Cartoon Bears, the Fed and Gasoline

From Gas Prices Explained: http://www.youtube.com/watch?v=40hNSJEKUgo

(aka Blaming “the Bernank”)

I recently came across this video, which explains a particular point of view on what is primarily driving gasoline prices in the US.

The gimmick, as you see, is that this particular theory of what is actually an extremely complicated economic global commodity trade model is explained by a few cartoon bears.

Their logic follows this progression:

1) Gas Stations are not to blame, because prices are up across the country, and that many individual business owners could not collaborate to fix prices.

2a) Lack of supply is not to blame; Supply is “so high” that refiners are exporting.

A very interesting anecdote supporting this assertion is the story of the “Alaskan Explorer.” This oil tanker was stuck with 12 million gallons of Alaskan crude (a quarter of its cargo) that it could not unload at a refinery in Washington, because the onshore storage tanks were at capacity. (from the Houston Chronicle, “U.S. awash in oil, but global demand drives prices,” 27 APR 2012)

There has also been a spate of articles reporting headlines like the following:

Bloomberg writes that to offset weak U.S. demand, refiners exported 439,000 barrels a day more than were imported the year before.”

(from USA Today, “U.S. exported more gasoline than imported last year,” 29 FEB 2012)

2b) Demand is low. Note the significant downward trend starting around 2008.

Note that: “Over the last several years, the refining industry has shut down about 1 million barrels per day of refining capacity aimed at the east coast, the latest of which is the St. Croix Hovensa refinery, closing next month.”

(from USA Today, “Refinery closings could push gasoline prices back to $4,” 28 JAN 2012)

3) Instability in the mid-east is not to blame, because “has there ever not been instability in the mid-east?”

4) It is not “the speculators” because they bet both ways – there are two sides to any trade.

But…

5) The “falling dollar” is to blame. “The price of anything is based as much on what it’s worth as it is on the currency you are using to pay for it.”

At this point, the bears focus on Chairman Bernanke (aka “the Bernank”), and the Federal Reserve. These bears suggest that “the Fed” has been “printing more and more” money to stimulate the economy, leading to a devaluation of the dollar. They note that “the Bernank” claims the Fed is responsible for higher stock prices (as a result of its policies), but that he does not claim responsibility for higher gasoline prices. They then note that gasoline prices and stock prices are generally correlated.

It is true that in this interview, Chairman Bernanke says “the purpose of the monetary policy easing is not to increase stock prices per say, the purpose is to strengthen the US economy, put people back to work and create price stability, but the way monetary policy always works is through interest rates and asset prices. […] So, yes, I do think that by taking these securities out of the market and pushing investors into alternative assets, we have led to higher stock prices and lower stock market volatility.”

from: http://youtu.be/_-Jkgaehkwo

 

 

Is it true that stock prices and gasoline prices are highly correlated? Yes. The correlation between the S&P500 and Gasoline (“Conventional Gasoline: U.S. Gulf Coast, Regular”) (compared daily prices from January 4 2010 through May 1 2012) is a respectable 0.87.

Gasoline Data from: http://research.stlouisfed.org/fred2/graph/?s[1][id]=DGASUSGULF

S&P500 Data from: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l–

So, does this mean the cartoon bears are correct?

Not necessarily. Note that over the same time period, the correlation between gasoline prices and the value of the dollar (measured as the exchange rate against the Euro) was only 0.44 (U.S. / Euro Foreign Exchange Rate (DEXUSEU)).

US/EU Exchange data: http://research.stlouisfed.org/fred2/graph/?s[1][id]=DEXUSEU

But, then again, maybe the US and the EU policies are too closely related, and currency exchange rates between the two may not capture changes in the value of the US currency against the global market for petroleum based products.

Comparing the exchange rate between the US and the Aussie dollar (U.S. / Australia Foreign Exchange Rate (DEXUSAL)) against the price of gasoline in the US suggests that the bears may be on to something.

The correlation, again over the same time period, is 0.88… which is an even stronger correlation than that between the S&P500 and gasoline prices.

US/AUS Exchange data: http://research.stlouisfed.org/fred2/graph/?s[1][id]=DEXUSAL

So,  maybe we can learn a thing or two from a cartoon bears. I wonder what their stance is on honey-based biofuels…

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2 Comments

Filed under biofuel, energy, Uncategorized

2 responses to “Cartoon Bears, the Fed and Gasoline

  1. Chad Blevins

    What would the impact be, if oil were priced on the global market with currencies other than the US dollar?
    Iran is accepting the Chinese renminbi as payment for its oil.
    http://www.ft.com/cms/s/0/63132838-732d-11e1-9014-00144feab49a.html#axzz1uUaWxG5B

    Is it reasonable to consider that oil might be traded using renminbi in other circumstances? Is this even possible with the renminbi “pegged” to the dollar the way that it is, rather than being allowed to float?

  2. asdivakaruni

    Great post. It’s interesting to note that the high correlation between gas prices and stock prices is a relatively recent development. Prior to 2000, gas prices were hardly linked to the stock market at all. Between 2000 and 2007, the relationship became more clearly defined, and since the global financial crisis, gas prices and stock prices have moved virtually in lockstep.

    You can view a graph that illustrates this phenomenon here: http://www.cxoadvisory.com/wp-content/uploads/2012/02/gas-SPY.png

    I do believe that the laws of supply and demand will dictate the price of gasoline in the long run. Nevertheless, it’s undeniable that policy action in the last decade has influenced gas prices considerably, and the aggressive quantitative easing that we’ve seen in recent years from the Fed has all but overwhelmed the other factors that usually come into play.

    While we’re on the subject of correlations: does anyone happen to know what the relationship between gas prices and the presidential approval rating is?

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