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Old 06-08-2009, 02:35 PM
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Default That's Another Part Of the Gas Price Runup
Yes, the sagging value of the dollar is another reason why the price of gas is increasing. OPEC and other world suppliers of oil have agreed that payment for oil shall be in U.S. dollars. (They're currently considering switching to Euros because of the dramatic decline in the value of the dollar--that would really have a bad impact on the price we pay for gas. But that's a problem for another day.) If you want to see how precipitously the value of the U.S. dollar has declined compared to other currencies, go to this website http://www.fxstreet.com/rates-charts/usdollar-index/ It's a Java script display and may take a minute to load, even if you have a fast internet connection.

So, there are several factors that effect the price we pay for gas...
  • Demand for gas. Lots of things can affect that--the economy, fuel efficiency of cars and trucks, temporary blips in demand, like holiday weekends, etc.
  • Supply of gas and oil. The gas pipelines are usually pretty constant. There can be some temporary interruptions like Hurricane Ike, which shut down a major refinery on the Gulf Coast and drove the price of gas up to near $5 a gallon in the southeast U.S., if you could get gas at all. OPEC also controls the supply of oil by adjusting how much they pump and ship based on demand and price.
  • The value of the dollar. Just because oil suppliers demand payment in U.S. dollars doesn't mean they agree to assume the foreign exchange risk of a devaluing U.S. dollar. Typically, if the dollar declines in value the oil suppliers will quickly reduce the amount of oil they ship in order to drive the price per barrel upwards (in U.S. dollars).
The reason the price of gasoline moves so closely in comparison to the value of the dollar is that there is a very active market in financial derivatives that keeps the price of gas in line with the expected oil shipments based on the value of the dollar and other factors. There is also an active oil futures market. I've read reports that an imbalance in demand for oil futures has driven the price of oil and gasoline up, mostly as the result of investors re-allocating towards commodities and oil in particular to escape concentration in the equities or bond markets.

Of course, there can and are "other factors". It is quite clear that at times the OPEC countries act in consort with one another to influence political decisions here in the U.S. Maybe the most dramatic one was when OPEC shut down production dramatically during the 1967 war between Israel the neighboring states of Egypt, Jordan, and Syria. That action resulted in long lines at gas stations, increased cost of gas, even many stations that ran out of gas. OPEC, made up of Muslim countries, shut off our supply of oil as a "message" that they disapproved of U.S. support for Israel. The war ended quickly--in only six days as the result of Israel's military strength--but even so the U.S. "got the message". There have been other times when the Middle Eastern countries adjusted the flow of oil to influence political decisions here in the U.S., but none so blatant as happened during the 1967 war.

So it's easy to see that the price of gas is a lot more dependent on lots of factors and people. We cannot "drill our way out" of this dependency. There are simply not enough proven oil reserves under U.S. control that can be accessed in anything less than 10-20 years. The only real solution to reducing our dependency on foreign nations, particularly the Middle East, is to dramatically reduce our use of gasoline. With the newly enacted CAFE standards and the pressure the government has placed on GM and Chrysler to build more fuel-efficient cars and trucks, along with high unemployment and a crappy economy, our use of gas is declining pretty noticeably. But like I tried to explain above, that doesn't always result in lower gas prices. And the relationship between U.S. consumption of gas and it's price isn't always linear. As we reduce consumption, OPEC will reduce output in an effort to keep the flow of income to them coming at a desired rate. The problems resultant from dependency on a strong and well-disciplined cartel is a hard one to beat in the short term. If the U.S. truly reduces it's use of oil over time, market forces will eventually come to bear. But having short term expectations is likely to leave us all disappointed.