Friday, May 27, 2011

What is Causing the High Gas Prices

Reading around the blog, I was looking for posts about oil markets. Specifically, I was looking for posts that tried to answer the contention that speculators are responsible for higher gas prices. The claim is often made that rising gas prices are due to speculators keeping the price of oil high in order to make money. Well, I found some answers to the contention, and I thought that I would post them here.

The first and easiest answer to find is that most of the rise in the price of oil is due to the Federal Reserve. Of course, blaming monetary inflation is not an uncommon phenomenon among Austrians, but it makes sense. Oil is traded in dollars, so when the supply of dollars goes up or is expected to go up, the price of oil goes up. This would be a direct result of inflation. With more bills and the same scarcity, the end result is a higher price.

What I found more interesting, though, was the indirect result of this inflation. Because of the inflationary policies of the Federal Reserve, nominal prices will tend to rise and the average real value of a bill decreases. This means that when you invest a fixed amount at the current time and expect payment in the future, you will get less in real terms than you expect because of inflation. This drives investment in commodities markets because their value will rise in nominal terms when the supply of bills increases. This kind of commodity speculation is not useful, but how can you blame investors for wanting a hedge against inflation? They are just trying to protect themselves. Commodity investment is supposed to be about predicting demand rises and supply shortfalls so that we can conserve those scarce resources better. When investment is driven by a fear of inflation, what is the purpose to the average consumer? But again, blame the government policies for that, not the speculators who are merely trying to protect themselves.

And probably my favorite explanation of all is the short and sweet one provided by someone called the Anti-Gnostic.

–Trillions in new dollars seeping out of reserves?
–Record levels of deficit spending?
–Supply chain disruption/uncertainty?
–Environmental restrictions?
–Competing consumption by government military operations?



Must be the speculators.


  1. Maybe this is all Bush's fault?

  2. Well of course when Bush was in office it was his fault, but now that he's not in office why not the same blame for Obama?

    But the presidents were partly responsible with that strategic oil reserve, but that was not a major contributor. I'd say what was more important is inflationary monetary policy and the unnecessary commodity investment that it caused. Environmental restrictions and Middle East uncertainty is causing a lot of the problem now.

    As for the speculators, if they really were the problem, then why did oil prices eventually fall after 2008?

  3. No, it wasn't Bush's fault. The Bush administration repeatedly asked Congress to approved new areas of oil production in the Atlantic. Gulf, Pacific, Alaska, and shell exploration in the US. None of it was approved by the Democrat's filibuster in Congress.

    The Problem has gotten worst with the environmental prone Obama Administration.

  4. Yes, environmental restrictions have made it much worse, especially Obama's banning of new exploration in the Gulf. That was bound to cause problems, and speculators have invested money expecting future problems because of that ban. Don't blame investors for that, blame crazy environmentalists.

  5. and don't forget-a bit of soft tyranny from our govt 'servants'

  6. Linked to on our Teeing it Up post.