Dollar, Gold and Gasoline: Much Ado About Nothing

U.S. regular gasoline price has spiked almost 4% in one week to $3.688 a gallon as of Feb. 26, the highest level since last September, with residents in three states--Alaska, Hawaii, California-- are already seeing above $4 at the pump, based on AAA's Daily Fuel Gauge Report.

The current price level is roughly 11% above a year ago.  Analysts estimate that every 1-cent increase in the price of gasoline costs the economy $1.4 billion.  Consumers are starting to feel the pinch, and a new Associated Press-GfK poll says 7 in 10 Americans find the issue "deeply important".

Crude oil is one of the oldest and most complex commodities in the world heavily underpinned by geopolitics, and market speculation throughout its history.  Now, with Iran, Israel, U.S. and Europe exchanging sanctions, threats in daily new headlines, it is hard to imagine anyone in the business world would miss the connection between surging oil, gasoline prices, and escalating tensions over Iran's nuclear program.

To our surprise, Forbes published an op-ed by Louis Woodhill dated Feb. 22 titled "here ), and speculators bidding up the price exacerbating the legitimate worries from real end users.  

Gold and crude oil do sometimes move in tandem when funds flow to the direction of the age-old inflation trade - long commodities, short the dollar.  Furthermore, the dollar does typically have an inherent inverse relationship with commodities, since most commodities, including crude oil, gasoline and gold, are priced in dollars.  Nevertheless, these are hardly the cause of the effect of "no ultimate ceiling on gasoline prices." as Woodhill concluded regarding the current run-up of gasoline prices.  

Dollar debase has been going on for over a decade and in the long run most likely would continue without some fundamental fiscal reform as the U.S. debt topped the $15-trillion mark, and the Federal Reserve's extraordinary measure to keep interest rates low till 2014. Fed Funds Rate has been targeted at 0%-0.25% for an unprecedented 3+ years since Jan. 2009.  Most other central banks around the globe also have been on the monetary easing bandwagon since the Great Recession.

This "great punch bowl" served up by central banks would eventually come back to bite the world economy in the form of stagflation in the developed countries or hyperinflation in other higher growth regions. Nevertheless, this time around, dollar devaluation has little to do with Iran geopolitics, and speculators jacking up the oil and gasoline price right now.

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Written By: EconMatters