Is $2 gas a good thing?
The question seems almost silly, on the surface. Of course I would prefer to pay $2 instead of almost $4. At the same time, if you really understand why and what it would take to get there, it becomes a more complicated question. There has been a lot of chatter this election cycle that the price of gasoline, the first day of President Obama’s term, was $1.76. Candidates such as Michele Bachmann suggested if elected, she would get gas back to 2 bucks, and somehow that is really desirable. Seems like some people have fuzzy “facts”.
Technically, the price of gas was about $1.80 when the President was sworn in, but it’s very hard to see how that is relevant. The price of gas has been bouncing around $1 and $2 from 1985 to 2000. As late as 1998 oil was $10 a barrel, and gas was $1. From 2000-2008 the price of gas went from the mid $1.50 to over $4. Fiscally, we had President Bush’s ethanol push, which led to poor quality gas and higher inflation across the board. In hindsight it was a bad decision all the way around. The Fed has been weakening the dollar for the past 12 years, making oil imports more pricey. Add in the Iraqi War and ever-present tensions in the Middle East, there has been a $20 to $40 “War Premium” in oil, since we went into Iraq, in 2003.
Going into 2008, the price of gas was around $3 a gallon, and by the late summer it was over $4 in many places. The round numbers always become talking points, and with gas at never seen before levels, there was an open outcry for “Big oil” to pay additional taxes and no longer receive subsidies. As the chatter got to a fever pitch the 24-hour news cycle became entrenched in the stock markets’ collapse. Our economy was shedding jobs and melting down as fast as 1929. Suddenly, within about eight weeks, the price of gas was under $2. Not many were talking about it. Gas was cheap but millions of people were losing their jobs, every month. Until we make some serious energy changes, gasoline is a leading economic indicator. Especially when you add in what the Federal Reserve is trying to accomplish with QE infinity.
Why the price of gas is a global economic indicator
The main reason it is naive to believe $2 gas is actually a good thing, is looking at the global economy. China, India, Brazil and Russia have exploding middle class populations. Millions and millions of people are buying cars for the first time, or adding a second car. For oil and gas prices to decline, while there is a global coordinated Central Bank easing, would have to mean a large global slowdown of the world’s economies.
Two dollar gas means it is cheap but no one has a job.
The demand for fossil fuels from the BRIC (Brazil, Russia, India, China) nations is secular and geometric. Without serious energy changes, gasoline prices will increase in economies that are expanding and go down in economies that contract. It is that simple. There are no gasoline policies that can trump the increased demand from billions of people.
It has been about two months since our Central Bank went off the charts with an unprecedented QE infinity hail Mary. Gas was about $3.10, in the futures market, that day. Tuesday, gas in the futures pits are trading at $2.60 or a tad lower. The Fed is throwing everything they have and the kitchen sink and gas prices have all but tanked, in the past eight weeks. The speculation on Iran is heating up, but it doesn’t seem to matter. Oil and gas prices are moving down fast, right now. It could be some election shenanigans but what seems more likely is the vibe analysts and traders are getting off these third quarter quarterly conference calls, is a global slowdown is accelerating, even as Central Banks ease.
When we first discussed what could happen as QE infinity plays out, we discussed that this play by the Fed may have been a self-inflicted wound, with dire consequences. If the markets tank, while the Fed has the bid, the game is over. That is the only way, given the global increase in demand for fossil fuels, that gas goes back to $2. The only way it happens, given the real demand, is a deflationary vortex, like we briefly saw in 2008. But this time, if we go down that path, the Fed and Central Banks have no bullets left, to prop up the markets. The politicians and talking pundits who suggest that gas was $1.76 on President Obama’s first day, and that it has doubled because of his policies, are immature and misleading, at best. At worst, they are simply carnival barkers who should be voted out of office or lose their audience.
Watch video on why the price of gas was low when Obama took office