FT138: “High gas prices mean high food prices.” —Old Pithy

Posted by PITHOCRATES - October 5th, 2012

Fundamental Truth

We use Diesel Fuel in our Ships, Trains and Trucks to move Food from the Farm to the Grocery Store

People don’t like high gas prices.  When the price at the pump goes up more of our paycheck goes into the gas tank.  Or, more precisely, in everyone’s gas tanks.  For even if you don’t drive a car when gas prices go up you’re putting more of your paycheck into the gas tanks of others.  Thanks to oil being the lifeblood of our economy.  And unless you’re completely self-sufficient (growing your own food, making your own clothes, etc.) everything you buy consumed some petroleum oil somewhere before reaching you.

Gas prices go up for a variety of reasons.  The purely economic reason is the market forces of supply and demand.  When gas prices rise it’s because demand for gasoline is greater than the supply of gasoline.  Which means our refineries aren’t producing enough gasoline to meet demand.  And the purely economic reason for that is that they are not refining enough crude oil.  Meaning the low supply of gasoline is due to the low supply of crude oil.  Which brings us to how high gasoline prices consume more of our paychecks even if we don’t drive.  The reason being that we just don’t make gasoline out of crude oil.  We also make diesel fuel.

Diesel fuel is a remarkable refined product.  It just has so much energy in it.  And we can compress an air-fuel mixture of it to a very small volume.  Put the two together and you get a long and powerful power stroke.  Making the diesel engine the engine of choice for our heavy moving.  We use it in the ships that cross the ocean.  In the trains that cross our continents.  And in the trucks that bring everything to where we can buy them.  To the grocery stores.  The department stores.  To the restaurants.  Everything in the economy that we don’t make for ourselves travels on diesel fuel.  Which is why when gas prices go up diesel fuel prices go up.  Because of the low supply of oil going to our refineries to refine these products.

Oil is at a Disadvantage when it comes to Inflation because you just can’t Hide the Affects of Inflation in the Price of Oil

And there are other things that raise the price of gasoline.  That aren’t purely economical.  But more political.  Such as restrictions on domestic oil drilling.  Which reduces domestic supplies of crude oil.  Political opposition to new pipelines.  Which reduces Canadian supplies of crude oil.  Special ‘summer’ blends of gasoline to reduce emissions that tax a refinery’s production capacity.  As well as our pipeline distribution network.  Higher gasoline taxes.  To pay for roads and bridges.  And to battle emissions.  The ethanol mandate to use corn for fuel instead of food.  Again, to battle emissions.  All of which makes it more difficult to bring more crude oil to our refineries.  And more difficult for our refineries to make gasoline.  Which all go to adding costs into the system.  Raising the price at the pump.  Consuming more of our paychecks.  No matter who is buying it.

Then there is another factor increasing the price at the pump.  Inflation.  When the government tries to stimulate economic activity by lowering interest rates they do that by expanding the money supply.  So money is cheaper to borrow because there is so much more of it to borrow.  Hence the lower interest rates.  However, expanding the money supply also causes inflation.  And devalues the dollar.  As more dollars are now chasing the same amount of goods and services in the economy.  So it takes more of them to buy the same things they once did.  One of the harder hit commodities is oil.  Because we price oil on the world market in U.S. dollars.  So when you devalue the dollar it takes more of them to buy the same amount of oil they once bought.

Oil is at a particular disadvantage when it comes to inflation.  Because you just can’t hide the affects of inflation in the price of oil.  Or the gas we make from it.  Unlike you can with laundry detergent, potato chips, cereal, candy bars, toilet paper, etc.  Where the manufacturer can reduce the packaging or portion size.  Allowing them not to raise prices to reflect the full impact inflation.  They still increase the unit price to reflect the rise in the general price level.  But by selling smaller quantities and portions their prices still look affordable.  This is a privilege the oil industry just doesn’t have.  They price crude oil by a fixed quantity (barrel).  And sell gasoline by a fixed quantity (gallon).  So they have no choice but to reflect the full impact of inflation in these prices.  Which is why there is more anger about high gas prices than almost any other commodity.

Perhaps we can lay the Greatest Blame for the Current Economic Malaise on the Government’s Inflationary Monetary Policies

Current gas prices are hitting record highs.  And this during the worse economic recovery following the worst recession since the Great Depression.  Gas prices and the unemployment rate are typically inversely related to each other.  When there is high unemployment people are buying less gasoline.  This excess gasoline supply results in lower gas prices.  When there is low unemployment people are buying more gasoline.  This excess demand for gasoline results in higher gas prices.  These are the normal affects of supply and demand.  So the current high gas prices have little to do to with normal economic forces.  Which leaves government policies to explain why gas prices are so high.

Environmental concerns have greatly increased regulatory policy.  Increasing regulatory compliance costs.  Which has greatly discouraged the building of new refineries.  And making it very difficult to build new pipelines.  Which tax current pipeline and refinery capacities.  A problem mitigated only with their restriction on domestic oil production.  The current administration has pretty much shut down oil exploration and production on all federal lands.  Reducing crude oil supplies to refineries.  These environmental policies would send gas prices soaring if the economy was booming.  But the economy is not booming.  In fact the U-6 unemployment rate (which counts everyone who can’t find a full time job) held steady at 14.7% in September.  So an overheated economy is not the reason we have high gas prices.  But the high gas prices may be part of the reason we have such high unemployment.

