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Thursday, July 31, 2008

The Public Will Reduce Gasoline Prices By Driving Less

Why Are Gasoline Prices So High? Experts give 3 reasons: 1) Supply & Demand, 2) Speculation and 3) Drop in Value of the Dollar. World production is around 86 million barrels of oil per day and consumption is at about 85 million barrels per day. The USA uses about 20 million barrels of oil every day. We import about half to 60 percent of our oil. Do the math. China and India will only use more oil and unless production is increased, the price will continue to rise. AAEA will be promoting coal-to-liquid instead of offshore drilling as the best method for increasing domestic oil supplies.

Airlines, trucking and heating oil industries believe speculation in the markets, particularly by institutional investors who do not intend to receive delivery of oil are at least partly responsible for high oil prices. Congress is having trouble defining speculation in a form it can legislate to try to regulate illegitimate and legitimate hedge trading. Experts guess that speculation can account for 40-60 percent of the current increase in the price of a barrel of oil.

When the value of the dollar falls, the nominal dollar prices of internationally traded commodities, like gold, rice, and oil, must increase because more dollars are required to purchase the same quantity of any commodity. Accordingly, a weak dollar should signal higher commodity prices. And it does. For example, if the dollar had held its January 2001 value against the Euro, oil would have traded at about $76 a barrel in May 2008. This is almost $50 below the price that crude oil was trading at in May 2008. Accordingly, the decline of the dollar’s value accounted for a whopping 51% of the $97 a barrel increase in the price of oil from May 2003-2008. The July euro stood at $1.57 and the yen at about 107.83. The value of the dollar makes commodities more or less attractive to investors buying oil futures as a hedge against inflation and weakness in the U.S. currency.

The public response to the +$4 per gallon gasoline price is to drive less. This though is having the effect of reducing the taxes for the Highway Trust Fund, which finances highway and mass transit projects. Congress will have to authorize billions to make up for the loss to maintain project schedules. Source: Cato Institute

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