Populism has its limits. The populist, when he sees a problem, immediately assumes that someone is taking more than his or her fair share. It only stands to reason, particularly in an land as rich as the United States. And there certainly are times when such effects as "the tragedy of the commons" or the "monopoly effect" lead to loss of general welfare or higher prices. However it is not a good idea to explain things like high commodity prices, as Scott Shields does with a sidelong glance at big oil is to miss the important economic point of the our era.

The standard explanation is correct - reformulation, along with what the market will bear - is the reason for the annual pilgrimage of gasoline prices upwards around Memorial Day. However the real question to ask is why this happens, and why the price of crude continues to march upwards.

Scott Shields' post has a logical discontinuity, he argues that because "Big Oil" is blaming reformulation, that Big Oil is bad because of their attempts to whitewash, or perhaps we should say shitewash, global warming. On the global warming point, there is no argument: the carbon burning industries have spent huge sums of money creating doubt where none has really existed, and profitted enormously because of it. Strangely, global warming and peak oil are two things that "Big Oil" has started to embrace, for reasons that will be clearer below.

But the first part, that reformulation and refinery capacity are not the problems in the change over, isn't correct. Refineries are going to run at capacity, to have more capacity to make the change over, means having that capacity sit idle - piling up interest costs - except for a few weeks a year. Since there isn't much you can do with a refinery except refine petroleum, no one wants to build a refinery whose sole purpose is to lower prices for other people. Basic rule of business: people, particularly of the corporate kind, only do what they can monetize the profits of. And if they can't they don't do it for long.

Which means that the real question is not "why do gas prices spike at this time of the year", but why are people willing to pay the higher prices, and why is no one willing to come up with a better solution to the problem. We can build more refineries, but then the people who build them will want everyone to pay for them, since there is no profit it in doing so themselves.

So why are commodity prices marching upwards? It isn't because of an intergalactic conspiracy to charge people more. Nor is it because of the headline grabbing reasons that are in the newspaper. It isn't even because of acute shortage, since world supply is slightly ahead of world demand, and petroleum stocks are going up, not down.

The ultimate root cause is not Iran's nuclear aspirations, nor Nigeria's political problems, nor the civil war in Chad, nor the tensions with Venezuela, nor the war in Iraq, nor any other specific event. These are effects, not causes. They are driven by the high demand for crude oil, and while they are used by speculators to drive the price of money higher, speculators can only speculate if they have two basic inputs. One is money, and the other is people willing to pay that money. Speculators are hoping that there will be a disruption - a war, a gulf hurricane, a terrorist attack, or some combination of the above - that will push supply below demand, burn through existing stocks, and force people and companies to pay dearly for petroleum in short supply.

So the two parts: cheap money and expensive investment have to work together. If investment were cheaper, the response to rising prices for some basic input - whether that input is land, labor or what the financial world calls "stuff", is to invest in capital. The answer to this then is in two parts: why are so many dollars sloshing around the world? And why are people willing to pay the higher prices that result? It is this, not "big oil" that is responsible for rising prices, not just for oil, but for copper, gold, steel and other basic commodities - instead, it is an imbalance in the world economy. That imbalance is that is leading as, John Authers notes leads to debt being cheaper than equity. If access to debt is cheaper than equity, then borrowing is cheaper than investing.

Which means that it is presently cheaper to speculate on commodities, than to invest in the solution to the problem. This means that, for as long as this effect is in place, it will be easier for speculators to push the price of commodities upward, and for consumers to borrow money to keep doing what they are doing now, that it will be for entrepreneurs and governments to find solutions, and for ordinary people to shift from consuming, to saving.

It was exactly this sort of problem that killed the old liberal order's hegemony over American politics, starting in the late 1960's, but accelerating rapidly in the late 1970's, there were too many dollars, a "dollar glut". Debt was more available to companies and consumers, and policies pushed up nominal wages to give people a "cushion" against the rising prices. This led to two things, what econogeeks call "wage push inflation" was the result: people had the money to pay higher prices, and they were willing to pay them. It also meant that those who had pricing power used it. "Pricing power" is the economic way of saying "I have you over a barrel."

