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Thursday, March 1, 2012

What Is The Real Price Of Gasoline?

"The people always have some champion whom they set over them and nurse into greatness. This and no other is the root from which a tyrant springs; when he first appears he is a protector." — Plato

While politicians deflect, defend and blame and consumers grouse about Big Oil, large profits and offshore drilling, almost no one is discussing what’s really happening to the price of gasoline at the pump.

Conventional wisdom is that gas prices are shooting through the roof. But that’s not the case. In fact, gas prices are right at their historical average.

Gas prices are reflecting inflation. As I have explained before, inflation is not rising prices. It is an increase in the money supply. Rising prices are a product of inflation, and the increasing numbers on the signs at gas stations are a reflection of inflation. Or, to put it another way, they reflect a decrease in the value of the dollar.

This is explained in detail at Forbes:

During the 493 months since January 1, 1971, the price of WTI has averaged Au0.0732/bbl. It has been higher than that during 225 of those months and lower than that during 268 of those months. Plotted as a graph, the line representing the price of a barrel of oil in terms of gold has crossed the horizontal line representing the long-term average price (Au0.0732/bbl) 29 times.

At Au0.0602/bbl, today’s WTI price is only 82% of its average over the past 41+ years. Assuming that gold prices remained at today’s $1,759.30/oz, WTI prices would have to rise by about 22%, to $128.86/bbl, in order to reach their long-term average in terms of gold. As mentioned earlier, such an increase would drive up retail gasoline prices by somewhere between $0.65 and $0.75 per gallon.

At this point, we can be certain that, unless gold prices come down, gasoline prices are going to go up—by a lot. And, because the dollar is currently a floating, undefined, fiat currency, there is no inherent limit to how far the price of gold in dollars can rise, and therefore no ultimate ceiling on gasoline prices.

Federal Reserve Chairman Ben Bernanke uses a “core CPI index” that excludes food and energy to guide monetary policy. From Big Ben’s point of view, rising gasoline prices are not a problem. For the rest of us, they are becoming a big problem.

Over the centuries, gold has been “the golden constant”. Eventually, all prices equilibrate with gold. This is why gold represents the best available standard in terms of which to define the value of a monetary unit. Forty-one years ago, when the value of the dollar was defined in terms of gold at $35/oz, WTI was selling for $3.56/bbl.”

The following is a simple version.

Since Jan. 1, 1971, the price of a barrel of West Texas Intermediate (WTI) crude oil compared to gold has averaged 0.0602 ounces of gold per barrel. Gold is currently trading $1,789 per ounce, and WTI is trading at $108 per barrel. That’s a ratio of 0.0603, and it’s right on the statistical average.

So who or what is to blame for “higher gas prices?” Look no further than the Federal Reserve, Ben Bernanke (and Alan Greenspan before him) and their money-printing policies.

Another way to look at the price of Gasoline is to compare it to the price of silver.

The real price of oil is $5 a barrel in real US silver coins from 1963. The real price of gasoline is down 50% from 1963. In 1963 a gallon of gasoline was three silver Roosevelt dimes ($.30). Today, in 2012, the real price of gasoline is two gallons at $3.77 per gallon ($7.54 less tax) for three silver dimes. In real money gasoline is 50% cheaper today in 2012 than it was in 1963. You can calculate the price of silver in your coins by clicking here.

We are misallocating our civilization based on fake counterfeit money and unlimited credit. The problem is not oil. The problem is fake counterfeit money that promotes misallocation of all our assets. It’s not an energy problem. It’s a money problem benefitting asset owners, banks, and government. The winners love this counterfeit fraud that drives their possessions, taxes, fees, and profits up, up, up. It’s all free money.

Losers are the bottom 80% have their time and money misallocated into wasteful social experiments. When these losers are fired at age 50 from a misallocated job they suffer greatly in restructuring and lose their homes and families because they can’t get a comparable job at their misallocated wage rate.

I did some checking using the U.S. Bureau of Labor Statistics Inflation Calculator. In 1963 the average price for a gallon of gasoline was $0.29 per gallon (less taxes). Using the inflation calculator I got a price of $2.15 per gallon for 2012. If I add $0.65 for taxes (state, federal, and local) for California I get $2.80 per gallon. This is the price Newt Gingrich is advocating with his energy policy.

You see, gas prices aren’t rising. The value of those green slips of paper in your wallet is shrinking.

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