Posted tagged ‘gas prices’

Tough Times Ahead

May 30, 2008

Oil prices in recent days have taken a breather and have settled back to $ 130 per barrel!  At the pump, Americans are looking at $ 4 per gallon gasoline prices and all around us prices seem to be rising except of course the price of your house.  What a mess for the next President to inherit.  Yet there does not seem to be a voice of concern amongst the three soldiers left standing.  For sure Hillary, Barack, and John all are for better paying jobs and a steak on every babeque, but that is hollow political talk.  Unfortunately, American voters do not prefer to hear the truth, and worse, may not recognize it if one of the candidates did share it.

Economics is complicated to be sure and most of us studied something else.  Over time, however, experience has taught us certain laws like

  • Supply and Demand – the more of something available the lower its price, the more people want something, the higher its price. 
  • There is no free lunch – if someone tells you it is free, watch out because you will be paying for it one way or the other.
  • If you snooze, you lose – If you do not pay attention and perform proper preventive measures (like home repairs, healthy life styles, savings and investments), you will end up with a loss.

The current American saga under the direction of producer and director George W Bush with able assistance from Dick Cheney is a case in point.  During the past 8 years American national policies have ignored these three laws.  Here are the results.

1. It has been long known that America was dependent upon imported foreign oil, and that oil reserves were both limited and under increased demand from other developing economies such as China and India.  Rather than put in place domestic goals and policies that would have (1) reduced US demand for oil, and (2) increased sources of alternative energy (thereby reducing demand for oil), America ignored the rules of supply and demand.  We now see higher oil prices in part due to this ignorance.

2. When George W Bush took office, he inherited a budget surplus and interestingly a military budget of some $ 400+ billion.  Bush set about increasing the military spend which now is about $ 600 billion.  At current levels the US spends more on its national defense than the rest of the world combined and about 10 times more than its next rival.  Why?  Since there is no free lunch this increase in the defense budget has had to come from some place.  Where?  Most of the increase has come from borrowing and the rest has come from overlooking the maintenance needed for America’s social and physical infrastructure.

3. During this Bush era, Americans have pretty much snoozed.  To be sure there has been first class mood music in the background (from spin and outright misinformation) to help Americans sleep.  Never the less, in 2008, we have awoken to a weak economy, rising prices, and a significantly devalued dollar ( as one measure, the euro is now worth about $1.55 versus $0.85 when Bush was elected).  The price of oil is set by world traders and they see this weakening of the dollar and are demanding more dollars for the same barrel of all on top of what ever supply and demand effect there may be.

You can look at this mess from different directions but you will come out at the same approximate point if you are honest in your assessment.  The next President will have to:

  • Increase tax revenues
  • Decrease the Defense budget

in order to stimulate

  • alternate energy programs
  • repair of the infrastructure
  • an increase in the value of the dollar
  • stabalization of inflation at less than 2%/year

The picture is not pretty and will seems worse because the facts have been withheld for too long.  America’s future can be healthy but we must tend to it.

The Blessing of High Gas Prices

May 23, 2008

Yesterday I filled my SUV gas tank and I was unable to fill it completely until I gave the attendant my credit card again.  There is a $ 75 limit associated with my credit card and in trying to fill it I exceeded that amount.  The Bush Administration would like me to think that the high price of gas is due to the Chinese and the Indians using so much gasoline, and the Saudis (and others) refusing to pump more.  While the Chinese and other developing economies are clearly consuming more oil, the Saudis could not make a big difference if they did try to pump more.

In addition to normal supply and demand, there are, some say, three other factors at play.  (1) There is speculation with oil traders practicing the game that prices always go up and no matter what they pay, they can sell it at a higher price tomorrow, and make a profit.  (2) There remains a lot of instability in the oil producing world and the fear that oil supply might be disrupted is a real fear.  The US, of course, has itself to blame for screwing up Iraq and the Middle East in general.  (3) Probably the largest effect is the devaluation of the US dollar.  Arguably the dollar is 50% of its value when President George W Bush began his Iraq War and had he not followed this foolish course, and even more foolishly financed it with borrowed money, oil might today sell for $ 60-70 per barrel rather than the $ 120+ that it is now.

The blessing however is the sharp punch in the nose that all Americans are now experiencing with higher fuel and transportation costs.  The one unique characteristic of America and Americans is the constant need and desire to travel.  Our whole life style is built around mobility.  What we have never faced up to is the recognition that this style costs more than other styles.  With cheap oil, you could not see the real costs.  In Europe, for years and years, fuel has been expensive largely due to extra taxes, and as a result Europeans have developed more energy conscious living styles.  It is time for America to begin making some of these trade offs and even more urgent is to apply its innovation to developing real alternatives like wind, wave, and solar power.

Which candidate do you think will bring this focus?