While everyone would like to find one single reason for gas prices being what they are, it looks more an more like they are the result of a "perfect storm" of combining causes.
Here is an excerpt from a study by the Center for American Progress that looks at one of the causes -- a weak dollar.
America’s working families have been squeezed for most of this decade by stagnant wages and diminishing health and retirement benefits. Now they face new economic pressures from rising gasoline, food, heating, and electricity prices. A portion of those higher costs are directly attributable to the weakening of the dollar and the economic policies that have produced a weak dollar.
Since January 2000, the dollar has fallen by 37 percent against the euro, with nearly two-thirds of that decline occurring since January 2006. The dollar has fallen 31 percent against the Canadian dollar, and 17 percent against the British pound.
The fall of the dollar has affected oil prices in two specific ways. First, as the dollar falls against the euro and other major currencies, oil-exporting states have been demanding more dollars per barrel of oil to protect their ability to meet expenses paid in euros and other currencies.
This can be most clearly seen in the price of oil (the spot price for Saudi light crude) as measured in U.S. dollars and euros during the first four years of the current Bush administration. As the dollar weakened, the dollar price of oil increased proportionately.
Measured in dollars, oil cost about 28 percent more on average in 2004 than it had cost in 2000, but the price remained relatively constant if measured in euros. In fact, Europeans were actually paying about 8 percent less for oil in 2004 than they had paid in 2000.
More recently, the declining dollar has pushed the price of oil and other commodities higher for a second reason. Retirement funds, hedge funds, speculators, and other institutional investors around the world have tried to protect themselves against further declines in the dollar by moving money into commodity futures that are denominated in dollars—financial instruments that will remain stable or even rise against other currencies even as the dollar falls.
Stewart Bailey reported for Bloomberg last month that “global investments in commodities rose by more than a fifth in the first quarter to $400 billion, helping boost prices as investors sought a buffer against inflation and a weaker dollar.”
Because so many money managers are attempting to use commodities to hedge against the declining value of the greenback, their investment strategies create at least temporarily additional demand for those commodities, driving the price upward.
This effect is demonstrated by the fact that although the increase in the price of oil has been substantial, it is not out of line with what has happened with other commodities, and in particular agricultural commodities.
Over the past 25 months, the dollar price of oil has increased by 79 percent. That is more than the increase in precious metals such as gold and silver. But it is significantly less than the increase in commodities such as soybeans, which have gone up 137 percent, or corn, which has gone up 167 percent.
There are of course additional factors that influence the price of oil and other commodities. These include growing global demand, particularly from China and other emerging economies, and the so-called “security premium” or “tension premium” that results from the market estimation of the potential for hostilities that could interrupt the production or distribution of a commodity.
With respect to oil, recent U.S. saber-rattling toward Iran and the possibility of hostilities in or near the narrow Straits of Hormuz has clearly played a significant role in a number of recent spikes in oil prices, and perhaps in the ongoing higher price of oil.
Yet the fact that oil prices have risen nearly fivefold when measured in dollars, but slightly less than threefold when measured in euros, would indicate that nearly 40 percent of the increased price American consumers are paying for oil is attributable to the weak dollar.
If only 10 percent of the price increase is attributable to the flow of dollars and other currencies into commodities to hedge against further weakening, then at least half of the explanation for high gas prices is the weak dollar.
Weak Dollar and Gas Prices...
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by Nytewyng » Fri Jun 27, 2008 7:16 pm
You know all the so called experts keep changing their minds, The dollar is weak because of Bush policies and the Bush war. First they said it was supply and demand/ wrong! The US has used 6% less gas this year. The speculators are driving up the price because China holds the mortgage on the USA right now. Time for change. If some good old boys in freakin japan can come up with a car that gets 45 mpg why can we? Corporate greed sorry for the rant just my friggin 2 cents,,or did that go up too?
Rob and Deb Mangano
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To me it did.)
