Best of the Week
Most Popular
1.BrExit Looks Set to Win EU Referendum, Final Opinion Polls Give LEAVE Lead Over REMAIN - Nadeem_Walayat
2.BrExit Morning - New Dawn for Britain, Independence Day! - Nadeem_Walayat
3.LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - Nadeem_Walayat
4.BrExit to Save Europe from Climate Change Refugee Migration Apocalypse - Nadeem_Walayat
5.Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - Nadeem_Walayat
6.EU Referendum Latest Opinion Polls Show LEAVE Halting REMAINs Surge - Nadeem_Walayat
7.Gold And Silver – Insanity Is World “Norm.” Keep Stacking! - Michael_Noonan
8.Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - Nadeem_Walayat
9.Gold And Silver: Security, And BREXIT - Michael_Noonan
10.BrExit Vote - "The Trend is Set" -- And What You Should Pay Attention to Next - EWI
Free Silver
Last 7 days
Stock Market Rally Runs Out of Steam - 29th June 16
Rapid Growth:The Financial Trends Of Online Gaming - 29th June 16
FTSE and Sterling Brexit Trading, Deconstruction of the EU Referendum Result - 29th June 16
Stock Market Bounce May be Over - 28th June 16
Stock Market Meltdown Likely to Drive Gold Towards $1,500 - 28th June 16
Brexit Victory over the EU Globalists - 28th June 16
Brexit Psyop: Greenspan Falsely Blames the Brits for the Crash and Chaos to Follow - 28th June 16
Greenspan Calls Brexit a ‘Terrible Outcome’ as Euro Area Tested - 27th June 16
Stock Market SPX Below Mid-Cycle Support - 27th June 16
Best Holidays for Summer 2016 - 27th June 16
Another Stocks Bear Market? - 27th June 16
BBC EU Referendum Result Highlights - YouGov, Markets, Bookmakers, Pollsters ALL WRONG! - 26th June 16
Investors Map Post-Brexit Strategies Amid Global Market Upheaval - 26th June 16
Gold Price Weekly COT Update - 26th June 16
First the UK, then Scotland ... then Texas? - 26th June 16
Stocks Bear Market Resumes or Just More Noise - 26th June 16
Gold And Silver: Security, And BREXIT - 25th June 16
Dow, Euro & Brexit Recap - 25th June 16
Resistance Holding Gold Stocks after Brexit - 25th June 16
Venezuela vs. Ecuador (Chavismo vs. Chavismo Dollarized) - 25th June 16
Gold, Silver And PM Stocks Summer Doldrums Risk - 24th June 16
Here’s Why China “Economic Hard-Landing” Worries Are Overblown - 24th June 16
Jubilee Jolt: Markets Crash, Gold Skyrockets as Britain Takes Brexit - 24th June 16
BrExit Morning - New Dawn for Britain, Independence Day! - 24th June 16
LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - 24th June 16
Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - 24th June 16
EU Referendum Shock Results Putting BrExit LEAVE in the Lead Hitting Sterling Hard - 24th June 16
Final Opinion Poll Gives REMAIN 52% Lead, Bookmakers, Markets and Pollsters ALL Back REMAIN Win - 23rd June 16
Does BREXIT Matter? Outlook for Sterling - 23rd June 16
Keep Calm and Vote BrExit - Last Chance to Break Free of EU Superstate - 23rd June 16
Here’s the Foreign Policy Trump and Clinton Really Want - 23rd June 16
Details Behind Semiconductor Stocks Leadership - 23rd June 16
Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - 23rd June 16
BrExit Looks Set to Win EU Referendum, Final Opinion Polls Give LEAVE Lead Over REMAIN - 22nd June 16
Proof that the Gold Bears are Wrong - 22nd June 16
Here’s a Trillion-Dollar Investment Opportunity for Those Few with No Debt - 22nd June 16
BrExit to Save Europe from Climate Change Refugee Migration Apocalypse - 22nd June 16
Increase In U.S. Rig Count Will Not Cap Oil Prices - 22nd June 16
Are Copper and China Stocks Set to Rally? - 22nd June 16
SPX May Break Its Trendline - 22nd June 16
Believe it or Not: More Kids Live At Home Now than Since The Great Depression - 21st June 16
EU Referendum Latest Opinion Polls Show LEAVE Halting REMAINs Surge - 21st June 16
British Pound Outlook - BREXIT, Europe and You - Does your vote matter? - 21st June 16
Fascist Victory Behind the European Union - 21st June 16
EU Referendum Opinion Polls Analysis Shows Strong Momentum in REMAINs Favour - 21st June 16
Is It Time to Dump Gold and Buy Platinum? - 21st June 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Market Volaility

