Sunday, March 18, 2012

Lower Gasoline prices requires wise energy and economic policy

The biggest impact of gasoline prices this time of the year is the poor valuation of the dollar combined with the Iran risk premium on the price of raw crude. As we get into late spring and summer some refinery units have scheduled required maintenance while others switch to summer state-specific formulations which allegedly reduce pollution. As we get into May and June there will be no excess gasoline inventory and prices will likely rise sharply if demand for the product is anywhere near normal.

The effect of increased US supply of crude would be to keep dollars here in the US where they can circulate. It will also lower the Iran/Middle East Risk premium off the base price, increased predictability of gasoline and other distillate inventory will lower the futures prices.

Removal of risk premiums would probably lower prices toward the $3 - $3.15 gallon area (My thinking is a 25% of the price is risk premiums). A shift in monetary policy to shrink the money supply (higher interest rates) and cleanse the dollar of toxins which are also lowering it's spending power would probably send gas prices to $2.50 or even lower. One reason that gasoline averaged $1.78 at the time of Pres Obama's inauguration was the collapse in money supply brought on by the financial crisis in 2008.

President Obama's policies to increase supplier costs (through taxes and regulations) and lower the reliability of supply (restrict drilling, exploration, deny Keystone) definitely plays a strong role in increasing the cost of finished product (gasoline). Fed Chairman Ben Bernanke along with Federal Spending that went from unacceptable(!) (President Bush) to destructive (President Obama) is flooding the US with dollars which are not backed by goods or services. Further distorting the economy is how ordinary people are not in the pipeline for those dollars YET bear the brunt of rising prices of goods and services that has resulted.