WANT LOWER GAS PRICES? STOP DEFICIT SPENDING!

The seventh post in the series "The 5-minute ENERGY Blog" on America's energy future by Tim Dunn, CEO of Crown Quest Operating and board member of the Texas Public Policy Foundation follows. Earlier posts can be found here.

The 5-minute ENERGY Blog

POST 7: WANT LOWER GAS PRICES? STOP DEFICIT SPENDING!

No doubt oil supply/demand has a major impact on gasoline prices, and prices are easing in recent weeks. But there is an excellent argument that a key reason gasoline prices are high is because of Federal deficit spending. With the Federal Reserve monetizing trillions in deficits by printing money, purchasing power will inevitably shrink due to an oversupply of dollars.

This could actually go unrecognized for a key reason: Federal Reserve Chairman Ben Bernanke uses a “core CPI index” that excludes food and energy to guide monetary policy. From Big Ben’s point of view, rising gasoline prices are not a problem.

You can see this readily if you think about oil prices in terms of gold prices; in terms of gold, oil prices are actually in a lower range.Think of it, if the dollar was linked to gold, gasoline prices would be down substantially. There is no inherent limit to how far the price of gold in dollars can rise, and therefore no ultimate ceiling on gasoline prices so long as the Fed can print money.

Ludwig von Mises said “A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource

of any economic policy whose consequences have to be concealed; …When governments do not

think it necessary to accommodate their expenditure and arrogate to themselves the right of making up the deficit by issuing notes, their ideology is merely a disguised absolutism.

The Federal Reserve has eliminated food for humans and food for our economy, energy, from the inflation computation. Don’t you think that fits the above description of an “economic policy whose consequences have to be concealed?”

I think voters intuitively understand this. They know the lack of fiscal responsibility by Congress is linked to our economic malaise.

This graph from Consumer Reports shows something most people don’t consider when thinking about gasoline prices: the Federal Reserve has a consistent, predictable plan to raise all prices by eroding the dollar.

At roughly $100 per bbl, oil is only about 80% of its average over the past 41 years in terms of gold. Assuming a gold price of $1,760/oz, oil prices would have to rise to about $129/bbl, in order to reach its long-term average in terms of gold.

During the 1970s, the toxic combination of a weak dollar, high tax rates, and onerous regulations introduced a new word into America’s economic vocabulary: stagflation. Reaganomics banished this word to the history books. Now, President Obama and Fed Chairman Bernanke are teaming up to give stagflation another go. It is not likely that Americans will like it any more this time around than they did 40 years ago.

I think the increase in prices from the Fed’s printing press has only just begun. Americans should be ticked off because of high gasoline prices. And their ire should be focused on Congress and the President. And until spending is under control, gasoline prices will continue to rise a lot more than they should.

*I got much of this from Lois Woodhill’s Forbes article at:

http://www.forbes.com/sites/louiswoodhill/2012/02/22/gasoline-prices-are-not-rising-the-dollar-is-falling/