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Greg Cowart - Mortgage Broker or Lender at The Securus Group
Greg Cowart - Roseville Loan Guy

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Let’s talk about gas prices… And interest rates.

Let’s talk about gasoline for a few moments. Surprisingly, doing so may afford some insight into other subjects, maybe even the level of interest rates.

The place to start, I suspect, is here: We have heard a lot of whoppers about how the current high price of gasoline at the pump either was engineered by Obama or was the result of Obama’s lack of obvious oil-price-easing activities. In short, it’s because of what Obama did (or, as the case may be, it resulted from all Obama didn’t do).

Most economists look at this argument and respond with a very obvious point. Obama couldn’t cause gas prices to rise if he wanted to. Sadly, he isn’t much more proficient at making gas prices fall, either.

There is a belief, however (“Drill, Baby, Drill”) that Obama could bring prices down if he found ways to encourage greater gas production in America. An obvious problem here is that we have not only already increased our production – largely because of technology that unlocks the oil heretofore bound up in shale deposits in a vast number of locations beneath the American soil (note for example, North Dakota) – but we even graduated to the status of net oil exporter (that’s right, we export more oil than we import) this past year.

It was assumed that the price of oil would decline if we seemed to have enough of it. But no. The price of oil is determined by “the international market,” and thus it depends on the level of demand for oil across the world, and the key there is whether OPEC wants to boost the price of oil or to bring it down.

A grocery store, after all, can lower the price at which it sells hot dogs. But when an international chain of supermarkets sets the price higher, the grocery story may gain several new fans, but the price of its hot dogs will eventually move to the price established in the international markets.

This has raised the question of why OPEC countries are so “greedy” – why they don’t just accept a lower price when the profits they are making by producing it for a few bucks a barrel and selling it for over $100 are outrageous (the same, of course, can be asked of American oil companies. The Saudis, among others, have no lock of greediness)?

In any case, there is an obvious answer… If you are the Crown Prince of Saudi Arabia, for example, and the only things your country has for its people – like food, like the essentials of living, as well as the luxuries – are imported, not grown or manufactured at home and those imports are paid for with oil money, you want to manage your national resource with great (and greedy) care. Otherwise, you will end up thrown out of office and into the same dustheap of history where Mubarak and Gaddafi and others find themselves.

As Bibal Qabalan noted in NPR’s Planet Money, every gallon of gas we buy has an unspecified but costly tax within it. “Like it or not, the bill for keeping the Persian Gulf monarchies in power is now being footed by every American. Every time we fuel our car we send an extra 35 cents per gallon, or roughly $6 per fill up, to the Save the King Foundation. Since oil goes into everything we buy from food to plastics, this adds about $1,500 annually to the expenditures of the average American family.”

Is it a political issue, therefore? Absolutely. But neither Obama nor any other American politician can do much about it – except throw his and her support behind our own energy program, and get us into electric cars, still a somewhat dubious proposition, especially in the short term.

The Saudis don’t want to make us overly angry. So they also work to keep oil prices from rising too high – whatever that might prove to be. Studies have shown that, even as oil prices rise still further, “Americans may protest loudly, but their economic behavior indicates a remarkable indifference to the price of oil.”

And what might this have to do with interest rates? It just fits into a similar category. Interest rates, particularly today, are established in world markets. They depend on how well the euro happens to be faring, the psychology of certain fiscal and political problems – from Greece to Spain to Iran to Brazil – and other matters. To gain some understanding of why rates are going where they’re going, we have to dig very, very deep. And we’re still likely to come up with little to no gain – either in understanding or in profit… And so it is at this moment.

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