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Gasoline Prices Are Not Rising, the Dollar Is Falling
Topic Started: Feb 24 2012, 09:39 AM (865 Views)
Chris
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Fire & Ice Senior Diplomat
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Rivers, here's that story on rising gas prices I promised earlier...except it ain't rising gas prices.

Gasoline Prices Are Not Rising, the Dollar Is Falling
Quote:
 
Panic is in the air as gasoline prices move above $4.00 per gallon. Politicians and pundits are rounding up the usual suspects, looking for someone or something to blame for this latest outrage to middle class family budgets. In a rare display of bipartisanship, President Obama and Speaker of the House John Boehner are both wringing their hands over the prospect of seeing their newly extended Social Security tax cut gobbled up by rising gasoline costs.

Unfortunately, the talking heads that are trying to explain the reasons for high oil prices are missing one tiny detail. Oil prices aren’t high right now. In fact, they are unusually low. Gasoline prices would have to rise by another $0.65 to $0.75 per gallon from where they are now just to be “normal”. And, because gasoline prices are low right now, it is very likely that they are going to go up more—perhaps a lot more.

What the politicians, analysts, and pundits are missing is that prices are ratios. Gasoline prices reflect crude oil prices, so let’s use West Texas Intermediate (WTI) crude oil to illustrate this crucial point.

As this is written, West Texas Intermediate crude oil (WTI) is trading at $105.88/bbl. All this means is that the market value of a barrel of WTI is 105.88 times the market value of “the dollar”. It is also true that WTI is trading at €79.95/bbl, ¥8,439.69/barrel, and £67.13/bbl. In all of these cases, the market value of WTI is the same. What is different in each case is the value of the monetary unit (euros, yen, and British pounds, respectively) being used to calculate the ratio that expresses the price.

In terms of judging whether the price of WTI is high or low, here is the price that truly matters: 0.0602 ounces of gold per barrel (which can be written as Au0.0602/bbl). What this number means is that, right now, a barrel of WTI has the same market value as 0.0602 ounces of gold.

During the 493 months since January 1, 1971, the price of WTI has averaged Au0.0732/bbl. It has been higher than that during 225 of those months and lower than that during 268 of those months. Plotted as a graph, the line representing the price of a barrel of oil in terms of gold has crossed the horizontal line representing the long-term average price (Au0.0732/bbl) 29 times.

At Au0.0602/bbl, today’s WTI price is only 82% of its average over the past 41+ years. Assuming that gold prices remained at today’s $1,759.30/oz, WTI prices would have to rise by about 22%, to $128.86/bbl, in order to reach their long-term average in terms of gold. As mentioned earlier, such an increase would drive up retail gasoline prices by somewhere between $0.65 and $0.75 per gallon.

At this point, we can be certain that, unless gold prices come down, gasoline prices are going to go up—by a lot. And, because the dollar is currently a floating, undefined, fiat currency, there is no inherent limit to how far the price of gold in dollars can rise, and therefore no ultimate ceiling on gasoline prices....
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Stoney
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The stimulus and debt are just ways to raise taxes on everyone and the "tribal followers" will just deny it.
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Chris
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Injecting money into the economy cheapens it.
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Deleted User
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The US dollar is overvalued and has been for years. If it were not world reserve currency, it would be 30-40% lower than it is, compared to other hard currencies. It is quite interesting watching it against the Canadian dollar & Australian dollar. Both are currently stronger currencies, but the Canadian dollar tends to follow the US, because of our huge trade relationship. The Australian dollar which represents an economy maybe a bit weaker than Canada's, has risen further against the US dollar, doubling its value against it over the last few years. Its major trading base, however, is Asia, not the US.
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Mountainrivers
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Chris
Feb 24 2012, 09:39 AM
Rivers, here's that story on rising gas prices I promised earlier...except it ain't rising gas prices.

Gasoline Prices Are Not Rising, the Dollar Is Falling
Quote:
 
Panic is in the air as gasoline prices move above $4.00 per gallon. Politicians and pundits are rounding up the usual suspects, looking for someone or something to blame for this latest outrage to middle class family budgets. In a rare display of bipartisanship, President Obama and Speaker of the House John Boehner are both wringing their hands over the prospect of seeing their newly extended Social Security tax cut gobbled up by rising gasoline costs.

