Video: Gas Prices Explained

I missed this one from Omid Malekan a few weeks. You can tell based on a reference to winter gasoline prices being the highest ever in the video. It’s still a good primer on gas/petrol prices for those of you who are interested.

Speculators probably do have something to do with oil prices though. Remember that commodities have been financialized and that means when the Fed is artificially suppressing rates, people get killed in fixed income and annuities and this buoys demand for alternative investments. It’s called risk seeking return. I wrote a premium article on this last week saying:

What is clear is that the high oil prices are a tax on lower-income workers and emerging markets where a larger percentage of take-home pay is used up by food and energy. This makes the rise in oil and commodity prices generally a socially combustible issue that could lead to riots as it has in the past. Some are predicting just this for 2013… My sense is that politicians will not be able to get to grips with this problem during the election cycle because there are multiple problems (Mideast tensions, supply bottlenecks, peak oil, commodity financialization, etc). So it is likely that the oil price will rise until we hit demand destruction again. That’s my prediction of what is likely to occur.

Omid also wrote me:

I got a bunch of requests from people for a cartoon on gas prices so I threw one together. It amazes me how you could read 10 MSM articles on why gas prices are so high, and not one will reference the falling dollar. I put a chart into the cartoon at the end that to me speaks volumes. Even I was surprised as to the level of the correlation.

Video below

  1. Pacioli says

    This is a cute video – but largely false.

    Gas prices and stocks correlate closely because both are levered to economic activity.

    The value of the dollar is up 4% over the last year. During the same time frame, gas prices are up 12%. So both are up – therefore the supposed inverse relationship with the direction of the $USD does not appear to be true at all.

  2. Keating Willcox says

    In the past decade, the value of the dollar as against other currencies has dropped about a third. It has been stable to rising recently, but overall, a higher price in energy and any imports would seem logical. The video minimizes speculators but the gasoline price shift from $3 to $4 to $2 in 2008 was due to manipulation on a massive scale, and this year’s price change may have some of that.

  3. Edward Harrison says

    The graph depicting the lockstep change in the dollar’s value and the rise in house prices is not central to my read of this video, nor should it be to anyone’s. What the video breaks down, however, is that gas prices are not controlled by gas retailers any more than orange juice prices are controlled by food retailers. The main point is that the rise in gas prices are a global phenomenon that have many potential causes. I discount the currency cause and look more to supply-demand imbalances and financialized commodity markets as I indicated in this post.

  4. David Lazarus says

    The fact that US refiners are exporting for the first time in decades is another factor. They can get more for their output abroad. China is probably stockpiling oil while the US is draining its strategic reserves as well.

  5. TiPs says

    Try to find a negative correlation between oil and the $ prior 2000; you won’t because it’s a relatively recent phenomenon. It coincides with the 2000 CFMA and the financialization of commodities. Investors believe QE will lead to inflation, then hedge by buying commodities via ETFs, swaps, etc, creating a self-fulfilling prophecy.
    We end up with mini bubbles like the current one and last year’s that popped the first week of May. And, btw, there was no move in the dollar that week when oil fell by the maximum one-day allowable on the CME.

    1. David Lazarus says

      You are right the expectation of QE causing inflation. Though QE only has limited outlets. No one is touching MBS because they are toxic. Interbank is too much of a gamble still, and that can be seen by the volume of overnight deposits with central banks. Stocks by all but the most optimistic measures are overpriced, and have already risen enough. Real Estate is too illiquid. So that leaves commodities. There may be limits to the carry trade as some nations have trapped money their via credit controls so everything points to commodities again.

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