Jeff  Carter

Gas prices are up over the last three years. There are economic reasons why, and it’s not demand driven. A lot goes into the price of a gallon of gas. They are talking $4 buck per gallon gas this summer. All people have to do is come to Chicago and you can pay $4 today! Most of the cost is taxes.

Ironically, as the media fans the fear flames of higher gas prices, Congress is deliberating a new highway bill. Highway bills are among the most pork laden bills passed in Congress. A Christmas tree of blacktop and cement. In a trade off, Republicans trade projects in their states and districts for gas taxes that support unions. True sausage making at its finest.

When we look at the price of gas today, there are many factors that figure into that price. Demand for gas is plummeting. Crude oil ($CL_F) prices have been all over the map. With the recent tension in Iran, they are poised to go higher. Last year, it was the Arab Spring that put upward pressure on prices. However, all that social pressure ignores Obama’s domestic policy on energy. His policies and regulations via the EPA have constrained the supply side of the market, putting even more upward pressure on price.

What goes into that supply side? It is simply more than exploration which Obama has banned. There are bottlenecks in the supply chain because the US doesn’t have the necessary refining capability to keep up with domestic demand. Our country hasn’t built a new refinery since the 1970's. That puts huge pressure on existing refineries to generate output. That causes what Operations Research pros call “whip” in the supply chain. A little kink at the top creates a lot of volatility at the bottom. Think about how you crack a bullwhip and you will get a mental picture.

Jeff Carter

Jeffrey Carter is an independent speculator. He has been trading since 1988. His blog site, Points and Figures was named by Minyanville as one of The 20 Most Influential Blogs in Financial Media.