Saturday, June 21, 2008

The Myth of Gas Price Inflation

Nick Sloan was kind enough to point out that we forgot to mention the value of the US dollar and how it relates to oil in one of our previous posts that laid out data to dispute false assumptions by our friend Yael at the KC Star. Yael thinks that opening Anwar and the off the coastal shelf areas to drilling would not lower oil prices. We of course dispute that.

So Nick, this post is for you and the rest of us who want to find out just how much effect the value of the dollar has on oil. You might be surprised at what we found.

We've reviewed more than 60 years of data and were astonished when we saw just how stable the real price of oil was. Notice we said real. If you track oil versus the dollar, the value of oil is all over the place. President Bush and others blame this on supply and demand, but is it?

What happens when you compare the price of oil to say silver? We saw you rolling your eyes at us. No, we aren't trying to make some Ron Paul return to the gold standard argument here. Now that we've cleared that up, let's take a look at the average gas per gallon prices since 2002.

The cost of a gallon of gas in 2002 was about $1.35. Today it is at $4.08. A growth of 302%

In 2002 the cost of one ounce of silver was $4.60. Today it is $17.32. A growth of 377%.

We chose 2002 as our start date in this example because it reflects the prices immediately prior to the beginning of the Iraq War. An event which we argue triggered the speculators and drove up the price of oil, or rather down the value of the US dollar, as you will soon see.

As you can see from just this small time period the value of oil has stayed relatively similar to the value of silver compared to the US dollar. In fact, silver has increased in cost slightly higher than oil. That's not a good sign for our supply and demand friends, but what happens if we go back farther than just five years?

We chose silver for our comparisons in large part because of this YouTube video. In the video, the announcer claims that gas cost 25 cents in 1957. Some quick Internet searches back up that claim.

In case you are a product of Kansas City's school district, 25 cents is equal to one US quarter. Back in good old 1957 the US quarter consisted of 90% silver, that's .18 ounces of silver. Just to make it even easier on you, that puts the amount of silver in that coin worth $3.13 at today's prices.

So, if in 1957 you could get a gallon of gas for the silver equivalent of $3.13 and today you can get a gallon of gas for the silver equivalent of $4.08, you can see that cost of a gallon of gas has only increased by 30%. That's a total of 30% in 61 years!

Indeed it would appear the price of oil is an issue of supply and demand... supply and demand of the US dollar, not oil.

1 comment:

Dustin said...

Here, here!