ow Do Gas Prices Increase?

Be careful who you piss off (Israel) on the way up, you might meet them again on the way down
Every four years or so, election years of 2008 and 2012, gas prices spike up, and all the talking heads give their spin on why this happens. The left blame speculators, the right blames lack of supply and the truth gets lost in useless arguments. What ends up happening is people receive misinformation about economics.
So what are the facts?
Prices are determined by supply and demand. That is the beginning but there are other factors, “independent” variables, which can affect supply and demand.
The “independent” variables for demand are;
1. Income. If a good or service is “normal” people want more of it when they make more money, demand will increase. If it is inferior, they want less. People generally buy less fast food when their incomes rise.
The real disposable personal income has dropped from $32,814 from when Obama was inaugurated in January 2009 to $32,458 today. A decrease of 1.1%. So if gas prices were $1.84 a gallon when Obama was inaugurated we would expect them to be about $1.82 all things being equal.

Oil production supply is relatively "inelastic" in the short run. Drilling crews, machinery, leases, political hurdles, all have to be overcome before production begins

2. Price of related goods. Unfortunately with the exception of the Chevy Volt there are no substitutes for gas during this time frame, 2009 to today.
We subsidize farmers to grow corn for ethanol, driving up food prices, while imposing tariffs on cheap, $2.00 a gallon Brazilian bio-fuel. If Washington DC eliminated the tariffs on the $2.00 Brazilian bio-fuel we could lower the cost of both fuel and food at the same time. Corn farmers would be priced out of the ethanol market and would have to substitute back to food production, but with the current crop of corrupt politicians this will never happen.
3. Taste. This variable has not changed significantly since 2009. People prefer cars to bikes and scooters.
4. Population and demographics. The population has increased from 306,208,000 to 313,020, or a 2.22% increase. Using our baseline of $1.84 for gas the price today should be about $1.88 a gallon.
5. Expected future prices. This is the most controversial of the five. Nancy Pelosi refers to this variable as “speculators” and she is correct. If consumers expect higher prices they will, if possible, consumer more today. They are speculators forecasting into the future. There is nothing Nancy, or the federal government can do about speculation. It’s like legislating against cow flatulence. The only way to stop it is to kill a bunch of cows.

Tensions between Israel and Iran can play a role in the price of oil

Also playing into expected future prices is world politics. If Saudi Arabia does not like the Obama Administration they can cut back on oil production, or threaten to cut back, and prices will increase.
If Israel does not want to see the Obama Administration re-elected they can pick a fight with Iran, or pretend to be picking a fight with Iran.
If Iran is suffering from inflation and desperately needs higher oil prices, and their number one export is crude oil, they might choose to play along with Israel in the mutually beneficial game of war chicken, hoping one or the other will back down at the last minute.
While the tensions between the two are high they both enjoy the desired results, bad publicity for the Obama Administration, more revenue for Iran. As long as the game does not go into a actual “hot” war both win. This is sometimes referred to as a Nash Equilibrium and/or dominate strategy.
The “independent” variables for supply are;
1. Price of inputs. This would not be the end product, oil, but the cost associated with producing oil. Workers wages, drilling equipment, leasing land, and so forth.
For this example we will assume the cost is directly translated into a price increase. Of course in the “real” world there would be a lot of mitigating circumstances, such as the elasticity of demand, inelasticity, and other factors. But here we will keep it simple and assume there is a direct, one to one, correlation between these variables.
The Consumer Price Index (CPI) has increased from 211.962 (1982-84 dollars= 100 MSA) to 227.505, a 7.3% increase or translated to $1.97 for a gallon of gas. The Producer Price Index has increased 17.1% or translated to $2.15 a gallon.
2. Technological change. For petroleum production there has not been a dramatic change since 2009 that I am aware of. Assume this has had a negligible affect on the price.

