Why did Gas Prices go up, again?   July 19th, 2009

Opinion by Noel T. Braymer

Since the late 1970’s there has been talk off and on of raising taxes on gasoline as much as 50 cents more a gallon. The reason for this would be to raise money for alternatives to driving such as better rail and transit service, for alternative energy, infrastructure repairs and to reduce the demand for imported oil.

Every time there is talk of raising gas taxes the argument usually given is this would be a terrible hardship for the average person who needs their car to get to work etc. In the last few years we have seen wild spikes in the price of oil. Last summer gasoline nationwide went over four dollars a gallon only to crash to less than two dollars a gallon by the end of the year. Recently gas prices had risen over a dollar a gallon in just a few months. What is going on?

Pundits love to talk about the soundness of the fundamentals of the economy. But they never explain what the fundamentals of the economy are. The fundamentals of the economy are supply and demand. In a healthy economy they are in state of balance. Most of us have learned that prices go up when demand is greater than supply and down when supply is greater than demand. The job of a free market is to balance the supply and demand of goods and services. So there must be a shortage of oil and growing demand driving up prices? Well no: with the current recession demand for oil is at record lows in this country and around the world. There is a glut of oil all around the world right now and finding storage for it is a problem. In this country refineries for the first time in years have surplus capacity.

So how could this happen in a free market? This brings up the old story of a professional gambler who found a friend and fellow gambler in a game that he knew was rigged. When he pulled his friend aside and told him his friend said “I know the game is rigged, but it is the only game in town”. This brings up Wall Street. Most of the financial industry in this country is headquartered in New York City and is often called Wall Street. The current economic problems that affect most of the world now can be traced to Wall Street. What happened is the largest banks in the United States bankrolled massive speculation on many risky schemes, largely centered on housing. Speculators make huge profits by buying a lot of something which artificially drives the price up, then selling off their share before the price drops back to its true level and letting the suckers lose their money.

The problem for the Wall Street Banks is they are holding massive amounts of bad loans from the “irrational exuberance” of the last seven years. Usually when a customer can’t or won’t pay back on a loan, the bank gives up, writes off the bad loan and cuts its losses. Last September the previous administration rolled out the bank bailout bill to try to stop the tailspin the economy was in. It was called TARP for Troubled Asset Relief Program. The troubled or toxic assets were the bad loans of the big banks. The problem for the economy was the banks were losing so much money that they were not functioning. This cut off credit for much of the economy, which affected spending by businesses and consumers which greatly reduced demand. The idea was the government would buy the bad loans, banks would have money, they would go back to lending money and all would be well.

It is now nine months since TARP was put in place and not one bad, toxic, or as they are now called legacy asset has been bought from any of the big banks. The problem is the banks don’t want to sell them. That is they don’t want to sell them at their true market value. If the banks were to write off the losses of these bad loans by selling them at their true value they would be admitting how much money they really lost. This would drive some of these banks into failure. Many powerful people would lose a great deal of money and the bank executives if they can hold on to their jobs would see their income greatly reduced.

Before the TARP bailout the banks were desperate for cash. In an attempt to find cash some banks turned to speculating on commodities. The banks speculations last year drove up the price of many food items like rice, wheat and corn as well as petroleum. Forecasts that gas prices would reach up to $5 a gallon last year were made by investment banks such as Goldman Sachs and Morgan Stanley. The 700 billion dollar TARP bailout in addition to trillions of dollars lent to the banks at little or no interest by the Federal Reserve Bank has succeeded in keeping the banks afloat and stabilizing the economy. But these big banks are not making money. The current “profits” are from the banks not listing their bad loans at their true market value on their balance sheets. The banks are using their interest free money from the Federal Reserve to pay off their loans from TARP. They are also using this interest free money to loan money for credit cards at up to 40% annual interest. And they are back speculating and driving up the price of oil. The banks are sabotaging much of the effort to restart the economy by sucking up money from consumers that should be used to increase demand. So in effect the taxpayer is being double taxed. Keeping the banks afloat is costing the taxpayers a lot of money. Instead of rising gas taxes to find alternative energy, fix infrastructure or expand transit and rail services, high gas prices are being used to keep the banks afloat. This bank tax on gasoline is taxation without representation.

This entry was posted on Sunday, July 19th, 2009 at 10:26 PM and is filed under Editorials.