TJP

The Real Cause of US Economic Problems

By Byron A. Ellis

February 02, 2008

It is interesting to look at historical prices of US regular retail gasoline, Figure 1. US regular retail gasoline prices began a significant rise after the invasion of Iraq. Prior to the invasion prices averaged between $1.00 and $1.50. Prices increased steadily after the Iraq invasion.

Pundits and others, however, want the public to believe that the rise in prices is due to excess demand, rather than instability in the Middle East. However, British Petroleum (BP) Statistical Review of World Energy June 2005, documented that in 2000 worldwide crude oil production was 74,950 million barrels per day and increased to 80,260 million barrels per day in 2004. The Energy Information Administration (March 2006, International Petroleum Monthly) reported average total world demand in 2005 was 83.62 million barrels per day and average total world supply was 84.08 million barrels per day. The Economist (Aug. 13, 2005) also indicated that crude is plentiful, and this is expected due to the lure of higher prices.

Figure 1

Clearly, increases in crude oil prices are not due to supply constraints, but rather regional instability. Regional instability causes traders to bid up crude oil prices. Thus, the decision to invade Iraq created instability in the Middle East and adversely affected the price of crude oil, and over time the US economy.

Lets look at how the average suburban consumer’s disposable income is affected by the rise in gasoline prices. Assume that the consumer’s round trip from home to work is 60 miles and the individual drives a sport utility vehicle (SUV) with an average fuel economy of 17 miles per gallon and a 28-gallon gas tank.

Thus, the SUV driver would need to fill her tank once a week. Prior to the invasion she paid about $42.00 (=28 Gal X $1.50) for filling her tank. In 2007, however, she paid twice as much, $84.00 (=28 Gal X $3.00), or a 100 percent increase. Therefore, in a year the SUV driver paid, on the average, $2,200.00 (=$42.00 X 52 Wks) more for gasoline.

Similar computation applies to the transportation industry. Truckers, delivery services, school buses, and others are also paying twice as much for transportation fuel. And, some of the extra transportation cost is pass on to the average consumer in the form of higher products. Hence, the basket of food purchased by consumers has also increased, as well as the cost of utilities, cleaners, and so on. All these increases further reduce the consumers’ disposable income, leaving less disposable income to pay for rising adjustable mortgages, credit card, utility and other bills.

Unfortunately, the consumers’ decrease in disposable income is profits for energy companies and crude oil producing nations. Yesterday, Exxon-Mobil Corporation reported earnings of $40.6 billion in 2007, the largest corporate profit in America and Chevron Corporation reported a profit of 2007, its best year ever.

Thus, the root cause of the current economic malaise is the ill-advised invasion of Iraq, which is draining the US government and the average Americans. Thus, the choice that voters make in the upcoming primaries is likely to determine their economic destiny.

The choice is more of the same or a new vision.   

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