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Sunday, April 20, 2008

Diesel Prices

From Gene following a recent fill-up:

I hold these truths to be self evident, but your mileage may vary.

In January I paid 3.15 per gallon for diesel in Spartanburg, SC. It is 3.94 at Wal-Mart in Springfield, TN now, and I have seen it as high as 4.19 in Springfield.

In 1999 crude oil (and at the current price crude is the correct term) dropped to a low of 8.00 a barrel (42 USA gallons). At the end of 2006 it was around 60.00. It just hit 115. What is going on?

My friend Google attempted to shed some light on the mystery. There are a number of partial explanations for the rise of prices. The weight on how important each is, and which is in control at the moment, is a matter of opinion. I certainly have my share of those.

Among the reasons for the increasing prices are: limited production, limited refining capacity, increasing global demand especially in the growing south Asia economies, and fear of supply disruptions due to political instability in many oil producing regions. Any one of these may be cited on the evening news for today’s surprising increase.

Another major reason for the “run up” (you have to run, you can’t afford to drive) is the speculation factor. This is a Gordian Knot for me. Since the stock market is off, and interest rates are low, the big players need a place to park money in something that has intrinsic value and commodities are the answer…gold, copper, corn, wheat and OIL. With a commodity if the value of the currency the futures contract is measured in changes, it matters less because you still have a fixed number of ounces, barrels or bushels. Wait, there’s more.

One irony here is commodities are used this way in inflation situations, but we have a declining dollar. The declining dollar is creating inflation as it takes more of those dollars to buy products (read: oil) from overseas. So Daddy Warbucks would rather hold oil futures than dollars since oil has inherent value, US interest rates are ridiculously low (but the US population being all debtors rather than savers doesn’t mind), and it is one of the few investments he can make that has a good prospect for a short term (read: bubble like) gain. That short term investment speculation band wagon is what appears to be the reason oil is over, pick a number, 75 a barrel.

The mother of all ironies is that the low dollar value is brought to us by our own government. The drastic lowering of interest rates does not increase the world’s desire to hold US dollars. Deficit spending decreases the value of the dollar as the national debt rises. It appears the government has determined it is in the county’s best interest overall to lower interest rates and cheapen our currency. We have certainly heard the Federal Reserve say they are willing to risk igniting another inflation cycle to mitigate the current problems in the economy.

So when might oil prices decline to a level that reflects their global value? Who knows? Watch for interest rates to rise and the value of the dollar to increase in value from1.60 to 1 Euro to maybe 1.25. Watch for the Dow to rise and stay above 13,000. And keep watching the marquee at the Murphy Oil station at Wal-Mart

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