March 14, 2013
With gasoline prices gouging consumers at record levels for winter, the easy target would be to blame big oil like Exxon, but the real source of steep fuel prices lies at the feet of the Federal Reserve’s Ben Bernanke. Thanks to Bernanke’s insatiable appetite for low interest rates, the Federal Reserve has printed trillions of dollars the past five years.
Usually gas prices are driven by supply and demand as reflected in the futures market, speculation about Middle East unrest, and monetary policy. However, a little research and analysis of commodities’ graphs highlights a very different scenario. Currently, with a glut of oil in the marketplace and, typical low wintertime demand, stockpiles are expanding.
Meanwhile, Australian commodities brokerage group Compass Global Markets’ CEO Andrew Su calculates that crude oil prices will fall from the $90-range to $75 a barrel later this year due to the major growth of the shale oil industry.
So why is gas so expensive? A couple of factors are responsible for skyrocketing gasoline prices. First, a number of U.S. oil refineries are shuttered for either refurbishment or permanent closure adding further pressure to America’s operational refineries to keep pace with the demand in the U.S. Second, Federal Reserve Chairman Bernanke’s printing of $85 billion U.S. dollars per month.
Traders’ say a direct correlation between the devaluing of the U.S. dollar means higher gas prices. Proof of this comes from the commodities markets trading in oil where the price per barrel for oil is below $94. The American Petroleum Institute reported, “the Energy Information Administration projects the annual price of WTI crude will decrease from an average of around $94 per barrel to nearly $92 per barrel in 2014.”
Translation for those who are beginners in devaluing currency and how it affects everyday necessities can take umbrage because 90 percent of the American population has no idea just how important a strong U.S. dollar is to the average consumer.
During the past five years the dollar has devalued by 30 percent due to the printing of U.S. dollars and that means the oil traders are getting approximately 30 percent less oil per dollar.
While the consumption of fossil fuels in the U.S. has remained relatively flat, prices at the pump have surged to record levels. Further, analysts from the American Petroleum Institute (API) point to the devaluation of the dollar as a big driver behind rising gasoline prices. Typically, countries with stronger currencies reap the rewards with lower oil costs.
The Federal Reserve Board has indicated its commitment to near-zero interest rates through 2014 or until unemployment rates drop to an acceptable level. As a result oil and other commodity prices (think grocery store prices) have surged.
“As the U.S. dollar continues to lose its position as the world’s (reserve) currency, gas, oil, and other commodities will continue to skyrocket. Almost everything we consume will get dramatically more expensive. All the clothing, furniture, and household goods we import from China. All the food we get from Central and South America… all the electronics, televisions, computers, and cars we get from Asia and Europe. And when you look back over the past few years, the numbers are startling,” according to Porter Stansberry, one of the country’s foremost financial analysts.
Naysayers, like Paul Krugman, don’t agree and said in a New York Times story, “For three years and more, policy debate in Washington has been dominated by warnings about the dangers of budget deficits. A few lonely economists have tried from the beginning to point out that this fixation is all wrong, that deficit spending is actually appropriate in a depressed economy.”
But realists say consumers should keep in mind that there are only four large U.S. corporations that carry an AAA rating from Moody’s, Exxon, Microsoft, Johnson & Johnson and Automatic Data Processing of the thousands of publicly traded American companies.
How the price per barrel is divvied up
Price of crude oil accounts for about 68 percent of the price at the pump. Refining adds another 8 percent; Uncle Sam taxes add another 13 percent and distribution/marketing make up the final 11 percent, plus individual state’s taxes add to the total.
Typically the refining process returns a much lower profit margin causing smaller independent refineries to shutter plants. Oil industry analysts say there are a record number of stifling state and federal regulations imposed on carbon-based fuel plants, leaving only a handful of large corporations like Valero and Exxon to process the fuel required to power America’s economy. In addition, lawmakers in dysfunctional DC refuse to allow oil companies unlimited export capabilities, something the industry says will assist the U.S’s transition to green energy while providing other countries with heavier crudes.
For example the Institute for Energy Research said, 66 U.S. refineries have permanently shut down since the 1990s for regulatory reasons, mainly due to the increasing regulatory costs. And during that timeframe, the remaining corporations have spent $128 billion to comply with federal environmental regulations. Like most rising production costs, it’s the consumers who are slammed at the pump.
Adding to the pressure is the International Monetary Fund’s (IMF) move to remove the U.S. dollar as the reserve currency and replace it with something called “Special Drawing Rights,” or SDRs. SDRs represent potential stressors on the currencies of IMF members. The IMF plans to issue SDR-denominated bonds, which will lessen the central banks’ dependence on U.S. Treasury Bonds.
Stansberry explained, “As the dollar loses its place as the world’s reserve currency, foreign countries will no longer need to maintain large holdings of dollars. This means we will no longer be able to print as much money as we want — because there will be fewer and fewer people willing to loan us large amounts of money.”
This is a welcome idea for China.
“Displacing the dollar, Beijing says, will reduce volatility in oil and commodity prices and belatedly erode the ‘exorbitant privilege’ the United States enjoys as the issuer of the reserve currency at the heart of a post-war international financial architecture it now sees as hopelessly outmoded,” a Reuters story read.
Further, prominent researcher Zha Xiaogang of the Shanghai Institutes for International Studies said, “The shortcomings of the current international monetary system pose a big threat to China’s economy. With more alternatives, the margin for the U.S. would be greatly narrowed (and significant increases in gasoline would be the new normal), which will certainly weaken the power basis of the U.S.”
Most financial experts agree that the world is moving to leave the U.S. dollar in the dustbins of history; they say it is only a matter of time. This should concern every American because the change will result in a much lower standard of living as consumers will face skyrocketing prices on basic needs like gasoline, food, energy and interest rates.
Unfortunately, under the Obama administration, taxpayers can expect to reap the economic trifecta of increased taxes (those individuals earning $250k), increased withholding (all payroll taxpayers) and increased consumer prices (energy, gas and grocery consumption).
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