Stone Pigs

undeniable underlying truths

Is Gas Priced Right?

Posted By Alan Partis on November 7, 2008

A friend of mine wrote the following to me:

> Had a discussion with the neighbors recently where it was postulated
> that gas is really only worth $1.00 a gallon

I’d be interested in knowing the basis of that argument.  How was the ‘worth’ measured?  Clearly, it was worth over $4.00/gal because we were all actually willing to pay that amount for it recently.  However, there’s no doubt in my mind that a vast portion of the price of gasoline (and oil underneath) is subject to irrationality and geo-political instability.

> Was the decrease a result of the threat of our drilling offshore?  I
> thought so, but I really don’t know anything about international
> commodities pricing in the retail market.  Blissful ignorance, I think.

First question is, why is Bush not getting any credit for lowering the price since he was getting so much blame for its rise?  But I doubt that our offshore drilling threat had anything to do with it.  My opinion is that the price of oil was driven up by investors … very large institutional investors … who needed to make money somewhere to cover their devalued mortgage assets.  I don’t think supply and demand had anything at all to do with the price run up, nor its fall at this point.

When we saw oil price increases of $5 in a single day, that wasn’t due to supply/demand — that’s speculation and/or political hysteria.

What turned it around was housing prices.  As housing prices continued to drop and devalue the related mortgage assets held by these large investment groups (as a result of the silly “mark to market” accounting rules imposed by the Sarbanes-Oxley Act that sprouted up after the fall of Enron and WorldCom), there finally came a point where commodity holdings by these groups had to be cashed in to try to raise enough cash to cover their bases.  As soon as that selling began, prices fell through the floor.

At the same time, the Dollar has been restrengthening and that has likewise lowered the price of oil since it is mostly in imported item.

It was all a “perfect storm” … and as much as I am not a conspiracy theorist … I’m beginning to  think it was all too perfect.  So perfect, in fact, that it derailed any fear that Obama would lose the election.  Yes, I said it, I believe that we’ve all been scammed to put Obama into the White House … and now we’re all going to pay even more than we already have.


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