Does it always seem that some asset classes catch the attention of the public and even amateur economists. Professional economists talk about this asset class, as a perfect gauge of overall economic activity. We are talking of course about oil,that is, the different kinds of oil derivatives: Brent Crude, West Texas and other, but these two are the most widely traded. One if a hallmark of Europe and the other of the USA.
Gas has been on a rocky ride these past ten years and more. The beginning of the millennium say gas prices at around three dollars a barrel on the international markets. The inflationary decade that preceded us gave us a $ 150 price tag. The Great Recession of 2007 created an environment of a collapse in the price of gas, which isn’t strange due to the overall slump in global demand, the price had to fall, but barely two years and going, the price has crept from its lows of $30 a barrel to $100 a barrel.
The normal theme concerning the gas prices at home and abroad is the problem of speculators. The speculators were blamed for the run up of the price of gas in the past decade and they are blamed for the current situation as well. Its strange how they are never blamed for the fall in price? Usually, the politicians brag that the fall is attributed to their wise stewardship of the economy and forcing the price of gas down. They do this through releasing strategic reserves, built up over the past decades or the more infamous way by means of price controls and the like. Like all government actions, putting a floor or a ceiling on the price of gas is not going to solve the problem in the long run; its just going to distort it.
The price of gas is currently being influenced by the policies of the Federal Reserve. The global demand for oil has not reached the peaks of 2007, and yet the price is almost but the same. The demand for gasoline in the United States is the lowest in the past couple of years, and the production, believe it or not, is at the highest. Its so high, that American producers are exporting gas to Europe. Why is price for a gallon of gas in America and a liter of gas in Croatia so high?
Well, there is a massive influx of dollars in the oil market, pushing the price of gas higher and higher. That’s why there was discussion of releasing the oil reserves in The USA and from the British Prime Minister David Cameron in the UK. They are desperate to lower the price of gas and the so called cost push inflation that is draining the US GDP every day. According to ZeroHedge, every $10 increase in crude prices, cuts US GDP by 1%. The same logic applies to any country, as input costs rise, it gets increasingly difficult to pass these prices to consumers. The consumers can bear these costs as long as if the so called price elasticity of demand and the consumer short run budget lines go hand in hand.
After a while, it becomes unbearable and production processes can no longer absorb these increasing costs and production falls, taking consumer demand and the rest of the economy with it.
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