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Our oil woes

(Credit: Politirazzi)

By Jeff

Gas prices are high. Who’s to blame? Someone is always to blame, right? When prices rise for consumers, there has to be some corporate fat-cat wearing a monocle and lighting cigars with $100 bills and cackling maniacally.

Multiple choice: What’s the main reason for higher gas prices?

A: Oil speculators

B: The Iraq war

C: Greedy oil executives

Let’s go to the Google. How many hits do I get if type in: “gas prices”, oil speculators? 561,000. For “gas prices”, Iraq war? 433K. For “gas prices”, record profits? 408K.

Pretty close. Purely based on Google hits, it appears that we can blame those evil oil speculators for driving up gas prices just like Sen. Obama’s recent pandering says (an opinion echoed by Bill O’Reilly). Of course this ignores the fact that every other commodity has also skyrocketed in price. Did all speculators from every industry conspire together to bid up every commodity?

(continued) The reason oil prices and other commodities have risen so much isn’t largely due to any of these (though B and probably even C have some impact). Oil and most other commodities are priced in US dollars, and the dollar has been incredibly weakened in the last 3+ years.

Of course, if you search for “gas prices”, weak dollar, you only get 361K hits. Which is barely more than “gas prices”, conspiracy (308K).

Because who wants to talk economics (BORING!) when you point to evil fat-cats and governments conspiring to take over the Middle East’s oil supply (SEXY!) as the reason that gas is so expensive?

So how much impact does a weakened currency have on gas prices? Economist Bryan Kaplan did the calculations. In November 2002, gas was $1.45 a gallon. Today, it is $4.13 a gallon (a 280 percent increase). However, if you factor out the effect of a weaker currency, gas prices would be only $2.67 today — an 80 percent increase.

So why is the dollar falling? Or more accurately, why has demand for the dollar decreased? The economy has been faltering (which is a much broader question — but suffice to say, the economy isn’t falling because oil is expensive). When the economy falters, the Fed lowers the interest rate. When interest rates go down, investors buy other currencies because they can get better interest. Lesser demand for U.S. dollars results in a weakened exchange rate.

Oil is priced in dollars (for now), and a weak dollar decreases the price non-dollar countries pay, so they buy more. Demand increases, prices rise.

Since the U.S. consumes over 20 million barrels of oil per day, but only produces about 5 million barrels per day domestically, it means we need to import 75 percent of our oil and our currency stinks. ANWR and offshore drilling would probably only get us another 2-3 million barrels of domestic production a day — and that wouldn’t be for a decade.

It seems like everyone wants to wean the U.S. off of oil, whether it’s the left who want to do it for environmental reasons, or the right who want to do it to remove the political power in the Middle East. One option that is clearly preferable to fossil fuels is nuclear power. But although it directly produces no carbon emissions, has a dramatically better safety record, and can be produced 100 percent domestically, there hasn’t been a new plant in the U.S. in 20 years.

Tags: oil production , gas prices , jeff akston

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