-November the Exxons and Shells of this world effectively put their products – regular, mid-grade, premium, etc. – on sale. Prices drop. Consumers buy more fuel than the otherwise might have bought. At the same time, the refiners dial back a bit on their production.

By taking their year-end gasoline inventories down anywhere from 10-20 percent, the oil companies can save tens, or even several hundreds of millions of dollars in inventory taxes. They then begin rebuilding their inventories in the New Year. Then, at some point the supply-demand equation reaches the point where prices can naturally return to what had been their trend line prior to the year-end drawdown in inventory.

One Cost Affects Another

So, it’s important to remember that gasoline prices last summer and early fall were well above what had been their historical trend line in recent years. Pump prices usually begin to decline every August as the vacation season winds down. But in August 2012 U.S. gas prices jumped 13.6 percent. The nation’s food costs also rose almost 1 percent in August (that’s a big jump in historical terms) thanks to higher transportation and production costs attributable almost entirely to higher fuel prices. And unlike gas prices, which dipped in the fourth quarter because of the oil companies’ inventory reductions, food prices have continued on their higher trend line unabated.

Curiously, most economists – even those who’ve been predicting that the Fed’s policy of “Quantitative Easing” would fire up inflation – say they still see little evidence of anything approaching worrisome levels of inflation. But I suggest that’s in part because of the mechanics on how they track the economic numbers, and in part because the year-end dip in gasoline prices helped mask the inherently inflationary effect of an increased money supply. Inflation is happening, and it is being felt most keenly by most Americans at the pump, and at the grocery store where higher fuel prices are driving up food prices.

So where’s my proof?

According to calculations made by Tim McMahon at InflationData.com, the average price of a gallon of gas between 1918 and January 2012 was $2.49. Let’s arbitrarily adjust that to $2.50-a-gallon to account for one more year of relatively low official inflation. Thus, we can safely and fairly say that in January 2009, when President Obama first took office, the national average per gallon price of $1.95 was serendipitously below average, mainly as a result of the 2008 market collapse and recession. Conversely, the average price of $3.78 a gallon as of Feb. 21 (source: AAA) can only be described as painfully high vis-à-vis that $2.50 historical average.

Changes in active refining capacity, global demand, Middle East tensions, the amount of market speculation and, I suppose, the mood of the guy at the corner station who posts the prices on his pumps each morning, all are factors in why Americans now are paying more than the $2.50 historical average price of gasoline. But only the Fed’s policy of weakening of the dollar by running its printing presses non-stop can adequately explain why we’re paying a whopping $1.28-a-gallon – a 51 percent premium – over the historical average for gasoline.

 

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