The Obama Administration’s Dollar Devaluation lowers the Cost of Living in Britain

Posted by PITHOCRATES - October 6th, 2013

Week in Review

The British economy appears to be turning the corner.  Of course, they have an advantage over the American economy.  They’re not stuck buying petrol with a devalued American dollar (see UK economy growing at fastest rate in the developed world by Philip Aldrick, and Steve Hawkes posted 10/3/2013 on The Telegraph).

And there were hopes tonight that the signs of life could help tackle the cost of living, with a strong pound helping to push down the cost of petrol, which is traded globally in US dollars.

There are two primary forces that determine the price of gasoline.  Supply and demand.  And the strength of the US dollar.

Thanks to the worst economic recovery since that following the Great Depression, gasoline is not in as great of demand as it once was.  Before President Obama became president.  With so many people having left the labor force people just don’t have the money to put into their gas tanks.  Hence the ‘staycation’.  Spending the family vacation at home.  Doing fun things in the backyard.  Like cutting the grass.  And then when the kids’ chores are done there’s hotdogs on the grill.  Can a week at Disneyland compare to that?

Even though we’re buying less gas gasoline prices are still pretty high.  Why?  Because unlike the British we buy our gasoline with devalued dollars.  Due to all of that quantitative easing.  Printing money to buy treasury bonds.  To stimulate the economy.  Where only the rich Wall Street traders who buy and sell these bonds are getting stimulated.

With more money in circulation chasing the same goods and services in the economy it takes more dollars to buy what they once did.  Including gasoline.  Especially gasoline.  For the higher price of gas can be hidden in other products by reducing the package size of the product sold.  Such as smaller cereal boxes.  The prices may not be going up on cereal but we have to buy cereal more often.  Spending more money in the long run.  The higher price of gasoline (due to a weaker dollar) makes everything more expensive in the supply chain that ultimately puts those boxes of cereal on the supermarket shelf.  Ditto for everything else that is moved with gasoline or diesel.  But they can’t shrink the package size of gasoline to hide the added cost from the devalued dollar.  Because they sell gasoline by a fixed measurement.  We buy it by the gallon.  We don’t buy it by the box.  If we sold cereal by a fixed measurement we’d see cereal prices rising a lot higher than they are now.  But they’re not. So the boxes are getting smaller.

The British pound is stronger than the US dollar.  So when the British buy oil on the world market they exchange stronger pounds for weaker dollars.  Getting more dollars in exchange for their pounds.  Removing the U.S. price inflation (due to the devalued dollar) from the price of oil.  Lowering the cost of oil in Britain.  And lowering costs throughout the British supply chain.  Which will help lower the British cost of living.  Making life easier for the British consumer.  Because the British are more responsible with their currency than the Obama administration is with the American currency.

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Obama’s Rejection of the Keystone XL Pipeline raises Food Prices and makes the World a more Polluted Place

Posted by PITHOCRATES - April 13th, 2013

Week in Review

President Obama yielded to the environmentalists in his liberal base on the Keystone XL pipeline.  Who opposed it on environmental grounds.  Ironic as the environment will be at greater risk if the president doesn’t let them build the pipeline.  And to make matters worse the price of gasoline will go up also.  Making one of the worst economic recoveries in U.S. history worse.  By leaving less money in consumers’ pockets.  While at the same time raising the price of everything that uses refined oil to get to market (see Killing Keystone Seen as Risking More Oil Spills by Rail by Rebecca Penty & Jim Efstathiou Jr. posted 4/9/2013 on Bloomberg).

A rejection of the Keystone XL pipeline by President Barack Obama would push more of Canada’s $73 billion oil exports onto trains, which register almost three times more spills than pipelines…

Shipping more supplies by rail would lead to higher costs for oil producers because train shipments are more expensive than pipelines…

Without Keystone, designed to carry 830,000 barrels a day of oil, shipments of Canadian crude by rail would rise an additional 42 percent by 2017, according to RBC Capital Markets.

“One of the unintended consequences of delaying Keystone XL is that more oil has been getting to markets in Canada and the United States using rail, truck and water-borne tankers,” Shawn Howard, a spokesman for TransCanada, said in an e-mail. “None of those methods of transportation are as safe as moving it by pipelines,” he said.

Trains are one of the most efficient ways to transport heavy freight.  Bulk freight carriers on the Great Lakes can ship heavy freight cheaper but they don’t travel as fast as trains.  And they can only travel on water.  A train can travel almost anywhere.  Over, under and around bodies of water.  Something a ship just can’t do with land.  But the benefit of train transport comes with a cost.  Rail infrastructure is very costly.  And you have to have it wherever a train travels.  Unlike a ship.  Still, rail is the best way to transport bulk freight.  Except that kind of bulk freight that we can push through a pipeline.

