Why Gas Prices Are High

By Richard White ©2008, Richard@TalkWithCAM.com

It is not that gas is high; it is because the dollar has been devalued. Check the price of a dollar against any foreign currency and you will see that our dollar has been devalued to the point it has modest purchasing power. This article will address main reasons why our United States Dollar is so devalued which will answer why we pay such a high price for our gas. Unless we control the value of the dollar, gas will continue to rise. While we need to address economic reasons, this article will not go too deeply into the philosophy of economics. Nevertheless, we must touch on a little monetary history and discuss inflation.

In 1950 my high school taught us about inflation. It seems that today that subject is missing from the curriculum. The problem that my teacher gave us was as follows: she said that today (1950) we have about 50 years of known oil reserves (about 60 billion barrels) and the cost of gas is $.10 a gallon: yes, a dime would buy a gallon of gas. The cost of milk is the same cost for a gallon, a dime. We were to calculate the cost of gas and milk in 50 years. That date was 2000. My teacher also told us that the Federal Reserve has a strategy to develop controls to sustain inflation at around 3% a year. Our teacher told us to keep in mind that oil was a depreciating commodity and milk was a restoring commodity. We will come back to this problem at the end of this report.

From the InflationData.com, the average inflation for each decade since follows: 1950 to 1959 was 2.05%, 1960 to 1969 was 2.36%, 1970 to 1979 was 7.09%, 1980 to 1989 was 5.55%, and 1990 to 1999 was 3.00%. So the goal of 3% seems to hold to the Federal Reserve's strategy. But let's take a look at the Federal Reserve's goals or functions. The Federal Reserve has three main functions: control the money supply, control inflation, and issue debt. Before we answer the question how they control inflation or create inflation, we need to understand what inflation is.

Inflation is not the rising cost of commodities and goods. The rising prices of these goods are a result of inflation. Inflation is caused by an increase in the volume of money and credit relative to a limited availability of goods resulting in a rise in the general price level. It is a situation of supply and demand. When the amounts of money and credit in circulation increases and productivity of goods increases at the same level, prices will remain the same. But if the amount of money and credit increase without a corresponding increase in available goods, prices will be forced up, thus inflation. It appears that the Federal Reserve tries to increase money supply and/or change the credit percentage to have inflation increases around the 3% figure. They feel that the 3% is good for stimulation of commerce. In past years, the Federal Reserve published the amount of money and credit in circulation. The Federal Reserve ceased publishing some of the money supply statistics in March 2006. The question arises about possible deception to devalue the dollar. Some scholars say that the true story of the government hiding the true inflation rate is because Social Security and government pensions because they are tied to the inflation rate.

Now there are a few other factors that reduce the purchasing power of the dollar. In the early 1900's we were on the gold standard. In the mid 1900's we were taken off the gold standard and silver was used but only for a few years. The gold standard broke down during World War 1 but officially in 1933 President Roosevelt nationalized gold. Before this time, our dollar was fixed in value to gold. Then in 1971 President Nixon abandoned the gold and silver backing of our dollar. Now our currency is not backed by anything except "good faith". It is called fiat money! This results in the value of the dollar reducing and foreign governments currency increasing. Thus we pay more for foreign goods such as oil because the dollar is worth less.

Now back to the teacher's question. In 1950 our coin, the dime, was 90% silver and was worth $.10. Today a 2008 dime is worth $.10 but it has been inflated and has little exchange power and has less silver percentage. The kicker is that if you had saved the 1950 dime since it was mostly silver; today a coin collector will pay you $6.00 for a slightly imperfect 1950 silver dime and up to $25.00 for an un-circulated dime. You could buy a gallon of gas with the 1950 coin and have change. By the way, this week I went to the grocery store and a gallon of milk was $4.15, just about the same as a gallon of gas, yet we do not hear complaints about the cost of milk. I can remember when a Coke cost a nickel and a loaf of bread cost a dime.

What does this have to do with the cost of gas and other commodities? Well everything because inflation not only involves milk, bread, soft drinks, and gas but all commodities. The teachers were teaching fiscal policy and monetary policy and how inflation caused prices to rise when I went to school. For the past 95 years we have experienced inflation primarily because of the Federal Reserve policies and other events involving the production of goods. (The Federal Reserve began in 1913.) It is not as if the government has been hiding the facts but I will admit they do use smoke to hide the information and you will need to dig out the answers. But in truth a trip to the grocery store each week should be a red flag that something is causing the prices to raise.

As to gas, we have a limited supply of crude oil that will deplete in the future. When will we exhaust the oil supply? It is published in Wikipedia that the oil reserves known today are about 1.2 trillion gallons. It also says that we have approximately 65 years of reserves before all oil is depleted with our current consumption. Others say that the world's oil consumption is increasing and that will deplete the oil in fewer years, one says in 20 years. It is the law of supply and demand. As the amount of oil is reduced, the price must rise. But there is another factor, and that is that the value of our dollar is dropping therefore requiring more dollars to buy a reducing commodity, oil. It would not surprise me that gas will double in price if we continue with the same financial policies in a couple of years.

So what can we do about this situation? First, require that our government make fiscal changes to strengthen the dollar. We do this by learning our history and changing our financial policies. We have a presidential election this year and must listen and learn what each candidate says about their plans for action to strengthen our purchasing power. Do not be hoodwinked by what your government can give to you in way of services but ask what your government can do to strengthen our dollar to allow you to buy more. One last question, today the news said gold was rising. Does the value of gold rise or does it take more devalued dollars to buy gold?