Why is gasoline so damn expensive? The mainstream media has rounded up the usual suspects. They demonize oil companies (for excessive profits), lambaste environmentalists (for blocking domestic drilling and refining), and sock it to speculators (for fear mongering over supply). Simply put, the current crisis is a speculative bubble whose impact to American consumers is exacerbated by domestic economic conditions. I fully expect crude oil will trade below $80 a barrel in the not too distant future. Meanwhile, let’s tackle this one myth at a time.
Oil companies are easy targets for the public’s gas-price-related ire. ExxonMobil recently scooped second on the Fortune 500, with annual earnings of $40.6b. Chevron slipped in at number three, with $18.7b of profit. Surely these under-taxed wicked corporations screwed unwitting customers to amass these ill gotten gains profits.
Here's a politically inconvenient truth: most of the oil companies' profits are the result of volume, not market prices. ExxonMobil, Chevron, et al make in the neighborhood of 10 cents per gallon– whether gasoline costs $1.50 a gallon or four bucks. Big Oil’s making big bucks because there’s record worldwide demand, especially in India and China.
And let’s not forget history. The oil companies we know and despise today are the result of a devastating supply glut during the early ‘90s. That “crisis” pushed these companies to the brink of extinction. Record losses spurred Exxon to merge with Mobil, and Chevron to merge with Texaco. During the same time frame, Conoco and Phillips combined and British Petroleum gobbled up Amoco. The mergers lowered overhead expenses by eliminating redundant exploration and administrative overhead expenses.
The second myth is that supply shortages are sending U.S. pump prices skywards.
While demand is certainly at an all-time high with the emergence of the insurgent Chinese and Indian economies, supply is also plentiful. Have we passed “Peak Oil?” As far as the oil future’s market is concerned, it doesn’t matter. Even the greatest pessimists concede that known reserves will last at least another fifty years. More optimistic (and realistic) estimates stretch hundreds of years hence. Either way, the delivery dates of oil contracts being traded today are days, not decades, from now.
On a more immediate level, fuel shortages are a fiction. I’m not aware of a single gas station that’s unable to refill its fuel tanks or factory unable to obtain required petrochemicals or plastics. To the contrary, in April, U.S. stockpiles grew nearly 12m barrels. Iran is now storing crude in old tanker ships floating in the Persian Gulf because they have run out of space in conventional storage tanks. The world’s positively awash in oil.
How about this one: America needs more refineries; the greenies are blocking our energy independence.
Although no new refinery plants have been built in the U.S. in a generation, there’s no shortage of refining capacity. Oil companies have retooled to improve the refining capacity at existing sites. Currently U.S. refineries are operating at only 85 percent capacity. Go figure.
The corollary to this erroneous supposition: domestic drilling would alleviate high prices.
Should Uncle Sam allow ExxonMobil to tap ANWR? As far as today’s oil prices are concerned, it really doesn’t matter. Even if there were pumps in the protected Alaskan field pumping at full capacity right now, crude oil trading in global markets would continue largely unfazed. If we pumped more, the rest of the world would simply pump less to prevent a glut. OPEC makes these kinds of adjustments every time they meet.
So here’s the truth about high oil and thus gas prices: the pain at the pump is the result of a weakening dollar and strengthening speculation. During the last year the U.S. dollar has fallen 14 percent against the Euro, nine percent against the Chinese Yuan, and 15 percent against the Japanese Yen. In other words, it takes more dollars to buy the same goods on the world market.
The other culprits, speculators, are taking their money out of the falling stock market and collapsing real estate investments and pumping them into the red hot commodities market. Buying oil futures has become intensely popular, driving prices heavenward despite an ample supply of product.
Who are these opportunistic speculators that are causing you so much grief every time you fill up your SUV? You. Most of us have pensions, insurance holdings, or various investment funds in our 401K that hedge losses in the commodities market-– usually without the knowledge of the ultimate beneficiaries, you and me.
Market fundamentals don’t support the current high oil prices. As surely and as predictably as the technology bubble burst after a decade of market excess, world oil prices will come tumbling down, as investor dollars flood back into revitalized stock and real estate markets. When will this occur? That’s the trillion dollar question.
