Fix the Dollar, Solve the Energy Crisis?
Tuesday, April 29, 2008
American Public Media's Marketplace had a great headline story tonight about the current state of the energy market. Both crude oil futures and retail gasoline prices have recently hit all-time highs (not adjusted for inflation, but still significant), and a common explanation is that the supply and demand equation is simply out of whack. It goes like this: we’re demanding more crude and gasoline than ever and there is less of it. Admittedly, even I used this line of logic over at my other blog as a reason to reject John McCain’s federal gasoline tax holiday. However, the evidence points to something more fundamental pushing crude and gasoline prices up.
To say that our country has a gasoline shortage is simply incorrect; anecdotally, when was the last time there was a line at the local Chevron station? The reality, according to Marketplace’s research, is that refiners have been rebuilding their plants over the years and now can produce at a higher capacity than ever. Even if refineries are operating near capacity, they are still cranking out more gasoline than ever, and the United States has more on reserve than it did, for example, a year ago.
So is the issue on the demand side?.. Shockingly, no. 2008 is projected to be the first year in over a decade when gasoline consumption will fall, compared to the prior year. As people start commuting less, swapping gas guzzlers for more efficient sedans, and generally adjust their lifestyles to consume less energy, demand falls, as economic theory would predict.
Supply is up, demand is down, why is gasoline so expensive? The answer could be the greenback burning a hole in your pocket. Think about it, today, Valero (NYSE: VLO) announced that its Q1 profits were down over 70% year over year; meaning that while high gasoline prices could have previously been blamed on fat profits for refiners, nowadays, refiners are making significantly smaller profits, and the reason is because the main input in gasoline, crude oil, is well up over $100 per barrel. The correlation coefficient between the value of the dollar and the price of a barrel of crude is very strong, meaning that historically, as the dollar falls, crude strengthens, and vice-versa.
I still don’t think McCain’s gasoline tax holiday is a good idea because of the many unintended (although completely predictable) consequences that would result. The point is that if politicians like McCain really care about helping the “average consumer” and bringing down energy prices, they should be talking about fixing the value of the dollar, not about half-baked ponzy schemes like the gasoline tax holiday. Likewise, American consumers should pressure our leaders to focus on the dollar, rather than wasting time with the annual “boycott Exxon station” gimmicks that have become popularized thanks to Facebook and “consumer advocacy” blogs. It certainly isn’t a perfect fix, and not the best long-term solution, but it’s a start.
Posted by Rob Pitingolo 10:08 PM