Unfortunately, the talking heads that are trying to explain the reasons for high oil prices are missing one tiny detail. Oil prices aren’t high right now. In fact, they are unusually low. Gasoline prices would have to rise by another $0.65 to $0.75 per gallon from where they are now just to be “normal”. And, because gasoline prices are low right now, it is very likely that they are going to go up more—perhaps a lot more.

What the politicians, analysts, and pundits are missing is that prices are ratios. Gasoline prices reflect crude oil prices, so let’s use West Texas Intermediate (WTI) crude oil to illustrate this crucial point.

As this is written, West Texas Intermediate crude oil (WTI) is trading at $105.88/bbl. All this means is that the market value of a barrel of WTI is 105.88 times the market value of “the dollar”. It is also true that WTI is trading at €79.95/bbl, ¥8,439.69/barrel, and £67.13/bbl. In all of these cases, the market value of WTI is the same. What is different in each case is the value of the monetary unit (euros, yen, and British pounds, respectively) being used to calculate the ratio that expresses the price.

In terms of judging whether the price of WTI is high or low, here is the price that truly matters: 0.0602 ounces of gold per barrel (which can be written as Au0.0602/bbl). What this number means is that, right now, a barrel of WTI has the same market value as 0.0602 ounces of gold.

During the 493 months since January 1, 1971, the price of WTI has averaged Au0.0732/bbl. It has been higher than that during 225 of those months and lower than that during 268 of those months. Plotted as a graph, the line representing the price of a barrel of oil in terms of gold has crossed the horizontal line representing the long-term average price (Au0.0732/bbl) 29 times.

At Au0.0602/bbl, today’s WTI price is only 82% of its average over the past 41+ years. Assuming that gold prices remained at today’s $1,759.30/oz, WTI prices would have to rise by about 22%, to $128.86/bbl, in order to reach their long-term average in terms of gold. As mentioned earlier, such an increase would drive up retail gasoline prices by somewhere between $0.65 and $0.75 per gallon.

At this point, we can be certain that, unless gold prices come down, gasoline prices are going to go up—by a lot. And, because the dollar is currently a floating, undefined, fiat currency, there is no inherent limit to how far the price of gold in dollars can rise, and therefore no ultimate ceiling on gasoline prices....
I don't understand the comparison with the price of gold. Please explain.
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Sea Dog
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I have to laugh about the complaints about fuel prices!

People cheerfully pay fifty thousand for a loaded pickup,
when the base model can be bought for twenty,
then moan and groan about a fifty cent per gal
increase in fuel prices.

Strange mindsets among some folks!
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Chris
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US $ is not pegged to gold anymore so there's no relationship. The market value of gold is up, the dollar down. Means less purchasing power, it takes more dollars to buy less.
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Mountainrivers
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Chris
Feb 24 2012, 10:26 PM
US $ is not pegged to gold anymore so there's no relationship. The market value of gold is up, the dollar down. Means less purchasing power, it takes more dollars to buy less.
Well, yes, isn't that called inflation? What am I missing?
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Jim Miller
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Sea Dog
Feb 24 2012, 10:23 PM
I have to laugh about the complaints about fuel prices!

People cheerfully pay fifty thousand for a loaded pickup,
when the base model can be bought for twenty,
then moan and groan about a fifty cent per gal
increase in fuel prices.

Strange mindsets among some folks!
There are some things we agree on, Sea. This is one of them.
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Chris
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Mountainrivers
Feb 24 2012, 10:33 PM
Chris
Feb 24 2012, 10:26 PM
US $ is not pegged to gold anymore so there's no relationship. The market value of gold is up, the dollar down. Means less purchasing power, it takes more dollars to buy less.
Well, yes, isn't that called inflation? What am I missing?
Nothing. Oh, maybe the causes of inflation like stimulus plans, quantitative easing, etc. These actions cheaper the value of the dollar.
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