Thursday, February 23, 2012

Why gas prices are increasing

Drivers in Atlanta and around the country are noticing rising gas prices.  According to historical data from, the Atlanta average gas price is now $3.588, even higher than the national average of $3.543.  Atlanta area gas prices have risen over 13 cents per gallon in the past month and almost 50 cents per gallon in the past year.  A year ago, Atlanta gas prices were almost 10 cents below the national average.  Economists predict that $4 gas will be a reality this summer and could rise even higher.

In the past half century, oil prices have historically fallen during recessions and then climbed again as the economy improved. This pattern was seen in 2008 as gas prices fell from record highs in the summer to sharp lows after the onset of the economic crisis in August.  According to this historical view, gas prices could be expected to rise as the economy recovers.

The problem with this theory is that, as Dick Morris recently pointed out, the current economic recovery is an illusion.  Changes in the way financial metrics are calculated and cherry-picked statistics mean that while a recovery appears to be underway statistically, the reality is that most Americans are not experiencing it.  As Morris notes, the stock market may be up, but the volume of trading is down because most ordinary Americans are no longer in the market.  The housing markets are still not recovering four years after the real estate bubble burst in 2008.  Housing starts are still at 20 year lows according to the National Association of Home Builders.  Foreclosure rates are up while the average sale price of homes is down according to RealtyTrac.  Georgia remains one of the highest foreclosure states.

Unemployment rates may be down marginally, but it isn’t because more Americans are working.  The Bureau of Labor Statistics changed the population estimates used in determining the unemployment rate in January 2012 just before the rate took a downward plunge.  The BLS notes that “these annual population adjustments affect the comparability of household data series over time” because previous data was not corrected.  Unlike the unemployment rate, the civilian labor force participation rate has not shown signs of recovery.  Similarly, Gallup’s employment survey remains flat.

Even though the U.S. economy isn’t in recovery, other countries are doing better.  Growing economies such as that of China are demanding more oil, which causes the price to increase around the world.

In the absence of a recovery, there are other reasons for the increase in gas prices.  One obvious factor is inflation.  According to a January 2012 report from the Bureau of Labor Statistics, the core inflation rate was only 2.3 percent in 2011.  This rate does not include food and energy, however.  Energy costs have risen by 6.1 percent over the past year, while food costs are up by 4.4 percent. 

One reason for the inflationary costs is the Federal Reserve’s policy of quantitative easing.  The Fed has tried to stimulate the economy by injecting more dollars into the economy.  A basic principle of economics is that when supply increases, price decreases.  In the case of quantitative easing, this means that as the Fed orders more dollars into the system, the value of each individual dollar decreases.  Each dollar buys less as a result.  This means that interest rates stay low, which helps borrowers.  A problem, however, is that imported goods, like barrels of oil, cost more dollars because each dollar is worth less.

Another factor in the rising oil and gas prices is the unrest in the Middle East.  Oil prices often rise and fall with tensions in oil producing regions.  The Iranian nuclear crisis is bringing the region to the brink of war with the possibility of an Israeli strike on Iranian nuclear facilities.  Secretary of Defense Leon Panetta told that if Israel attacks Iran oil prices, currently at about $100 per barrel, could go anywhere “between $200 and pick-a-number.”  There is also a civil war raging in Syria and unrest in Egypt in the aftermath of the Arab Spring revolt there.  There is also uncertainty over the future of Afghanistan and Iraq, another major oil producer, as U.S. military operations in those countries end. 

Other factors are at play as well.  The Obama Administration’s decision to cancel the Keystone pipeline means that American refineries are denied a source of cheap oil from Canada.  Similarly, Obama has made it difficult and expensive to drill for oil domestically and off U.S. shores, which means that the supply of oil is artificially limited, keeping prices high.  Ironically, the oil from Canada that would have gone to U.S. refineries is likely to go to China after President Obama’s decision.

Other factors, such as weather and refinery closures can also affect the supply of oil and therefore the price.  These factors are reported and analyzed weekly by the Energy Information Administration on its petroleum page.  For example, there have been several Caribbean refineries that previously sent gasoline to the U.S. east coast have closed recently according to the February 23 report.

In the end, there are only two ways to reduce the price of oil and gasoline.  Either the supply must be increased or demand must be reduced.  The Obama Administration is taking only token steps to expand oil exploration and drilling, while demand continues to increase around the world.  Demand will likely continue to rise unless the upward pressure of oil prices or some other factor causes the world to slide back into recession.

This article originally published on

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