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2008-05-17
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Controlling America's Rising Gas Prices

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Tagged As: Business and Society

Despite the rapidly rising gas prices, Americans still enjoy some of the cheapest fuel prices in the world. Even when compared against prices from three years ago, America is only now approaching the prices once bemoaned by those abroad. Only a handful of nations maintain prices ridiculously below those paid by Americans and those prices are typical of a state-controlled oil program. Despite this fact, Americans continue to complain and point fingers while demanding "somebody do something" about the prices. Once the price of gas is sliced up, there are only so many options available to reducing it.

One option is to increase the supply to meet demand as proposed by Shell Oil's president John Hofmeister, "The presidential candidates should be out there on the postings saying let's increase domestic production by 2 to 3 million barrels a day. That would be something that would put money back into this country, jobs back into this country, and it would bring more supply toward the Americans who need it." A knee-jerk reaction by most Americans would be to assume that this plan simply pads oil company revenues. Despite their seemingly enormous profits, Hofmeister contrasts those profits against those found elsewhere in the economy, "If we had made $7.8 million on $114 million of revenue, nobody would call that excessive, because that's 7½ percent. We made $7.8 billion profit on $114 billion revenue -- same 7½ percent. So to me that is not an excessive number when banks and pharmaceuticals and IT companies earn a whole lot more." This course of action may very well come to fruition as congress is set to propose cutting off oil routed towards the strategic reserve and directing it towards consumers.

Another avenue of price relief, which has become virally popular to consumers via the Internet is a suspension of the federal gas tax. This measure has been proposed by all three Presidential candidates as a means of shaving 5% off the price of gas during the summer to not only give consumers and businesses a break, but free up money to stimulate the economy. If you ask an economist, it's just bad policy formed to placate an ill-informed voting constituent. Estimates indicate the government would stand to lose $9 billion and up to 300,000 jobs while crippling funds for commerce and infrastructure. Economists argue history shows tax savings do not go to the consumer but end up with the commodity supply retailers, "I don't think it's brilliant economics; unfortunately, it may be good politics. The smart people say 'It's stupid,' and the people who aren't as schooled say 'At least it will do something for me.'"

But lastly, one of the root causes of the increased oil price is a run away commodities market on the trading floors. At the moment, the price for a barrel of oil is not actually being driven by the demand to put gasoline into a vehicle, rather it's driven by commodities speculators creating a demand for barrel options. Earlier this year, it was shown the price of oil was pushed over $100 by a single trader seeking notoriety. The same principle is driving commodities prices more aggressively now, "The guys who screwed up the mortgage markets are bringing their awesome skill sets to bear on physical commodity markets." Investors were looking for something tangible to sink their money into after pulling out of the fixed income catastrophe of mortgage backed investment vehicles. The Fed's interest rate cuts may have prevented an all-out market crash, but it created a bubble for traders to purchase commodities like oil, food and precious metals. The sudden trader demand boosted prices leading to a bubble effect of traders securing themselves an option to buy at prices X, Y and Z which in turn continued to drive the price higher. When the interest rate is driven too low, a period of heavy inflation ensues similar to what was seen in the 1970s. It is widely believed the Fed's interest rates cuts will be put on hold for awhile to stabilize the commodities market and limit the weakening of the dollar - all of which impact the price for a barrel of oil.



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