To think of the immense advantage of moving things by pipeline consider the hot water in your house when having a bath.  Without the pipeline system in your house you would have to heat water outside over a fire.  Then carry it in small containers and pour it into your bathtub.  Container after container you would have to fill with cold water.  Carry it to where you converted it into hot water.  Then carry the hot water by foot where you could stumble or fall, spilling your converted cold water.  Leaving you a mess to clean up.  And the need to burn more fuel to convert more cold water into hot water.

Now imagine having a bath by simply opening the hot water tap at your bathtub and letting it fill your tub.  It’s a whole lot easier.  Less chance to spill water.  And you burn less fuel.  So which would you rather do?  Clearly moving anything by pipeline is the best way to move anything.  You reduce the chance of spills because the only moving part is the oil in the pipeline.  And there are no loading and unloading costs to factor into the price of gasoline.  As the refineries basically have a hot water tap to turn on when they want to refine oil.  It just doesn’t get simpler than that.

Keystone XL pipeline doesn’t put the people or the environment first.  Just those people who oppose businesses and capitalism.  Who don’t care that people have to spend more to put gasoline into their cars.  Or have to spend more at the grocery store thanks to higher fuel costs passed along in higher food prices.  For if it were up to them people wouldn’t even have cars.  Or enjoy eating anything that came from an animal.  That’s the world the environmentalists have in mind for the American people.  Where the people sacrifice.  So the animals can enjoy a pristine environment.  Where they can happily eat each other.  And crap all over the place.  The way Mother Nature meant it to be.  Before God created man.  Who the environmentalist hate.  And blame for making a mess of everything.

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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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Drilling More will Lower Oil Prices and Lower the Price at the Pump but it won’t Win Votes on the Left

Posted by PITHOCRATES - May 6th, 2012

Week in Review

Global warming alarmists and environmentalists have a friend in President Obama.  They represent a large swathe of the voting electorate.  Including some very high profile names in the entertainment industry.  Whose expertise in energy policy is nonexistent but persuasive nonetheless.  Because of an unwritten law in society.  If you sound and look good you are a de facto expert on the subject.  Which comes in very handy in making bad policy popular.  As demonstrated by the high price at the pump (see The 3 biggest benefits of producing more oil by Shawn Tully posted 5/3/2012 on Fortune CNNMoney).

President Obama argues that a campaign to substantially raise domestic crude oil production would provide miniscule benefits in lower prices and enhanced growth…

In fact, tapping the potential gusher within reach would enrich our future in three ways. First, despite the President’s declarations to the contrary, the extra output could be large enough to lower world prices by several dollars a barrel, chiefly through exploiting the enormous promise of shale oil. Second, adding to capacity would provide a sort of catastrophic insurance policy by cushioning shocks in supply that are especially damaging in the kind of tight, vulnerable market we’re experiencing today. And third, raising production means lowering our oil imports, and hence greatly improving our balance of trade. By pure GDP math, shrinking “net imports” would lift America’s growth trajectory…

Tight capacity means that almost all wells are pumping full tilt. To bring on more oil, producers that could react quickly may choose not to. A country like Saudi Arabia would need to spend lots of money uncapping old wells, and upgrading old fields, investments it’s now unwilling to make, in part from fears these high prices are temporary.

That leaves oil-hungry consumers to bid for the fixed number of barrels entering the market each day. In effect, someone commuting by car in London outbids a Chicago driver for scarce gasoline, and the Chicago driver saves by taking the train. That bidding is now driving the price far above the cost for the producer drilling the world’s most expensive oil, creating what’s called in economics a “scarcity premium.” And it’s why Exxon Mobil (XOM) and other oil giants are generating such huge profits.

How did the market reach this bind? From 2003 to 2008, demand for oil rose sharply, driven primarily by rapid industrialization in China and India. “The oil rich nations matched the rise in demand by producing more until around 2006,” says Lutz Kilian, professor of economics at the University of Michigan. “Then, production went flat, and even when demand started increasing again after the recovery began, production didn’t keep up…”

Well, there you have it.  Oil is expensive because demand is greater than supply.  So to reduce the cost of oil all we have to do is bring up supply to match or exceed demand.  And down goes the price of gasoline.  Elementary, really.  So why aren’t we doing this already? 

Because of the global warming alarmists and environmentalists who simply hate fossil fuels.  And the current president is appealing to these demographics for campaign funding.  And votes.  Neither of which he will win if he stops attacking Big Oil.  So he continues to attack Big Oil.  Buying campaign funding and votes.  All paid for by everyday Americans at the pump.  Who are cutting back everywhere in their lives to afford the high cost of gasoline the president is using as vehicle to reelection.

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Increasing oil supplies won’t lower gas prices only reducing U.S. demand can according to Obama and the AP

Posted by PITHOCRATES - March 24th, 2012

Week in Review

On the one hand gas prices aren’t high (see Rising gas prices aren’t as bad as you think).  On the other hand they are.  But there’s nothing the president can do about it so quit your bitching (see FACT CHECK: More US Drilling Didn’t Drop Gas Price [Higher fuel economy won’t lower gas prices according to AP] by JACK GILLUM and SETH BORENSTEIN, Associated Press, posted 3/21/2012 on ABC News).