::

In our time, however, we aren't seen rising consumer inflation, but, instead, falling real wages. This is the same problem in the other direction. Inflation, to the extent that a government is driving it, is a tax on those who hold currency, and helps those who hold debt. If dollars are cheaper, then it is easier to pay back loans. However, there is the reverse direction: tax those who are earning, and protect those who hold currency. This is why people are getting more and more unhappy, while the "unemployment rate" is low and consumer prices are not rising quickly - except in those places where consumers are directly exposed to higher commodity prices - they are also seeing their disposable income go down. They "feel" inflation, because they are buying more and more on debt. The real price of something is the retail price, plus the price you pay for the money. If people are borrowing more, it means that the prices that they "really" pay are higher. It is inflation, but simply not macro-inflation of the kind that shows up in our current statistics.

As a side note, this means that we need to find statistical measures that get at the real costs people are paying in order to measure how the public feels about the financial situation, rather than just how bankers feel about the situation. The two groups now have dealigned in how they look at the world enough that what works for one, doesn't work for the other.

The world then is awash in money, but what is happening rather than prices going up, for goods, is that prices for assets are going up. It takes more to buy a future dollar of earnings now than it did before. This asset inflation is leading companies to borrow, rather than to sell shares in themselves. Even as the markets have recovered, the market for Initial Public Offers (IPOs) has not. Instead, debt issues of various kinds are very, very in.

This squeeze – labor has no pricing power, and is being heavily taxed – shows up as the political "war on work" that John Edwards is crusading against. It also shows up as a tremendous disincentive to solve problems, because right now it is more profitable to leave the problem in place, and let consumers pay for it. "Make the poor pay", since they have been politically and economically willing to do so, has been the great solution to economic macro-problems for almost 20 years now.

Which brings us back to Big Oil and its view of the world, which is slowly shifting. Big Oil has profited, in the short run, from the run up in oil prices. It means they can exploit lower quality reserves, it means they can charge more for their higher quality reserves. However, "Big Oil" knows that most of the oil in the world left to be found, is not under their control. Thus, they are beginning to want alternatives to the current oil economy. However, they don't want that new oil economy to be any more open than the old one was. Since they don't have Saudi Arabia, they want to invent it – by, for example, mining coal and turning it into a liquid that can be used to make gasoline.

This is, in the long term, the real lie that Big Oil is telling people: that the current personal capital – internal combustion engines of all kinds – can be kept around, if people are just willing to pay slightly higher prices for gasoline. Since in the short run people are being faced with the choice of replacing every engine they own, and selling their house to get closer to where they work, people are willing to pay a few more dollars a week at the pump – hoping that wages will go up someday, or prices for gas will go down, or that they will be able to sell out and move to some cheaper place in the sunbelt. The yearly price spike into summer is merely part of this larger lie, and fits in with the "Global Warming" denial. Because ultimate "Big Oil" isn't about extracting oil from the ground, but in people burning hydro-carbons to get transportation energy. As long as energy isn't accessible, and let's face it, you as an individual can no more mine coal and turn it into petroleum than you can drill an oil well and get oil – then Big Oil stays in place.

It is important to remember that oil was, once, the future, because it was more accessible than coal – oil was found all over America, and all over the world. It was easier to transport and deal with, and it was easier to run personal transportation on oil than on coal. People went to oil over coal because it was more scaleable, sustainable and accessible than coal was. As the era of scaleable, sustainable and accessible oil ends, the real solution is to move from an economy that is based on liquid hydrocarbons, to something else. Big Oil, ultimately, doesn’t want that to happen.

This is why, from the progressive stand point, short term focus on the annual gas spike is a losing proposition – there are plausible ways to get the short term price down, in return for sinking even more of our present effort into capital that will only be a load around our necks going forward. Instead of easing the annual gas reformulation bottleneck, because we will pay more for doing so than it is worth, the focus should be on easing the larger money and oil problem which is hobbling our ability to raise wages and create jobs. Lower gas prices only mean, in the end, that we will get to peak oil faster, and that crude oil prices will rise, offsetting anything we do to lower gas prices fairly quickly.