Thursday, April 28, 2011

Why Gas Prices Are Rising?

A lot of folks blame Obama. Republicans have tried the old mantra drill, baby, drill.  Always exploit American ignorance with cheap politics is the name of the game when you're a republican. Fortunately for them, there's a lot of ignorance to be exploited. There's no short term solution to high gas prices, only a long term solution, but once again, Americans don't often think long term. Anyway, here's what Ben Bernanke said yesterday and I've posted some other sources that explain gas prices:
CHAIRMAN BERNANKE: So first of all, gasoline prices obviously have risen quite significantly. And we of course are watching that carefully. Higher gas prices are absolutely creating a great deal of financial hardship for a lot of people.

And gas, of course, is a necessity. People need to drive to work. So it's obviously a bad development to see gas prices rise so much.

Higher gas prices, higher oil prices also make economic developments less favorable. On the one hand obviously the higher gas prices add to inflation. On the other hand, by draining purchasing power from households, higher gas prices are also bad for the recovery. They cause growth to decline as well. It's a double wham my coming from higher gasoline prices.

Our interpretation of the increase in gas prices is the economist basic mantra of supply and demand. On the one hand we have a rapidly growing global economy, emerging market economies are growing very quickly. Their demand for commodities including oil is very, very strong. Indeed, essentially all of the increase in the demand for oil in the last couple of years, in the last decade has come from emerging market economies. In the United States our demand for oil, our imports have been actually going down over time.

The demand is coming from a growing economy where we have seen about a 25 percent increase in emerging market output since before the crisis. On the supply side, as everybody knows who watches television, we have seen disruptions in the Middle East and North Africa, Libya and other places that have constrained supply. That supply is not made up and that has in turn driven up gas prices significantly.

This is an adverse development. It accounts in the short-term for the increase, all of the increase in our inflation forecast at least in the very near term.

There's not much that the Federal Reserve can do about gas prices per se. At least not without derailing growth entirely, which is certainly not the right way to go.

After all, the Fed can't create more oil. We don't control the growth rates of emerging market economies. What we can do is basically try to keep higher gas prices from passing into other prices and wages throughout the economy and creating a broader inflation which will be much more difficult to extinguish.

Again our view is that most likely -- of course we didn't know for sure but we will be watching carefully -- is that gas prices will not continue to rise at the recent pace. As they stabilize or even come down if the situation stabilizes in the Middle East, that will provide relief on the inflation front, but we have to watch it very carefully.
The age of cheap oil is over.
Some blame speculators.
FTC says market fundamentals --supply and demand -- not illegal activity are causing higher prices.