136 Comments on “The Truth About High Gas Prices, Or How I Learned to Relax and Pay $67 to Fill Up My SUV...”
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http://www.businessweek.com/bwdaily/dnflash/content/may2008/db20080513_272469_page_2.htm
Congress is starting to train their sights on the speculator. Just as I predicted, and hoped would happen. Requiring 50% margin is a small step towards getting some badly needed oversight into the Modern Day California Gold Rush that is the oil market. Hopefully other major trading nations follow suit.
Thanks William, I give these same arguments every time someone complains about gas prices, you just said it much better than I can. I often focus on your first point. It is true that the big bad evil oil companies make about 10 cents/gal in profit. The Feds take 18 cents/gal and the states take even more, New York and Pennsylvania top the list at over 31 cents/gal, while the lowest is Georgia at 7.5 cents/gal, the average being about 20 cents/gal. That means that the Feds and the States combined (not counting local taxes) are making 3x the profits of the oil companies.
Also, regarding your point about the evil speculators making money: I always say, that there’s nothing stopping you from being an evil speculator too. Just open an E*Trade margin account, it’s not expensive and they have low minimums, and you can hedge your bets against rising fuel prices (or any other commodity you care about).
It’s great to read a levelheaded editorial on high gas prices. Inflation is the real culprit. What’s inflation? How does a fiat monetary system create inflation? What controls the printing of currency? Good questions…
Let’s hope the prices come down.
I just paid $62.40CAD to fill my Mazda3 with 50L of 87 gasoline (that’s 124.8 cents/liter) in Toronto.
So to be honest, even though I know our federal and provincial taxes make up a significant part of that amount, I’m not quite feeling the agony/despair of Americans filling up their cars and trucks at the moment.
As an aside, truth be told, the US has a very inefficient fleet of vehicles. Please tell me why again you need a V8 in an Econoline van when a small turbo diesel will do just as well?
Too bad we all have to suffer b/c of speculators.
This is one of those articles that needs so much information from other sources, it would be nice to know where you got the information from. Although there is a lot of oil around to extract yet, it seems that it is harder and harder to do so. That, and higher demand world wide, to me indicates that the price wont go down that far, once the speculation is finished… not that it ever ends.
The view from here where I spend the equivalent of $130 to fill up a small hatchback is that a strong euro isn’t enough to match the increase in gas prices. In 2002 as I recall, gas was going for about 1 euro per liter, now it’s going for 1.40.
Congress is starting to train their sights on the speculator. Just as I predicted, and hoped would happen. Requiring 50% margin is a small step towards getting some badly needed oversight into the Modern Day California Gold Rush that is the oil market. Hopefully other major trading nations follow suit.
Unfortunately, congress cannot write law for the rest of the world. With this proposed legislation in place investors will simply transact commodities in unregulated foreign markets. The politicians will pat themselves on the back for doing something that was really nothing.
Well put. When President Bush went to Saudi Arabia to beg for more oil, they told him no. Why, because they rightly said there is no oil shortage, in fact, they could produce another 2 million barrels per day if they wanted to.
The real question is where do you buy your gas that it only cost $67 to fill your SUV. It cost me $57 to fill my Fusion in CT.
I last filled up my Jeep Liberty 5 days ago in Flower Mound, Texas, 17.97 gallons at $3.69 each for a total of $66.47 (good guess, RF). I got 15.6 mpg in mixed city/highway driving.
Follow the money.
The right side of the aisle welcomes more profits for their oil executive buddies, because ultimately this results in more money in their campaign funds.
The left side of the aisle welcomes high gasoline prices because this results in fewer people buying and driving those icky gas guzzling SUVs and trucks. This also clears the way for more intrusive legislation giving the government more power over our daily lives.
It is utter fantasy to think that the US government can fix a problem that they themselves created. I just hope the bottom falls out of the market in time to catch the buzzards with their pants down.
However, it looks like it will be the same situation as the previous bubbles. The fat cats will cash out and leave the little guy holding the bag once again….
The truth about high gasoline prices is that the current pump prices do not reflect the curret $125+/barrel price of oil. The independant refiners are being squeezed because the crack spread between finished gasoline and raw crude is leaving no room for a profit. Refineries owned by the major oil companies can make up the difference on the upstream side, but not the guy that’s buying his inputs on the open market. We should be paying $5 or more per gallon based on historical refinery margins. So be thankful the price isn’t higher, it should be. And it’s time to face the reality that the SUV was a product of cheap energy that couldn’t last forever.