Perhaps we can lay the greatest blame for the current economic malaise on the government’s inflationary monetary policies.  Inflation increases prices.  Especially those things sold in fixed quantities priced in dollars.  Like oil.  And gasoline.  The price inflation in refined oil products is like a virus that spreads throughout the economy.  Because everyone uses energy.  Especially the food industry.  From the farmers driving their tractor to work their fields.  To the trucks that take grain to rail terminals.  To the trains that transport this grain to food processing plants.  To the trucks that deliver these food products to our grocery stores.  From the moment farmers first turn over their soil in spring to the truck backing into to a grocery store’s loading dock to consumers bringing home groceries in their car to put food on the table fuel is consumed everywhere.  Which is why when gasoline prices go up food prices go up.  Because we refine gasoline from the same crude oil we refine diesel fuel from.  Oil.  Creating a direct link between our energy policy and the price of food.

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New Zealand is Actively Looking for new Petroleum Deposits while President Obama Remains in a State of Denial

Posted by PITHOCRATES - June 9th, 2012

Week in Review

Petroleum fuels the modern world.  It’s what drives our trains (at least the diesel-electric ones).  It makes our airplanes fly.  Our cars drive (the vast majority of them).  And our trucks.  For the trains and cars that don’t use petroleum the electric generating plants do use it or another fossil fuel (like coal or natural gas) to make the electricity that moves the things petroleum doesn’t.  Life as we know it couldn’t exist without petroleum oil.  Sadly, though, the leader of the world’s largest economy doesn’t like petroleum.  And his administration is working aggressively against oil.  Wherever they can they have prevented new petroleum from coming to market.  Unlike they’re doing in New Zealand (see NZ puts 23 oil and gas exploration permits up for tender posted 6/8/2012 on Share Chat).

The government department is looking for companies to explore the onshore and offshore areas from 2013. The blocks cover over 40 kilometers of offshore seabed and 3 kilometers of land in the Waikato, Taranaki, Tasman, the West Coast and Southland. Tenders close on Oct. 15.

“The blocks cover a number of petroleum basins and a variety of environmental settings and resource types to attract a range of potential explorers with different expertise and interests,” David Binnie, general manager of New Zealand Petroleum & Minerals, said in a statement.

The New Zealand government understands that petroleum fuels the modern economy.  So they are inviting companies to come to their national lands and seas to explore for petroleum.  Meanwhile President Obama is shutting down oil exploration where he can.  (And if he could on private land he would do that, too.)  He said ‘no’ to the Keystone XL Pipeline from Canada.  And he’s pouring hundreds of billions of tax dollars into green energy businesses that have a penchant for going bankrupt.  And yet the modern economy still runs on Petroleum.  What is wrong with this picture?

President Obama.

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Gas Prices Stay High along the Environmentalist West Coast due to a Lack of Refinery Capacity

Posted by PITHOCRATES - May 20th, 2012

Week in Review

Take a look at an electoral map.  Say from the 2008 national election.  What do you see?  Blue (i.e., Democrat) on the coasts.  Red (i.e., Republican) in the middle.  And blue in the union Midwest.  Okay, now what else do you associate with the blue on the coasts?  That’s where there are high concentrations of liberals.  (The blue in the Midwest is more organized labor than liberal).  And what is one of the biggest issues with liberals?  That’s right.  The environment.  (I’ll just assume you said the environment).  Especially in California.  Where they have tougher emission standards than the federal government has. 

They take their environmentalism serious on the coasts. So much so that they punish the use of fossil fuels through high taxes and excessive regulations.  It is for these reasons you don’t see them building many new refineries in these regions.  For there are few things they hate more than petroleum oil.  From drilling it out of the ground.  To transporting it.  To refining it.  Their basic attitude towards the oil industry is, “Sure, you’re welcomed to do business here.  But you will pay.  And pay.  And pay.”  So with that in mind here’s a little story about high gas prices on the West Coast (see Unlike the East, gas prices stay stubbornly high out West by William M. Welch posted 5/18/2012 on USA Today).

“We are seeing a tale of two coasts,” says Michael Green, spokesman for AAA, which monitors pump prices. “On the West Coast, gas prices are rising steadily, while on the East Coast they are steadily decreasing.”

Oil analysts blame a refinery slowdown in western states for sending retail prices in the opposite direction of wholesale costs.

In California and Oregon, the average price of regular gas has increased 20 cents a gallon so far in May, AAA reports. Average pump prices were down 19 cents in Florida and 18 cents in Virginia…

Tupper Hull, spokesman for Western States Petroleum Association, blamed unexpected maintenance and other problems at refineries…

“Our concern is a lack of competition at the refinery level in California,” says Charles Langley, gasoline analyst at Utility Consumers’ Action Network in San Diego. “We’re not saying there’s a conspiracy. It’s just that with this few competitors, it’s very easy to game prices by turning off capacity.”

Bob van der Valk, petroleum analyst in Terry, Mont., said gasoline inventories are at a 20-year low in California for May. Supplies will return to normal, he said, but perhaps not in time for upcoming holiday travel.

The high prices on the West Coast are of their own making.  Prices have fallen on the southern half of the East Coast.  Because they aren’t as blue as they used to be.  They love their environment there.  Which is why they live there.  But they know they need petroleum oil and gasoline to live.  And they know that there is a direct correlation between anti-oil policies and the price at the pump.  Something they apparently don’t know on the West Coast.  For they hate oil.  Don’t want anything to do with oil in their state.  And yet almost everyone drives a car in California. 

If they want lower gas prices they have to make it easier to do petroleum business there.  That means they need to make it easier to refine gasoline in California.  Which means backing off on the taxes.  And the excessive environmental regulations.  They can do that.  Bring the price at the pump down.  And still have a beautiful environment.  Like they do on the southern half of the East Coast.

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