Sunday, April 1, 2012

Rising Gasoline Prices

What is the reason for high gasoline prices today? Liberals like to put the blame on big oil companies. They argue that these companies are profiteering at the expense of all of us. Conservatives like to blame the Obama administration for dragging its feet on drilling in the USA. They reason that if we had more supply, prices would drop.

However, it might be better to look in another direction for the reason for the high prices at the pump. Every time we fill up we exchange some money for a few gallons of gas. Instead of looking at the price of gas, maybe we should examine the value of the money we use to pay.

Let’s take an average driver who puts 12000 miles a year on his car. If the car averaged 20 miles per gallon, he would use 600 gallons in a year. At today’s price of about $4.00 per gallon, his total cost for the year would be $2400. Just imagine that instead of using cash or a credit card to pay, you used gold. At today’s price of $1640 per ounce, he would only need about an ounce and a half of gold to pay for a full year’s supply of gas.

Two years ago when gas prices were about $2.80 per gallon, the driver would have needed $1680 to pay for his 2400 gallons that year. However, in 2010 the price of gold was only $1125 per ounce. It would still have taken about an ounce and a half of gold to buy the full years supply.

In other words, the price of gold in relation to oil has hardly changed in the past two years. What has changed is the value of the paper we call money that we present at the pump. In the old days they would have this debasing the coinage.

Massive government borrowing has cheapened the value of our dollars. You’d have to be a real sucker to accept cheaper dollars for gasoline. The oil and gas we buy is the same product as always. It still probably costs about the same to drill and refine it into the finished product we use in our cars.

It is true that other factors are involved in gasoline production. Catastrophes and speculation can cause short-term swings in prices but in the long run no driller or producer is going to accept Monopoly money for their product.

We all knew this when we were children. Why don’t we understand it now? Which one of us would have traded a Mickey Mantle card for the whole Washington senator team? For that matter who today would trade Exxon or Chevron for the whole US Senate? ### 

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