Why would anyone look to the government (of all places) for help paying their gas bills?
Is the mirror really all that hard to look in to?
Great article, William!
I would only disagree with the speculator bit: I see a bit of chicken-and-egg: Are oil prices high due to speculation, or are speculators simply taking advantage of an already nervous oil market?
The way I see it, speculation is a self-correcting force. If speculators bid up the price of oil too high, different speculators would go short on oil, bringing the price down. How come so few speculators are betting on a falling oil price?
I believe the fundamentals are driving up oil prices (I’ve seen the comment about Iran storing oil in tankers. If true, that would make the market even tighter, won’t it?), and I think the challenge is to distinguish between US and world markets. US consumption is (slowly) declining, due to high prices. World consumption is still growing thanks to gas prices being subsidized in China and many oil-producing nations. Why conserve, if prices are low?
The best thing we can hope for is that the Chinese government looses its ability to subsidize gas prices, and start to pass on high prices to Chinese consumers. Till that happens, you’d have to make peace with $120/bbl, while it lasts: next stop $130, $140, etc.
Globalization is great! Except when it aint!
Personally, I blame the media for fanning the flames of fear. You literally cannot open a newspaper, turn on your television without some sort of “the sky is falling” prediction. This in turn is fueling much of the speculation. Demand will continue to drop and by mid Summer (4th of July) it should be readily apparent that we are not running out of oil/gasoline anytime soon, peak summer demand will begin to fall, the sub-prime crisis will hopefully begin to fade and we can all get back to reality.
Although, I don’t really enjoy spending $70 to fill up my Wife’s Pathfinder, I think the long term effects of higher gasoline prices are positive and are going to be felt for some years to come. I much prefer we get a wake up call many years prior to the disaster than actually have disaster at our doorstep with no plan in place to combat it. Assuming gas prices go down and stay down for an extended period of time, hopefully next time we have a run up in fuel prices we will have a number of small efficient cars on the market, efficient family sized crossovers, hybrids, alternative fuel vehicles, etc, etc.
Seeing as I can stomach the rising cost of gas (for now), I actually appreciate what it is doing to the automotive marketplace in terms of innovation and sales trends.
Gamper-
You’ve hit the nail on the head. Markets are very psychologically-driven. The media loves nothing more than a story that feeds on itself and damn any pain it might cause to regular folks.
Having said that, my pet peeve is the tax loophole that allows “businesses” (anbody who was willing to lie and file a schedule C) to deduct 100% of a “truck” (anything bigger than 5000 pounds that had some small amount of truck DNA) in the first tax year. This is what led to Volkswagen adding weight to the Toureg so that it would qualify for the deduction.
adam0331 said:
“The truth about high gasoline prices is that the current pump prices do not reflect the curret $125+/barrel price of oil. The independant refiners are being squeezed because the crack spread between finished gasoline and raw crude is leaving no room for a profit. Refineries owned by the major oil companies can make up the difference on the upstream side, but not the guy that’s buying his inputs on the open market. We should be paying $5 or more per gallon based on historical refinery margins. So be thankful the price isn’t higher, it should be. And it’s time to face the reality that the SUV was a product of cheap energy that couldn’t last forever.”
Look at it this way; crude oil was at about $64 a barrel just post-Katrina. Gas was at $3.89 here in northern Michigan. Crude is now $128 a barrel, and I paid $3.96 this morning (lucky for me, the price temporarily dropped 4 cents a gallon). Just extrapolating, you can see that gas “should” be at about $7.78 a gallon (since some of the taxation is percentage, while some is fixed, this ratio is not exactly accurate, but close enough). That’s $3.82 more than I’m paying, pretty close to your $5 a gallon, though.
I did some “rough” calculations and figured on $175 per barrel by Memorial Day 2009 (instead of $200, as some experts predict; I was trying to be optimistic and somewhat realistic); I calculated that the margins for wholesale and retail would be going up to about what it historically has been; I also conservatively added “only” $1.50 per gallon (not as much as $5.00 per gallon) due to the impending passage of a “global warming” legislation (read: massive tax increase on fuels) in the US Congress.