U.S. oil production is back to the same level it was in March 2003, when gas cost $2.10 per gallon when adjusted for inflation. But that’s not what prices are now.

That’s because oil is a global commodity and U.S. production has only a tiny influence on supply. Factors far beyond the control of a nation or a president dictate the price of gasoline.

Funny.  When the stimulus failed it was the stimulus wasn’t big enough.  But when we only increase oil supplies a little and it doesn’t influence the world price of oil they don’t say the increase in supply wasn’t big enough.

The late 1980s and 1990s show exactly how domestic drilling is not related to gas prices.

Seasonally adjusted U.S. oil production dropped steadily from February 1986 until three years ago. But starting in March 1986, inflation-adjusted gas prices fell below the $2-a-gallon mark and stayed there for most of the rest of the 1980s and 1990s. Production between 1986 and 1999 dropped by nearly one-third. If the drill-now theory were correct, prices should have soared. Instead they went down by nearly a dollar.

Figures don’t lie but liars figure.  Talk about twisting the facts to support your Democrat president.  For what they say the data doesn’t support the data DOES support during the previous decade.  Following the 1973 Oil Crisis.  When OPEC placed an embargo on oil shipments to the U.S. and other Western nations that helped Israel in the Yom Kippur War.  Oil prices soared.  Bringing a lot of non-OPEC producers into the market.  To cash in on those high prices.  And while they were increasing oil production from the mid-Seventies to the mid-Eighties they flooded the market with oil.  Which also coincided with a reduction in demand in the U.S.  Who switched from gas-guzzlers to little cars with ‘sewing machine’ engines.  Tiny four cylinder engines.  This explosion in supply and reduction in demand caused the 1980s oil glut.  Causing oil prices to plummet.  Which kept gas prices low throughout the 1980s oil glut.

So when oil supply goes up gas prices come down.  In the 1980s that increase in oil supply came from outside of the U.S.  But it lowered gas prices nonetheless.  If an increase in U.S. production can match the increase of the non-OPEC producers during the Eighties then gas prices will come down, too.  But NOT increasing oil production will only increase gas prices in the face of increasing oil demand.

Unlike natural gas or electricity, the United States alone does not have the power to change the supply-and-demand equation in the world oil market, said Christopher Knittel, a professor of energy economics at MIT. American oil production is about 11 percent of the world’s output, so even if the U.S. were to increase its oil production by 50 percent — that is more than drilling in the Arctic, increased public-lands and offshore drilling, and the Canadian pipeline would provide — it would at most cut gas prices by 10 percent.

By this logic then there’s no point in trying to improve fuel economy.  Yet we do.  For when it comes to gasoline everything on the demand side of the equation can lower gas prices.  But nothing on the supply side can.  President Obama says we can inflate our tires.  Get a tune up.  Increase CAFE standards (force auto makers to increase the miles per gallon their cars can get).  Move into electric cars and hybrids.  If we do any of these we can bring down the price of gasoline.  But if we flood the market with new domestic oil it won’t do jack squat.  Go figure.

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The Demand for an ever Higher Fuel Economy has decreased the demand for Gasoline and raised Gas Prices

Posted by PITHOCRATES - February 26th, 2012

Week in Review

A Republican congressman complains about the high price of gasoline.  But because he’s a Republican AND drives a Hummer he gets little sympathy (see Florida congressman upset at Obama for $70 fill-up of his Hummer by Justin Hyde posted 2/23/2012 on Yahoo! Autos).

Saying gas costs too much based on your H3 — which sports an average fuel economy of 16 to 18 mpg — seems akin to arguing Americans have grown too fat at the drive-through window of a Carl Jr.’s. Yet West and other drivers can’t be blamed for the current run-up; it’s not American demand for gasoline causing its prices to rise, but rather demand from China, Latin America and worries over Iran’s actions near the Strait of Hormuz. Last year, fossil fuels were America’s biggest export — partly because of the economic recession and the shift toward vehicles that get 40 mpg instead of 16.

Sad, isn’t it?  China and Latin America can enjoy life.  But the country that made driving the great American past time can’t.  Over there they’re buying gas and enjoying it.  Over here we make people feel ashamed for doing something their parents loved to do.  Packing the family into a big and safe vehicle.  Hitting the open road.  And seeing America.

Well, if it’s any consolation just think about this.  While we scrunch into our commuter mobiles that can fit 2 adults almost comfortably the Chinese communists are now living the American dream in China.  Enjoying the freedom and adventure gasoline gives you.  Who knows, perhaps they’ll be buying recreational vehicles in their retirement.  Spending their golden years seeing their country.  Like we once did here.  Visiting their family.  And camping out at parks and campgrounds.  Enjoying their retirement.  Something few can do now thanks to the high price of gasoline.

There’s a lot the government can do to fix this.  They can STOP doing everything that hinders the oil industry and stop equating gasoline to a drug addiction.  Let the market set the prices.  Let supply flow in to meet market demand.  And let us drive what we want to drive.

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