No Easy Fix for Gas Prices

Commodities / Gas - Petrol Feb 29, 2012 - 02:01 AM GMT

By: Peter_Schiff

Commodities

Best Financial Markets Analysis ArticleThis month, as unleaded gasoline prices increased for 17 consecutive days (to a national average of $3.647 per gallon - up 11% thus far this year) and West Texas Intermediate crude joined Brent crude in breaking through a $100 per barrel level, energy prices emerged as a full blown political issue. While President Obama conveniently claimed that rising prices were the consequence of an improving economy (they're not, and it isn't) Republican fingers began to point sanctimoniously at current drilling policies. And while none of the accusers had any idea why prices were actually going up, the award for the most dangerous 'solution' must go to Bill O'Reilly at Fox News. The master of the "No Spin Zone" announced that high pump prices could be permanently brought down by a presidential order to restrict exports of refined gasoline. Not only does Mr. O'Reilly's idea demonstrate contempt for the U.S. Constitution but it also displays a thorough lack of economic understanding.


Oil and gas prices are high now for a very simple reason: the U.S. Federal Reserve has gone on an unapologetic campaign to push up inflation and push down the value of the U.S. dollar. Just last week on CNBC James Bullard, the President of the Federal Reserve Bank of St. Louis, stated this unequivocally. What is somewhat overlooked is the degree to which an inflationary policy at home creates inflation abroad. Many countries who peg their currencies to the U.S. dollar need to follow suit with the Fed. As China, for example, prints yuan to keep it from appreciating against the dollar, prices rise in China. This is especially true for commodities like crude oil.

Many critics, such as Mr. O'Reilly, have relied on a limited understanding of the supply/demand dynamic to question why gas prices are currently so high at home. With domestic gasoline production at a multi-year high and domestic demand at a multi-year low, he logically expects low prices. But he fails to grasp the fact that the price of gasoline is set internationally and that U.S. factors are only a component.

O'Reilly's loudly proclaimed solution is to limit the ability of U.S. refiners (and drillers) to export production abroad. If the energy stays at home, he argues, the increased supply would push down prices. Although O'Reilly professes to be a believer in free markets he argues that oil (and gasoline by extension) is really a natural resource that doesn't belong to the energy companies, but to the "folks" on Main Street. What good would "drill baby drill" do for us, he argues, if all the production is simply shipped to China?

First off, the U.S. government has no authority whatsoever to determine to whom a company may or may not sell. This concept should be absolutely clear to anyone with at least a casual allegiance to free markets. In particular, the U.S. Constitution makes it explicit that export duties are prohibited. Furthermore, energy extracted from the ground, and produced by a private enterprise, is no more a public good than a chest of drawers that has been manufactured from a tree that grows on U.S soil. Frankly, this point from Mr. O'Reilly comes straight out of the Marxist handbook and in many ways mirrors the sentiments that have been championed by the Occupy Wall Street movement. When such ideas come from the supposed "right," we should be very concerned.

But apart from the Constitutional and ideological concerns, the idea simply makes no economic sense.

In 2011 the United States ran a trade deficit of $558 billion. For now at least America has been able to reap huge benefits from the willingness of foreign producers to export to the U.S. without equal amounts of imports. China supplies us with low priced consumer goods and Saudi Arabia sells us vast quantities of oil. In return they take U.S. IOUs. Without their largesse, domestic prices for consumers would be much higher. How long they will continue to extend credit is anybody's guess, but shutting off the spigots of one of our most valuable exports won't help.

