Gas Prices Explained

The movement of gasoline prices over time is a tricky topic for many to understand. While there are those who would pin the causes on any number of usual suspects, one pundit will surely disagree with the next as to the root of the problem.

Animator Omid Malekan takes a simple approach to the subject, using two bears and a straightforward chart that shows – with little doubt – a clear connection between the price of gas in America and stock prices. No stranger to economics, Omid’s popular videos tackle a range of topics, including the European Economic Crisis, Inflation, the Bank Bailouts, and the Federal Reserve. In short, it’s all about the markets and money supply.

I had never seen one of Omid’s brilliant animations until after we struck up a conversation at a YouTube event in New York City, last year. The day after the event, I watched Omid’s wildly popular Quantitative Easing Explained video (which has been viewed over five million times). I’ll freely admit that the cause and effect of quantitative easing escaped me. I simply didn’t get it until I witnessed two bears dish out on the topic. (I’m still not sure that I do …)

As of this writing, Omid’s videos have rolled up more than seven million views on YouTube, in all. He released his segment explaining the rise in gas prices back in March, when domestic prices hit a historic high for that time of year. While prices have fluctuated since then, we are once again in a perilous place.

His Gas Prices Explained video starts out by ruling out local service stations as the cause for the rise, comparing them to supermarkets. “If the price of cereal suddenly went up a lot everywhere, would you blame your local supermarket?” Of course not. “Most of the price of gasoline is based on the price of oil, which gas stations don’t control.” He then explains away a shortage of gasoline as the cause. “Supply is so high that American refiners have started exporting gasoline to other countries.” Simply put, refiners do business in a worldwide market and are selling at the global price. Demand for gasoline is at a decade low in America because of the sluggish economy and advances in fuel efficiency. Omid then rules out tensions in oil producing regions as a primary cause – “Has there ever not been instability in the Mideast?” – before dismissing speculators as “the politicians’ favorite scapegoat.”

Omid pins the rise in gas prices on the falling US Dollar. “As the value of the dollar goes down, we need more and more of it to buy a gallon of gasoline.” He explains that the Federal Reserve’s policy to print more dollars has a profound effect on the price of gas. An increased money supply is intended to help the US economy, but the rise in gas prices has the opposite effect. The extra dollars have driven up stock prices. Omid drives the point home with a highly convincing chart that plots gasoline prices along side stock prices, showing how the two have moved in unison.

“This chart makes things so simple, even an economist can understand what’s going on.”

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1 thought on “Gas Prices Explained”

  1. The analysis in the video appears to be inaccurate. The United States dollar has not been inflated much during the recent economic crash and subsequent road to recovery in spite of loose monetary policy by the Fed. Generally during an economic downturn, deflation – when dollars are worth too much compared to goods, thus causing people not to make purchases and thus causing unemployment – is the great danger, not inflation. The inflation rate during the past few years has been quite low. Thus, it inaccurate to say that a lower value dollar is the cause of higher gas prices.

    The video uses extremely fallacious logic to get around blaming speculators. The author correctly notes that speculators cause gas prices to go up and down, but then says that speculators do not cause gas prices to go up. Yes, speculators can drive the price of something either way, and during this period, they have driven the price of gas up. It is estimated that the Koch brothers alone add something like $.50 per gallon to the price of gas. When everyone bets on gas and no one against, even though real users of gas aren’t using as much, there is still a shortage.

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