I figured $12.77 per gallon by Memorial Day 2009, but then realizing what this would do to the economy (read: massive recession), I guessed that 1/2 of the 24% “discretionary” driving would disappear as fast as 25 cent soda pop on a hot July day, and taking into account that this “might” bring down fuel prices by 1/2 of the 12%, I figured on (make sure you are sitting down)
$12.00 per gallon in the US by Memorial Day 2009.
Unfortunately, I was dead right on my prediction for Memorial Day 2008 ($4.00 per gallon) about 6 or 8 months ago.
Guess we’ll see in 12 months 1 week, won’t we?
Plus, lots of gas stations are now closing down because they can’t make any money. This will mean fewer stations, less competition and eventually, prices WILL therefore rise (and the remaining stations will be able to make historically normal profit margins again).
Speculators win big sometimes… but they also lose big sometimes! Congress should get its grubby ig’nant paws out of regulating speculation. Doing so would lower the number of market participants who cushion the risk and spread it around… instead of concentrated losses (that could provoke taxpayer bailouts), any losses would be better spread across a plethora of speculators. Same goes for huge apprecations in value… they are actually spread across more players, unhampered by restrictive Democrat-led soviet-command-economy inspired regs.
menno: Your calculations are flawed. The high gas prices after Katrina were caused not by oil prices, but actual and/or perceived shortages of gasoline due to refinery issues.
Gas price does not go up in direct proportion to oil prices, because oil is just one cost component of gas. I do not believe your $12.00 gas by next year. Maybe $5.50; or maybe $3.50. I agree with William that there is currently a bubble.
But beyond the bubble, oil is heading for a global peak all too soon. National geographic has an excellent article this month. The range of forecasts by independent analysts for global peak oil centers on 2015. Meanwhile, the DOE sees ever increasing supply for decades to come. Who do you believe?
The big mega-fields that are cheap to pump are all in decline, some precipitously. Any addidtional capacity will be much more expensive to extract.
The reason the Saudi’s won’t pump more? They like the high prices, and have changed their strategy forever: they want their oil to last for future generations (of Saudis). That’s why they’ve given the finger twice to W’s request for more oil.
If the current bubble does pop (not guaranteed), enjoy it, because it won’t last.
Who are these opportunistic speculators that are causing you so much grief every time you fill up your SUV? You. Most of us have pensions, insurance holdings, or various investment funds in our 401K that hedge losses in the commodities market-– usually without the knowledge of the ultimate beneficiaries, you and me.
William, thank you! Few media outlets would dare telling their readers/viewers that they may be responsible for anything.
By the way, I’ve seen more and more ads by oil companies pointing out that most of their shares are in the hands of our retirement funds.
As commodities go, my firm uses a lot of sulfuric acid. Spot prices have increased 400% over the last 6 months! In the meantime they’re only increased 20% on the european spot market, proving that even speculative bubbles can be local.
@engineer
The way I see it, speculation is a self-correcting force. If speculators bid up the price of oil too high, different speculators would go short on oil, bringing the price down. How come so few speculators are betting on a falling oil price?
It’s partly true, but generally happens in a stampede and falling prices, as previous bubbles have shown. Only a few smart investors go against the grain, and they’re smart only if they do it moments before the dip. Selling oil short now if the bubble keeps increasing for another, say 10 months would be a sure money-loser.
The impact to American consumers is “exacerbated”, not “exasperated”, by domestic economic conditions.
I’m even going to refrain from making a bad joke about this mistake, which is not easy for me.
Speculators may be resposible for day-to-day price jumps (and subsequent declines), but the overall upward trend is due to real worldwide demand increases. This is merely what happens when a billion Chinese and a billion Indians all buy their first automobile at the same time.
Arod,
Your link includes some interesting opinions. My favorites:
1. Would U.S. legislation to curb oil futures accomplish its goal? With so little information not only on oil trading but also on global oil supply and demand itself (BusinessWeek, 5/14/08), it’s impossible to say exactly what impact the legislation could have. But considering the vast size and scope of the global oil market, it’s unlikely the bill would significantly rein in prices. Still, debate about the bill and Congressional investigations on speculation may offer more data on a market that is both poorly understood and immensely important to the global economy.
