What's up with gas prices?

Everyone (except people like my wife who drive company cars, and have their gas paid for) is feeling the hit to their wallet coming from the ever increasing cost of gasoline. The prices we see now were unimaginable for most of us several years ago, and frankly, it's a shock that's felt everytime I fill up. It's understandable to start feeling bitter, especially when the rise in fuel costs is far outpacing the rise in household earnings.

Since it is the aim of this blog to avoid knee-jerk reactions, let's see if we can sort out the reasons why prices are climbing so quickly. It's a laundry list; and in no particular order:

- the value of the dollar is plummeting relative to other world currency
- more people across the world than ever are starting to drive
- Middle East production is near maxed out
- no new refineries being built in the U.S. - production maxed out; upkeep of current plants is expensive.
- refineries must produce different "mixes" for different regions, limiting capacity and flexibility.

Unless you haven't watched TV news, or read a news article in the last year or so (unlikely if you're reading this blog), you realize there is a credit "crisis" in this country tied to subprime mortgages, and their portion of various investment portfolios belonging to banks and other financial institutions. The amount of money the U.S. is borrowing, and our ability to pay back those loans plays a large factor in the value of our currency, which is no longer backed by a solid asset like gold. The credit crisis is forcing us to borrow more foreign money, and lower interest rates, two factors leading to our currency losing value in foreign markets. In fact, some foreign markets are refusing to accept dollars, which are losing value rapidly, and instead are requesting payment in Euros, which are currently more stable.

One of those markets is the oil market. Whereas the dollar used to be the standard by which oil prices were measured around the world; because of its recent rapid decline in value, this is no longer the case. Since the dollar is valued less, it therefore can purchase less oil. That is why a barrel of oil cost $50 dollars not that long ago, but today that same barrel costs over $100. It's not that the value of the barrel of oil has increased that significantly, it's that the value of the currency used to purchase it has decreased. This may be the most important factor affecting gas prices.

Something else to consider is increased demand around the world. While most Americans seem to be insulated from news in other parts of the world (we can thank our standard media for that), nations like India, and China, along with other Asian countries, have been rapidly building modern industrial/manufacturing complexes. An acquaintance of mine reported upon his return from a recent trip his amazement at a factory he had witnessed in China. Having expected to see the equivalent of thousands of sweat-shop laborers manually producing parts as cheaply as possible in some dark and dreary factory, he was instead surprised to see a brand new, clean, and thoroughly modern manufacturing center, with production robots, and a few skilled laborers. Now think about how many products we purchase that are manufactured overseas. You're starting to get the picture?

All that production is increasing the standard of living in many of these previously "developing" countries, and their citizens are demanding more modern convenienes to go along. Automobiles, whose manufacturing process is based on the Japanese model, are now being produced in record numbers in places like India and China, for their native populations. GM, and other major automotive manufacturers, like Volkswagen, are pouring major investment dollars into these markets, viewing them as the next great frontier, upon which their future survival and success depends. And what is powering all these new cars? That's right - gasoline. As the two most populous nations start driving, demand for oil will increase exponentially.

As it is, however, there are reports that production is near maxed out in the Middle East, and in other regions. They can't pull the oil out of the ground any faster. If production can't be increased significantly, but demand rises significantly, prices are sure to follow that demand.

Here in the U.S., we're not doing much to help ourselves. A new refinery hasn't been built in ages, and the existing plants are struggling under the weight of aging systems, technology, and regulation. Not only that, but those plants must produce different fuel combinations for different regions, seriously limiting market flexibility here at home. That's one of the reasons gas prices in California outpace those in Iowa. There are many other factors, which are too complicated to give proper treatment to here, such as the effects of ethanol, and taxes, which also play a significant role.

Bottom line, gas prices aren't going to come down anytime soon, and even worse, probably won't even stabilize for a while. Yes, with expanding markets for the oil companies, allowing them to sell more fuel to more people than ever before; even if they lowered their profit margins - their overall profitability would surely increase, just due to increased sales volume. And so they will reap record profits. That's how capitalism works.

Americans need to wake up to the fact that we are no longer the only consumers of technology and convenience in the world anymore; and that with demand for the finer things in life across the planet, we are going to have to work harder, and become more competitive in order to maintain our standard of living. To stay ahead, we cannot rest on our past success in a mire of complacency, but must develop new fuels, and new sources of energy to propel us forward. We must find a new manufacturing base, for without that valuable developmental environment, we lose the human resources that emerge from its ranks, its springboard of invention and innovation, and the skills that bring them forth. We need to rediscover the building blocks upon which we achieved our prominent position on the world stage.