The Price of Oil/Gas and why

It hasn't really risen - the dollar has dropped in value thanks to the fed printing more and more paper money that's not backed by anything - from the American Geological Institute:

""The steep increase in the price of crude oil in the United States remains a headline issue, along with the falling US dollar. The drop in the dollar has caused concern in oil-producing countries which use it as the economic basis for the commodity, and often their currency. The chart below shows the spot market price of crude oil per barrel (BBL) in US dollars and in euros from 2001 to today. The price of oil has grown faster relative to the dollar than to the euro. Yet, a portion of the rise in oil prices is due to the fall of the value of the dollar. The graph also shows the number of barrels of crude oil per cost of an ounce of gold, demonstrating the parallel growth in commodity pricing.

If the US dollar had remained strong in the global economy, oil might, in theory, be around $65 per barrel. However, oil is priced in dollars, and oil prices continue to rise. The impact of increased oil prices can not be ignored in the US economy, and, in turn, can further weaken the dollar. Resource economics is a complex feedback loop where today’s resource boom is driven by many external factors."

Republican longshot candidate Ron Paul has talked about how monetary policy, as much as energy policy, is behind inflationary problems like the run-up in oil prices."

My comment - if the dollar was backed by gold (as it was decades ago), we would be paying the same amount for oil as in 2001 - see graph for proof.

Thanks for the $3.50 regular unleaded, Federal Reserve! :bang:

If you recall, FDR confiscated all gold from Americans. The Fed Gov's tearing down the gold standard started long before FDR. The initial problem was the creation of the Federal Reserve in 1913.

As I recall, over on the political forum I predicted serious problems with oil prices as a result of Fed monetary policy and the Iraq war 3 years ago - and I was ridiculed by some.

Refusal by the government to obey sound financial principles will continue to degrade the value of the dollar and will - if continued long enough - lead to a depression in this country.

MSB22 said:

its all bs everyones getting poorer and the oil companies are building palaces. . .

Click to expand...

True - everyone is getting poorer. However, that's not the oil companies fault - you need to look elsewhere for that - you might want to try starting with your Congressman.

From here:

http://mises.org/story/2940

The profit margins of a few selected industries are as follows:

Periodical Publishing 24.9%
Shipping 18.8%
Application Software 22.5%
Tobacco 19%
Water Utilities 10.2%
Major Integrated Oil and Gas 9.5%
Hospitals 1.4%
Drugstores 2.8%

My comment inserted: While it's true that they sell A LOT of gas, the profit margins are not that high.

Article continued: Gas prices are up and oil executives are once again testifying before Congress. Clearly, many politicians, pundits, and consumers lament the rising cost of gas. Before we join them in their chorus, let us take a step back and ask this question: Are gas prices really all that high?

A change in price can be a result of inflation, taxes, changes in supply and demand, or any combination of the three.

First, we need to take into account inflation. The result of the Federal Reserve printing too much money is a loss of purchasing power of the dollar: something that cost $1.00 in 1950 would cost about $8.78 today. (Note: That's caused by the dollar not being backed by anything - i.e. gold, silver, platinum, whatever. . . Increase the money supply, decrease the value of each dollar.).

As for gas prices, in 1950 the price of gas was approximately 30 cents per gallon. Adjusted for inflation, a gallon of gas today should cost right at $2.64, assuming taxes are the same.

But taxes have not stayed the same. The tax per gallon of gas in 1950 was roughly 1.5% of the price. Today, federal, state, and local taxes account for approximately 20% of gas's posted price. Taking inflation and the increase in taxes into account (assuming no change in supply or demand) the same gallon of gas that cost 30 cents in 1950 should today cost about $3.13.

Neither have supply or demand remained constant. The world economy is growing. China and India are obvious examples. At the same time, Americans continue to love driving SUVs and trucks. As for supply, we are prohibited (whatever the reasons may be) from using many of the known oil reserves in our own country. Furthermore, due to government regulation, the last oil refinery built in the United States was completed in 1976. In addition, the Middle East is politically unstable which leads to a risk premium on the world's major source of oil. It is obvious that the demand for oil has grown while supplies have been restricted.

(Again, thank the Fed Gov for restricting the supply.).

The average price of gas in the United States today is approximately $3.25. The question is, why are gas prices not higher than they are?

The water utility industry has higher profit margins than major oil and gas firms! Why isn't every CEO with profit margins above that of the oil companies made to testify before Congress for "price gouging"? Clearly, greedy corporate profits are not the issue.

Again, while just over nine percent of the price of a gallon of gas goes to oil company profits, approximately twenty percent of the price of a gallon of gas is composed of federal, state, and local taxes.

Those who want the government to step in and do something about the high price of gas are either forgetful of recent history or too young to remember the oil crisis of 1979. During that time, restrictions on the price of gasoline led to the inability of some to find gas at all. Price ceilings always lead to shortages. The only thing worse than having to pay "too much" for gas is not being able to find gas at any price.

Let us not be swayed by politicians out for power or by reporters out to create news where none exists. Facts and economic logic should prevail rather than rhetoric.