2. The problem with the proposed legislation is that for the U.S. CFTC to monitor all global oil trades in this vast market, it would need the cooperation of other governments. More regulation of U.S. oil trades would “mean nothing without cooperation from all other countries,” says Fadel Gheit, senior energy analyst for Oppenheimer (OPY). “You cannot close one window and leave the other windows open.”
3. Unsurprisingly, both the New York Merc and the CFTC oppose raising margin requirements. “Increasing crude oil margins on futures markets regulated by the U.S. CFTC inevitably will force trading volume away from regulated and transparent U.S. exchanges onto dark unregulated venues and onto less transparent overseas markets,” the Merc said in a May 7 press release.
Wall Street analysts argue that it’s misguided to think the U.S. can legislate global oil markets into submission. “We believe there is a fundamental misperception…that so-called ’speculators’ are driving up the oil price to supposedly unjustified levels,” wrote Goldman Sachs analyst Arjun Murti in a May 5 report predicting crude oil of $150 to $200 per barrel over the next two years. “Unfortunately, we do not think the energy crisis will be solved by finding and punishing the big, bad speculator.”
There is also this piece of wisdom: You can’t predict what oil prices are going to do even in the short-to-medium term unless you have a good handle on the forces of supply and demand. And that requires thorough and reliable data—which don’t exist. Regrettably, the world oil market is no more transparent than a fragrant barrel of extra-heavy Orinoco crude. And the situation is getting worse because the world’s fastest-growing oil consumer is also one of the most opaque: China. and
China, which has grown into the world’s second-biggest oil consumer after the U.S., stands out as a particular problem. Just ask Eduardo Lopez, who tries to dope out the China market as the senior demand analyst for the Paris-based International Energy Agency, an affiliate of the OECD. He says China does not report demand, leaving him and others to figure it out from data on production, trade, and inventories. What’s more, he says, “there are thousands of so-called teapot refineries all over China” that are technically illegal and therefore left out of China’s official statistics.
Making his job even more trying, China appears to be creating a strategic stockpile of oil, but has never acknowledged it, Lopez says. If Lopez and others are underestimating how much oil China is squirreling away, then they’re inadvertently overestimating true global consumption, and vice versa if they’ve overestimated China’s stockpiling.
Speculation, Too
Many other countries aren’t much better. Lopez says Russia produces “awful data” and demand statistics are patchy in countries like India and Indonesia. On the supply side, OPEC nations don’t report their output reliably, sometimes because they don’t want to officially admit they’re producing above OPEC’s quota. That leaves the agencies relying on unofficial “tanker trackers” like Lloyds Maritime Information Services and Petro-Logistics SA, a tiny company that operates upstairs from a grocery store in Geneva, Switzerland. OPEC members also jealously guard critical data about when new fields will begin production and how quickly existing fields are declining, says Matt Cline, an economist for the U.S. government’s Energy Information Administration in Washington. So there you have it: all we have to go by is data provided by a tiny company that operates upstairs from a grocery store. Does that sound like a problem to you?
Unfortunately, congress cannot write law for the rest of the world. You mistyped, right? Surely you meant Fortunately….
If you are seriously hoping that Congress, the same people who brought us corn ethanol and the Iraq war (”Would a blank check be OK?”), bring us low oil prices, you are setting yourself up for major disappointment.
Here’s a more likely scenario: The lobbyists write some legislation that would allow their clients to make a lot of money. Protecting the little guy? Only if it happens by accident. Eager politicians vote to pass the legislation. Come October, your incumbent tells you how hard he worked to reduce your pain at the pump. Now, if only you vote for him, he can keep fighting the good fight.
Just be glad the incumbent is not running for the White House. Else you might have to stomach the claim that begging the Saudi King to pump more oil equates intelligent energy policy, and may some day work…
I do believe there is a relationship between the dollar and oil prices that most people don’t appreciate — a positive feedback loop. What makes the dollar weaken? Simple: foreigners find they are holding US dollars that they can’t use or invest, so they want to get rid of them more urgently than anyone wants to acquire those dollars.
