Saturday, June 21, 2008

The price of oil

First, let me make it clear that I'm not at all upset by the rising price of gasoline. For the first time since the 1973 OPEC oil embargo, Americans are driving fewer miles -- only 1.8% fewer, according to what I heard on NPR, but perhaps if prices continue to increase so will that percentage. Better yet, manufacturers are selling fewer trucks and SUVs, and small, fuel efficient cars are in great demand. In urban areas, more people are using public transportation.

I've made big changes in my driving habits from last summer. Now my favorite beach is too far away for frequent visits, and so is Boner the Wonder Dog's favorite dog park. Most often we swim together now, combining our excursions at a park much closer to home. I've decided that five MPH over the speed limit is fast enough. Most of us can find ways to save on gasoline without too much effort -- although the impact of trucking costs on the prices of virtually everything we buy will be pretty unpleasant, and I'm afraid there will be a lot more people who won't be able to afford to heat their homes next winter.

One thing is certain -- the current situation is different from anything we've encountered in the past. As an official graybeard, I remember the last time we Americans changed out driving habits, and it wasn't the same at all. Back in 1973, during the embargo, there actually was a shortage of oil. We lined up at gas stations on alternate days, depending on whether our plate numbers were odd or even. Gas prices were up, but the main reason we drove less was because there just wasn't enough gas to be had.

Today, though, there's plenty of gasoline to go around -- anyplace you go, worldwide, you can pull into a gas station and fill up. Considering that total mileage driven by US drivers has dropped only 1.8% from last year and gas prices have doubled, it's pretty clear that the kind of supply and demand you learned about in high school doesn't apply.

Oh, yeah, we're supposed to blame the speculators.

Well, think about this: if your real wealth is vested in something with only nominal value, and that nominal value is going down, doesn't it make sense to transfer your wealth into something with real value? Dollars have only nominal value. People actually need to consume commodities, so their value is real. Moving wealth from dollars (or the financial institutions that deal in dollars) to commodities like oil and wheat and copper isn't some sort of evil plot, it's just common sense.

If you need somebody to blame, try Allan Greenspan. He really never was as all-powerful as he wanted us to think he was but, what the hell, blame him anyway. He got the credit during the so-called "good" years, so he might as well get the blame now that everything has come crashing down. It was cheap, easy, unregulated credit that made it possible for now tanking hedge funds and investment banks to create one bubble after another. It was cheap, easy, unregulated credit that made it possible for those hedge funds and investment banks to "leverage" their limited assets at rates of twenty to one.

The moral of the story is that credit has been too damned cheap, and "leverage" has to cost more. There already have been too many cuts in interest rates, and the dollar has fallen too far. We can deal with recession, because the alternative is worse. Strengthen the dollar now, and the crazy food and fuel prices inevitably must fall.

This is not your usual political crisis, so our usual political response won't do the trick. We need Ben Bernanke and the other Fed governors to bail us out of a problem politics can't solve otherwise. We need higher interest rates for a stronger dollar -- and only that will pull gasoline prices back down to something that feels vaguely normal.

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