Gas prices going up

3. Price of substitutes in production. Again, the only viable substitute is Brazilian bio-fuel, which is not allowed to compete because of tariffs.
4. Number of firms in the marketplace. There has not been substantial entry or exit since 2009.
5 Expected future prices. Suppliers “speculate” the same as consumers do. And this is where Obama plays a role in gas prices TODAY. If oil producers see the Obama Administration doing everything in its power to suppress supply, no new leases, regulations, more taxes, then it will have a effect on the price TODAY.
Why would it not?
Does Nancy Pelosi want to outlaw rational thought? Speculators are doing the best they can to deal with reality. If the President of the United States is hostile to oil production and consumption why would this not be reflected in the price of gasoline?
On the flip side if the president announced 100% support for the oil industry, drilling on a first come, first serve basis, prices would drop TODAY based on future expected increase in supply.
World supply has increased 2.2% from 2009 to 2010, 80,278 thousands of barrels daily to 82,095. Demand has increased from 84,714 to 87,382, 3.1%. The biggest increase in consumption was 5.3%, from the Asian Pacific countries including China and India.
The discrepancy between the amount of oil produced and/or imported and the amount consumed and/or exported is due to the omission of stock changes, refinery gains, and other complicating factors.
So based on increased consumption and the inelasticity of demand for crude oil, -0.06, translated, for every 10% increase in price consumers consume 0.6% less of the product, we can estimate that the price would increase to roughly $2.02 a gallon taking into account also the inelastic supply of oil production. Since I only have 2010 data let’s add on another 18 cents and make the price $2.20 per gallon.
From the previous data we know that all things being equal the price of gas should be about, in a worse case scenario, say about $2.50 a gallon. An educated guess, nothing more than that. Not pleasant but nowhere near the $3.70 a gallon today that we pay.
So what happened?
Now let’s put together a simple model.
If we have 100 gallons of gas, 100 customers, and $100 dollars split 100 ways consumers will buy a gallon of gas for $1 a gallon.
Simple.
That is supply and demand. If there is more supply, 200 gallons of gas, the price drops to 50 cents a gallon. If the supply is 50 gallons the price will increase to $2.00 a gallon. Notice that price acts as a rationing device, everyone gets what they need, and what is available, and not what they want.
If the number of dollars increased to $200 the price will go up to $2.00 a gallon if the supply remains stable at 100 gallons.
Did you get that?
One of the big factors that is overlooked by the talking head “economist” is the relationship between printing dollars, the Federal Reserve, and inflation.
Simply put all that Obama Administration spending has to come from three sources;
1. Taxes. Tax receipts as a percentage of the Gross Domestic Product (GDP) since 2009 have been 15.1%, 15.1%, and 15.4% of the GDP. Historically this percent has been around 18%. Spending has increased to 25.2%, 24.1%, and 24.1% of the GDP. This is important as will be explained.
2. Borrowing. This is not necessarily inflationary. Remember when you borrow from person x, person x forgoes consumption, but must be paid back in interest.

Federal Debt held by the Federal Reserve up 238% since Obama's inauguration in January 2009

3. Printing money. Extremely inflationary. Deadly. Something to be avoided at all cost. Some economist call it monetizing the debt, others counterfeiting, other increased “liquidity.” It all depends on your perspective. From Main Street it simply means Wall Street, Washington DC, the elites, get the use of printed cash first, and Main Street pays for it in the form of inflation. The elites get the sugar and we get the you know what.
So what is the record of the Federal Reserve and the Obama Administration for printing money?
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Federal debt held by the Federal Reserve for January 2009 was $492.3 billion and is currently $1.6647 trillion, a 238% increase.
Since the September 2008, before the TARP bailouts, the monetary base has increased from $886 billion to $2.7 trillion, a 206% increase.
Gold is up 82% since 2009 and many economists’ think that it is undervalued based on the inflationist policies of the Federal Reserve.
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The 800 pound elephant in the room no one wants to talk about is federal spending and the inflationary policies of the Federal Reserve. Politicians do not want to talk about this, Republicans and Democrats, because the smart ones know this is a hidden tax on all Americans, poor, rich, white, black, that for most is invisible.

Monetary Base, the total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves. This measure of the money supply typically only includes the most liquid currencies

When the price of eggs goes up from 99 cents to $1.49, to $1.99 does anyone really notice?
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Does anyone make the connection between the Obama Administration spending too much money and paying more for eggs?
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No, but they should.
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Jimmy Carter learned that big inflation numbers could cost him the election and the CPI was changed in July 1980 to deemphasize food and energy, the items that have the lowest “inelastic” numbers, or more simply things people need and are willing to buy at almost any price in the short term. Today the official “core” inflation rate is 2.9%.
I will submit to you that the biggest factor in the increase in gas prices is the Federal Reserve and the Obama Administrations reckless spending policies, followed by increase demand in the Pacific Rim countries, then global political tensions, and finally the Obama Administrations obstructionist energy policies designed to restrict supply from Canada and the United States, in that order.
The lesson for the working poor and the poor on government assistance is there is no free lunch. When the government spends too much money, you pay for it in lost jobs, lower wages, and inflation.
Be careful what you wish for, it might come true.