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Tuesday, April 12, 2011

Understanding rising gas prices

~ $2.59--  ahhh, them good ole days~

I'm back from my travels.. nice to have wifi once again.. and onward we go...

The big story that is affecting Americans daily is rising gas prices.

People are frustrated and angry, and asking 'Why'?

The simplest answer is to blame Libya and its political uncertainty, or in the case of the State Department, to blame Gahdafi specifically, as justification for the needless military action NATO is taking. (Ironically it is our  involvement which is causing the instability, but that's a story for another day)  But since Libya only supplies 2% of US' oil supply, it would not have the National impact of daily price climbs.

There are two specific factors causing the rising cost of gasoline-

1)  Federal Reserve's devaluing of the dollar,  and..

2)  Greedy, soulless commodities traders/investors.

Let's expand on these points a moment...

It has been stated repeatedly in this site that the Federal Reserve is intentionally devaluing (or weakening) the US dollar as a trading currency.   This is is done so that American business can export their goods abroad and make a larger profit.  The expansion of the US economy is Not based on the US consumer- he/she is tapped out; high debts, no credit, no jobs..  So US businesses need a weak dollar so other currencies, when strengthened, pay out a higher conversion rate.

To be clear, all nations are doing this, not just the US.  There is a current race amongst all nations to see who can devalue their currency the quickest.  It is ironic for instance that the US accuses China of currency manipulation when they themselves do the same thing.

And I state this often because it is very important to understand... it doesn't matter if it is the US Dollar, Japanese Yen or British Pound-- when a currency is devalued, it means it costs more to acquire the same goods/services as it did previously.

Now oil/petrol- the sale and value of the product, even amongst OPEC, is based on US dollars.  It holds a certain value in relation to $1 and as that dollar is weakened, it takes more of those  pieces of paper to match the amount of oil once purchased with only $1.   So as the Fed is weakening the dollar via Quantitative Easing 1 & 2, to the tune of $2.5 Billion/day, they are directly causing the price of oil to spike.

Now let's look a moment on the commodities trader/investor.  When gasoline is traded on the market floor, it is termed as  "Brent Crude".  Now as of this posting, the futures trading shows a Barrel of oil at $123.05.  A commodities investor looks at oil and trades exactly as it would, say Pepsi or Coca-Cola on the stock exchange.  It is an emotional science, often attached to panic buying and selling. The more they think it will rise, the more money that is put into the commodity which raises the price. And from there, those increased priced are immediately transferred onto the consumer.

And remember, as I've stated here often, a barrel is 42 gallons of oil, but when synthesized, it really equals 119 gallons of oil, and that comes to $1.03/gallon.  But gas has just about a 4x markup so the consumer pays about $4.

So the fear/excitement of investors and devaluing of the dollar are the two major contributing factors to the increased rise in the price of gas.

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