The truth about high gas prices

Guest post by Daniel Wilson.

United States gasoline prices are up over 13 percent since the start of the new year, standing at a national average of $3.92 a gallon. On a seasonal basis and in nominal terms, gas prices are the highest ever.

High and escalating gas prices have become a major political issue with numerous politicians and pundits in the media quickly coming to false conclusions on the issue.

One of the most common fallacies perpetrated by politicians on both sides of the aisle is that investors speculating in futures markets cause prices to rise and fluctuate dramatically.

Typically so, politicians have it backwards, speculators actually play a vital and important role in the economy. Speculators make markets more liquid by adding additional buyers and sellers, thus aiding transactions and improving efficiency. Also, speculators actually make markets less volatile. In order for speculators to make money they have to buy low and sell high. Buying at a low price, increases the low price, and selling at a high price, lowers the high price, causing the market price to have a lower variance in the long run.[1]

In addition, a recent study by the Federal Reserve Bank of Dallas demonstrated that speculators didn’t contribute to the run up in oil or gas prices over the last decade.[2]

Another common myth about gas prices is that the big oil companies control and manipulate prices upwards in the name of greed and corporate profits. This myth runs wild within the Democratic party, many of them have recently scolded the oil companies for price-fixing gas and oil to profit at the expense of everybody else. Oil companies control gas prices like grocery stores control cereal prices. Measured by profit margins, oil companies rank 114 out of 225 different industries.[3] Big oil companies, like Exxon Mobil only earn seven cents per gallon of gas. Compare that to the $.50 a gallon excise tax that’s embedded into the price of gas that local and federal governments collect.[4] In other words, governments are collecting seven times more in taxes than oil companies make per gallon of gas. So, the next time you fill up at a gas station, ask yourself, who’s actually greedy, big oil or big government?

One of the most conspicuous causes of higher oil and gas prices, that often goes ignored, is the depreciating value of the U.S. dollar on international exchange markets. People generally accept that individual prices go up or down based on changes in supply and demand. However, they fail to understand that the value of the dollar, in which goods are priced, is also determined by supply and demand. Therefore, when the Federal Reserve system prints excessive amounts of money for misguided political and economic reasons, the supply of US dollars increases, which then reduces the value of the dollar. Over the past 10 years the US dollar has lost 35 percent of its international exchange value. This means that commodities, such as oil, that are sold in international markets denominated in dollars, have to go up in price since the value of the dollar has fallen. To sum this up, when the value of the dollar falls from an increase in its supply, everything priced in dollars becomes more expensive, it’s called inflation.

Measured in Swiss francs, a strong currency, the price of oil has risen to a less extent. For example, since 2010 the price of oil has risen by 15 percent in Swiss francs, but 30 percent in US dollars.[5] Measured in terms of gold, which has historically been used as a monetary unit, oil prices are below their 40 year average.[6] Both of these measurements indicate that a large portion of higher gas prices are due to a falling U.S. dollar.

The Joint Economic Committee released a study showing that just a 10 to 15 percent appreciation in the dollar would lower gas prices by 43 cents.[7]

Politicians should stop wrongfully blaming big oil companies and speculators and worry about the real problem that threatens this country’s economic future and that’s the declining dollar. The resurgence of a strong greenback would lower gas and oil prices more than any other political solution.


[1] http://mjperry.blogspot.com/2011/05/money-making-speculators-must-stablize.html

[2] http://www.dallasfed.org/assets/documents/research/eclett/2011/el1110.pdf

[3] http://mjperry.blogspot.com/2011/05/oil-profit-margin-ranks-114-out-215.html

[4] http://mjperry.blogspot.com/2011/04/gasoline-taxes-per-gallon-vs-exxon.html

[5] http://4.bp.blogspot.com/-m4ANcWg-3QY/T15i6jps4lI/AAAAAAAARBo/eBQ8GuMe5hE/s1600/wti.jpg

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

[7] http://www.cnbc.com/id/46763891

Daniel Wilson is a senior who is majoring in economics at James Madison University.

3 Replies to “The truth about high gas prices”

  1. Like Mr. Wilson, I appreciate good citations.

    1. Mark J. Perry, the author of the blog that is cited multiple times in this post, went to great pains to tell people about how gas wasn’t so expensive in 2005 despite people’s fears, describing a “money illusion” – http://www.usatoday.com/news/opinion/editorials/2005-05-31-gas-prices-edit_x.htm

    2. While Mr. Wilson correctly notes that taxes take up a portion of the cost of gas, he fails to note the subsidies for the oil industry that at least one former Shell CEO acknowledges and says are unnecessary – http://www.nationaljournal.com/daily/ex-shell-ceo-says-big-oil-can-live-without-subsidies-20110211

    3. The VA Conservative also has a distaste for subsidies, at least where his Pepsi is concerned – http://virginiaconservative.wordpress.com/2009/10/05/thrown-back

    4. The citation at [7] to which the whole post seems to build is a Larry Kudlow reference to a JEC ‘report’, not the actual report. I would’ve appreciated actual material rather than a passive reference at a passive reference. The best I could find on my own was a link (via Perry’s blog, actually) to one random graphic from the Republican portion of the JEC (on a separate site, not the whole committee’s site) – http://jec.senate.gov/republicans/public/index.cfm?p=Charts&ContentRecord_id=48265c3f-c2b5-4cad-b67e-ec52ae812626

    5. A much more comprehensive graphic about gas prices can be found here (depending on how biased you think NPR’s numbers are) – http://www.npr.org/2012/03/06/148087543/whats-behind-these-high-gas-prices

    6. While the effect of speculators on the market is uncertain (I not convinced by Mr. Wilson’s argument), the limited supply of oil from OPEC seems to be quite important – http://www.npr.org/blogs/money/2012/04/02/149684373/the-real-reason-gas-costs-4-a-gallon

    7. The concern for a strong dollar may be frustrated by how much the dollar fluctuates due to the world currency market and other countries’ currency manipulations (depending on your trust of the NY Times and Obama’s economic advisers) – http://www.nytimes.com/2011/05/22/business/economy/22view.html?pagewanted=all

    While Mr. Wilson gave some interesting information, it seems mostly like a rehash of various arguments from Perry’s blog. These arguments are limited in scope on both blogs. Both Republicans and Democrats would benefit from an analysis of economic problems that runs deeper than ‘don’t tax me’ or ‘make the company pay’.

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