Gas Prices are Rising Because the Dollar is Falling
Americans are feeling the pain at the gas pump. Gasoline prices have soared 42 cents a gallon since the beginning of the year. The nationwide average is now $3.74 a gallon, a 101 percent increase from January 2009. So who’s to blame?
To be fair, multiple factors are responsible for the rising gas prices. But the bulk of the blame should be placed on the Federal Reserve. Quite simply, gas prices are rising because the purchasing power of the dollar is rapidly falling. Oil is priced in U.S. dollars which means that its price goes up when the value of the dollar goes down. The purchasing power of the dollar has significantly dropped since the Federal Reserve has printed trillions and trillions of new dollars in recent years. Whenever more dollars are pumped into the economy, the value of the dollar falls.
Look at it this way. One dollar could buy you a gallon of gas in 1989. I’m sure we all would like to go back to when gas was 98 cents a gallon. It costs us almost four times as much to buy the same amount of gas today. The price of gas has risen by 382 percent in just 23 years. The dollar can’t buy what it used to because the Fed has its printing presses working overtime.
The graph below shows the correlation between the value of the dollar and the price of oil:
As you can see, the price of oil has gone up as the dollar has fallen. We can see how the Federal Reserve’s actions have driven up the price of gas. The Fed’s multiple quantitative easing plans have only destroyed the value of the dollar. The term quantitative easing in layman’s terms just means that the Fed will print more money out of thin air.
The graph below shows how the Fed’s policies have affected gas prices:
West Chester University Economics Professor Eric Parnell explains the graph:
Gasoline prices have followed a predictable trend since the first days of Fed stimulus. During QE1, gasoline prices skyrocketed by +118%. Once QE1 ended in April 2010, gasoline prices immediately dropped by -27% in a matter of months, and this occurred during what is typically the strong summer driving season. Once QE2 was delivered to the market in August 2010, gasoline prices jumped another 92% by the end of this stimulus program in June 2011. Once again, the moment QE2 ended, gasoline prices retreated another -28% in a matter of months. Finally, since the latest Fed stimulus program along with the European Central Bank’s own LTRO program, we’ve seen gasoline prices skyrocket another +30%. What is even more irksome is that much of this rise in gasoline prices has occurred during a time when gasoline consumption has been falling. Have the laws of supply and demand been repealed? No, they’ve just been severely distorted by policy action.
The Federal Reserve may not be solely responsible for rising gas prices. But we should not ignore the fact that the central bank routinely devalues our currency which in turn increases the price for goods and services. As a National Review headline reads, “Gas Price Spike: It’s the Monetary Policy, Stupid.“