Foreign oil producers receive an influx of dollars for their product, which they could traditionally absorb, because they need some amount of US currency. But at some point they begin to receive more dollars per barrel than they need, so they unload the dollars … this weakens the dollar on the Forex markets, making it less valuable and causing oil sellers to require more of them to trade … leaving them with an even greater surplus of dollars per barrel to unload … which further weakens the dollar and amplifies the cycle.
Seems this would lead to a runaway oil price (which we’ve been seeing), but at some point the cycle breaks — and oil cheapens and the dollar strengthens, maybe very rapidly. Could be wrong but that’s what I expect.
Unfortunately, congress cannot write law for the rest of the world. You mistyped, right? Surely you meant Fortunately….
Touché.
But actually I meant ‘Unfortunately’ for anyone that thinks that congress can actually help this situation by regulating commodity trades. If you look at the full context of my rebuttal I think it is clear that I agree that this is a really bad idea.
blau,
Fixed, thank you very much.
Krugman at the NYT disagrees somewhat vehemently with the basic premise of this editorial …
http://www.nytimes.com/2008/05/12/opinion/12krugman.html
So here are two questions: Are speculators mainly, or even largely, responsible for high oil prices? And if they aren’t, why have so many commentators insisted, year after year, that there’s an oil bubble?
Now, speculators do sometimes push commodity prices far above the level justified by fundamentals. But when that happens, there are telltale signs that just aren’t there in today’s oil market.
Imagine what would happen if the oil market were humming along, with supply and demand balanced at a price of $25 a barrel, and a bunch of speculators came in and drove the price up to $100.
Even if this were purely a financial play on the part of the speculators, it would have major consequences in the material world. Faced with higher prices, drivers would cut back on their driving; homeowners would turn down their thermostats; owners of marginal oil wells would put them back into production.
As a result, the initial balance between supply and demand would be broken, replaced with a situation in which supply exceeded demand. This excess supply would, in turn, drive prices back down again — unless someone were willing to buy up the excess and take it off the market.
The only way speculation can have a persistent effect on oil prices, then, is if it leads to physical hoarding — an increase in private inventories of black gunk. This actually happened in the late 1970s, when the effects of disrupted Iranian supply were amplified by widespread panic stockpiling.
But it hasn’t happened this time: all through the period of the alleged bubble, inventories have remained at more or less normal levels. This tells us that the rise in oil prices isn’t the result of runaway speculation; it’s the result of fundamental factors, mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China. The rise in oil prices these past few years had to happen to keep demand growth from exceeding supply growth.
Gas prices aren’t anywhere near high yet.
Geotpf :
May 19th, 2008 at 3:45 pm
Speculators may be resposible for day-to-day price jumps (and subsequent declines), but the overall upward trend is due to real worldwide demand increases. I have trouble believing that world demand doubled in one calendar year.
Stein,
I disagree with many of Krugman’s assertions. Firstly, commodities across the board are high right now. The effect that he claims that is keeping oil high (cost of extraction) would only apply to oil prices.
Secondly, when I refer to speculators, I’m not narrowing my definition down to a handful of shifty-eyed traders that are pumping a price for short-term gains. I’m talking about a tidal movement of investment dollars that are receding away from falling stocks, real estate, and other securities. I’m talking about institutional buying and selling; about “smart money” investors hedging a weak dollar.
The law of supply and demand does apply, but in this case it isn’t the demand for oil outstripping supply. Instead, it’s the demand for futures contracts outpacing the supply of paper. There simply aren’t enough contracts to satisfy the flood of demand of investors seeking to shelter their dollars in a weak economy. So price goes up sans physical hoarding or shortages.
When the dollar strengthens, the stock market revives, and real estate reheats, all of these dollars will flee from the risky (relatively speaking) commodities market and back into more stable (relatively speaking) investments.
There are four primary reasons for the surge in world oil prices:
1) Increased demand from developing nations like China and India.
2) Decreased exports from major oil producers such as Mexico and Russia. Exports decease because of increased domestic consumption along with depleation of major oil fields. Yes, there is still lots of oil in the ground out there, but the “easy” oil is rapidly being used up. What’s left will cost more to extract, so it’s going to cost more to buy.