In recent years petroleum has become an increasingly large component of U.S. exports, partially filling the void left by our manufacturing output. According to the IMF, the U.S. exported $10.3 billion of oil products in 2001. By 2011, this figure had jumped nearly seven fold to more than $70 billion. How would our trading partners respond if we decided to deny them our gasoline?

Keeping more gasoline at home could hold down prices temporarily, but how much better off would the "folks" be if all the prices of Chinese made goods at Wal-Mart suddenly went up, or if such products completely disappeared from our shelves because the Chinese government decided to ban exports that they declared "belonged to the Chinese people?" What would happen to the price of energy here if Saudi Arabia made a similar decision with respect to their oil?

But most importantly, limiting the ability of U.S. energy companies to export abroad will do absolutely nothing to improve the American economy. As a result of our diminished purchasing power, American demand for oil has declined in relation to the growing demand abroad. Consequently, we are buying a continually lower percentage of the world's energy output. Consumers in emerging markets can now afford to buy some of the production that used to be snapped up by Americans. If U.S. suppliers were limited to domestic customers, then prices could drop temporarily. But what would happen then?

With the U.S. adopting a protectionist stance, and with gasoline prices in the U.S. lower than in other parts of the world, less overseas crude would be sent to American refineries. At the same time lower prices at home would constrict profits for domestic suppliers who would then scale back production (and lay off workers). The resulting decrease in supply would send prices right back up, potentially higher than before. The only change would be that we would have hamstrung one of our few viable industrial sectors. (For more about how diminishing supplies could exert upward pressures on a variety of energy products, please see the article in the latest edition of my Global Investor newsletter).

Mr. O'Reilly can spin this any way he wants it, but he is dead wrong on this point. It is surprising to me that such comments have not sparked greater outrage from the usual mainstream defenders of the free market. To an extent that very few appreciate, America derives a great deal of benefits from the current globalization of trade. Sparking a trade war now would severely reduce our already falling living standards. And given our weak position with respect to our trading partners, such a provocation may be the ultimate example of bringing a knife to a gun fight.

Rather than bashing oil companies, O'Reilly, as well as other frustrated American motorists, should direct their anger at Washington. That is because higher gasoline prices are really a Federal tax in disguise. The government's enormous deficit is financed largely by bonds that are sold to the Federal Reserve, which pays for them with newly printed money. Those excess dollars are sent abroad where they help to bid oil prices higher.

For years, mainstream economists argued that as long as unemployment remained high, the Fed could print as much money as it wanted without worrying about inflation. The argument was that the reduction in demand that results from unemployment would limit the ability of business to raise prices. However, what those economists overlooked was the simultaneous reduction in domestic supply that results from a weaker dollar (the consequence of printing money).

I have long argued that neither recession nor high unemployment would protect us from inflation. If demand falls, but supply falls faster, prices will rise. That is exactly what is happening with gas. The same dynamic is already evident in the airline industry. Fewer people are flying, but prices keep rising because airlines have responded to declining demand by reducing capacity. Since seats are disappearing faster than passengers, airlines can raise prices. At some point Americans will be complaining about soaring food prices as much more of what American farmers produce ends up on Chinese dinner tables. Because the Fed is likely to continue monetizing huge budget deficits, Americans are going to be consuming a lot less of everything, and paying a lot more for those few things they can still afford.

For full access to the March 2012 edition of the Global Investor Newsletter, click here.

New Special Report:For an even more in depth look at the prospects of international currencies, download Peter Schiff's and Axel Merk's Five Favorite Currencies for the Next Five Years.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by John Browne, Peter Schiff, and other Euro Pacific commentators delivered to your inbox every Monday.

For a great primer on economics, be sure to pick up a copy of Peter Schiff's hit economic parable, How an Economy Grows and Why It Crashes.

Regards,
Peter Schiff

Euro Pacific Capital
http://www.europac.net/

Peter Schiff Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife