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Enjoying the worst of two worlds

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  • Gasoline prices on average have risen above $3 per gallon after oil prices hit $90 per barrel in the oil markets at Christmas.
  • Normally gasoline prices decline during the winter months because refineries are turning out more heating oil with gasoline as a byproduct.
  • This winter, those supplies are being soaked up by developing nations whose economies have begun recovery while the United States continues to struggle with a recession.

The price of unleaded gasoline rose to $2.99 a gallon in places like Ames, Iowa, this week. The reason given for this unusual development – gasoline prices normally fall during the winter months – is a “decline in oil reserves.”

That’s interesting because, for years, oil industry analysts have been claiming that the world had ample oil reserves, and there was no need to develop alternate sources of energy because plentiful supplies of cheap fossil fuels would meet global energy needs.

It’s more complicated than that, of course. As farmers and their landlords know, the prices of most of the major commodities are up significantly in world markets. Nearby New York cotton futures are trading at $1.41 a pound. Corn futures are priced at $6.24 per bushel and soybean futures at $13.66 per bushel at this writing.

As Professor Paul Krugman said in a New York Times column, “What the commodity markets are telling us is that we’re living in a finite world, in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices.”

Another thing that’s unusual, says Krugman, is that the United States is largely a “bystander” in this situation.

Many motorists remember that gasoline prices last went over $3 per gallon – and hit $4 briefly – in the summer of 2008. Much was written at the time about the impact of rampant speculation in the oil markets and those for other commodities.

Those prices began to fall with the collapse of the economy into a worldwide recession in the second half of 2008. Some commodities dropped more than others, but the decline in the demand for gasoline drove those prices below $2.50 per gallon.

Now the economies of the developing world are beginning to rebound and drive up demand for oil and other raw materials. Farmers know cotton futures are trading for $1.40 per pound, in part, because China is increasing its textile production.

According to most economists, the United States isn’t experiencing the pace of economic recovery being enjoyed by the developing nations. But we still have to compete for raw materials against China, India and Brazil.

Many American companies reportedly are sitting on cash, refusing to invest in new capital expenditures or new hires until they’re sure the recovery is real. Those who are adding employees – according to an Associated Press article – are hiring them overseas.

That means Americans are now enjoying the worst of two worlds – continued recession and higher prices resulting from recovery in countries that are largely subsidizing their economies - as we begin the new year.

  

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