3) America’s decades long current account deficit is now coming due. We buy more stuff from abroad them we sell abroad. The sellers have been taking what amounts to IOUs for a long time now. It seems they have all the IOUs that they are going to accept, they want to get paid, so the dollar takes a beating. That means all the stuff we import is going to cost more, including oil.
4) America’s Likud driven Mideast policy has destabilized a major world oil producing region. There is a reason why speculators are driving the price of oil higher, they are betting that Washington/Tel Aviv will attack Iran this summer. An attack on Iran(Persia) will most certainly be a disaster for world oil production. You can expect the Iranians(Persians)to retaliate by attacking shipping and oil production facilities in the Persian Gulf. There’s a reason why it’s called the Persian Gulf. It sure looks like an attack on Iran is a done deal at this point. Say hello to $200+ per barrel oil this summer.
If you look at the full context of my rebuttal I think it is clear that I agree that this is a really bad idea.
My bad, then – I apologize for that.
The law of supply and demand does apply, but in this case it isn’t the demand for oil outstripping supply. Instead, it’s the demand for futures contracts outpacing the supply of paper. There simply aren’t enough contracts to satisfy the flood of demand of investors seeking to shelter their dollars in a weak economy. So price goes up sans physical hoarding or shortages.
Yeah, maybe. But if the real price of oil is somewhere around $80/bbl, as you suggest, why would speculators keep buying @ $125/bbl? If these guys are smart enough to get away with so much of our money, they should know the bubble would pop at some point, and be happy to get out of the market with oil valued at 50% above its estimated long term value. Why is that not (yet) happening?
It sure looks like an attack on Iran is a done deal at this point.
It does? How? Maybe I’m naïve, but I don’t see even Cheney being that crazy…
This article is right that the price of oil is due in large part to speculation, but makes the mistake of assuming that speculation indicates nothing. This speculation indicates that people think the demand for oil is high relative to supply. This is somewhat true for the time being; demand from developing countries HAS had an effect, and supply (though ample enough) still hasn’t caught up to the level necessary to provide cheap oil. The example of Iran’s excess of oil doesn’t mean much – food prices worldwide have risen, even though many individual countries have stockpiles of grains. One country does not represent the global market.
What the writer is missing or possibly hiding is this: the one factor most likely to cause a sustained drop in oil prices is decreased demand and conservation. If the price of oil drops, it will have more to do with 1,000,000 Priuses, fewer car trips, and CFL bulbs than with anything else. US demand has already shrunk. While it’s convenient for motorheads to pretend that we magically have infinite oil, the reality is that we react to finite oil with conservation and this reduces prices. This is what reduced the price of oil in the 1980’s, and is most likely to affect the price in the future.
“How about this one: America needs more refineries; the greenies are blocking our energy independence.”
No, no, and no again. This little fib just won’t die. In a 25-year period, the oil companies put forth a total of one application for a new refinery. Yes, one.
http://tinyurl.com/5y2j58
It’s a hell of a lot more profitable to maximize efficiency at existing facilities AND constrain overall output.
The other points made in this editorial have largely been addressed by other responses, but I won’t let this one slip by.
But if the real price of oil is somewhere around $80/bbl, as you suggest, why would speculators keep buying @ $125/bbl?
The same reasons that people bought otherwise worthless internet stocks at high prices, or paid $500,000 for $250,000 houses: Greed and stupidity.
When people try to make easy money, some of them turn to the greater fool theory. That’s particularly true when they’ve made money doing it so far. Nobody wants to jump off the bandwagon too soon, lest they leave any money on the table.
Some of those involved really don’t see it — these are the greater fools. The fools will rationalize that things are different now. Invariably, this will be described as a “new paradigm,”, which is code for “things are different now, but I can’t explain it without pushing the envelope of reason to do it.”
Oil demand has basically been flat for the last two years, and supplies have more or less matched demand. Over that time period, the price has doubled.
With supplies sufficient and demand flat, there isn’t much reason to believe that the price of the commodity itself should have doubled due to supply and demand, that just doesn’t make any sense.
When you hear lots of rationalizations and banter about new paradigms when the only fundamental that has changed is price, then you’re probably in a bubble. I’m hearing the same rationalizations today about oil that I did about housing before the credit crunch began or about the internet before the dot bomb went off. Same sh*t, different sector.
rtz :
May 19th, 2008 at 6:04 pm
Gas prices aren’t anywhere near high yet..
