Gas Prices Aren’t Rising, the Dollar is Falling

Gas Prices Aren’t Rising, the Dollar is Falling

Posted by Brittany Stepniak – Wednesday, March 14th, 2012

When people say “gas prices keep rising”, they’ve got it all wrong – gas prices are technically stagnant at worst.

It feels like an energy crisis is weighing us down. However, the real crisis is of a much larger scale – it’s the economic inflation crisis and the devaluing dollar that you should really be concerned about.

Overall, oil prices right now are unseasonably low. In order for gasoline prices to be considered “normal” they would have to increase by at least another 65-75 cents from where they are today.

Unfortunately, that means it’s plausible to assume that prices are going to spike upwards in a very short time.

Prices are not merely one-dimensional. No, prices suggest ratios of value. For comprehension, take a look at this real-life example, courtesy of Forbes:

As this is written, West Texas Intermediate crude oil (WTI) is trading at $105.88/bbl. All this means is that the market value of a barrel of WTI is 105.88 times the market value of “the dollar”. It is also true that WTI is trading at €79.95/bbl, ¥8,439.69/barrel, and £67.13/bbl. In all of these cases, the market value of WTI is the same. What is different in each case is the value of the monetary unit (euros, yen, and British pounds, respectively) being used to calculate the ratio that expresses the price.

In terms of judging whether the price of WTI is high or low, here is the price that truly matters: 0.0602 ounces of gold per barrel (which can be written as Au0.0602/bbl). What this number means is that, right now, a barrel of WTI has the same market value as 0.0602 ounces of gold.

In order for gas prices to settle a little lower, gold prices too would have to take a bit of a nosedive. Ultimately, gas prices will go up – rather dramatically – if gold prices continue to rise at historic rates.

The scariest part of it all is that there’s really no “ceiling” for gasoline prices. The dollar is an undefined fiat currency, so gold can continue rise to an unlimited value (in dollars).

Meanwhile, gold will hold strong in it’s famous position as “the golden constant”.

In order to combat the rising gasoline costs, some experts worry that politicians may take some drastic measures…

This time around, the government may advocate for further payroll cuts while initiating higher taxes for energy producers. A similar scenario took place in the 70s:

During the 1970s, the toxic combination of a weak dollar, high tax rates, and onerous regulations introduced a new word into America’s economic vocabulary: stagflation. Reaganomics banished this word to the history books. Now, President Obama and Fed Chairman Bernanke are teaming up to give stagflation another try. It is not likely that Americans will like it any more this time around than they did 40 years ago.

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