Very true. We are not even up to Europe’s gas prices yet.
I sure hope that it’s a bubble. I’d like to be able to pay $2 a gallon for the next 30 years.
Somehow, I suspect that even if it is a bubble, that after the bubble bursts, oil will still run $80 to $100 a barrel.
Of course, during the end of the bubble, it could go significantly higher.
My “faulty” calculations (which were WAG’s – “wild ass guesses” anyway) didn’t even take into account what would (will?) happen if Israel or the US (or both) attack Iran to forestall or stop the nuke bomb proliferation by these folks.
How high is UP?
Dinu: Please tell me why again you need a V8 in an Econoline van when a small turbo diesel will do just as well?
California Air Resources Board. You know, greenies.
OPEC has us (worldwide) by the short & curlies.
$200 a barrel oil anticipated by OPEC. Only question is – when?
http://www.ft.com/cms/s/0/4200dc9e-1521-11dd-996c-0000779fd2ac.html?nclick_check=1
Here’s what the United States is planning in response.
http://www.ft.com/cms/s/0/eda93eea-259f-11dd-b510-000077b07658.html
So,then; why is my projected $175 per barrel by next year so dumb, again? Rhetorical question…
As for gas prices, I can see that due to the declining value of the US dollar (vs virtually all other currencies and more importantly later on, against gold and silver) oil prices are going up MOSTLY for the citizens of the United States. Canadians used to pay about twice as much (in US dollars/US gallon equivalent) for fuel compared to Americans; now the difference is less than 20%. Britons used to pay as much as 400% more for fuel compared to Americans, and now it is more like 225% more. (Mostly due to taxation in both cases). Oil being priced in Euros by Iran may not be the “deal of the century” for the Europeans after all…
Yes, it’s pretty much our own fault – here’s why.
We got rid of sensible financial restraints on a personal indidual basis AND on a national level. It’s difficult to demand that our elected representatives toe the line and use fiscal responsibility, when we individually can’t or won’t.
We collectively allowed ourselves to be led down a path of fiat money rather than financially stable currency which could not be debased constantly (i.e. making what is described as inflation). Starting with an illegal ururpation of Constitutional authority by President Roosevelt in 1933 when the United States government declared holding gold to be illegal (when in fact, the actual Constitution requires that monies used within the United States BE silver or gold – not paper, not paper backed by gold or silver). Still does; just read it.
We did not listen to the signs of the times in 1973 and 1979, and deliberately set ourselves a national energy course to eliminate our national dependency on our enemies for our absolute requirements and needs to sustain life. I mean to say, we could have started down another path, such as using the Fischer-Tropsch (sp) process to make motor fuels out of abundant American coal, by gradually adding fully legal and constitutional tariffs on imported oil.
Clearly, hindsight is 20/20. But there have been voices crying out in the wilderness for literally 8 decades about many of these issues, and all were ignored.
If we put our national effort into eliminating oil imports by building plants to convert garbage, offal and sewage into oil (a process invented in America) in the same way that we put our national effort behind winning World War II and manned space flight and the moon shots, we can do it in a matter of 5 years.
We just have to stop, think, elect wise men and women and ignore the mainstream media extolling us to continue on just as we are and vote for the two major parties. Because, in case you hadn’t noticed, it simply isn’t working for us any more.
Wow. It took $63 to fill up my 350Z. Maybe I should get an SUV to get more utility out of the same amount of gas. Every Carmax I drive by looks like a lawn made of Expeditions and Suburbans.
After commodities cool off, I wonder what the next big thing is going to be.
We collectively allowed ourselves to be led down a path of fiat money rather than financially stable currency which could not be debased constantly (i.e. making what is described as inflation).
Argh. The gold standard would be the absolute worst thing for our economy. We might as well base the value of the dollar upon sea shells or French fries or Mickey Mouse watches, it makes no sense whatsoever.
When the US was on the gold standard, it experienced several economic depressions. Getting rid of the gold standard allowed it to become the world’s largest economy, and allowed it to replace the pound as the world’s reserve currency.
Compared to the pound, the dollar is twice as strong today as it was over most of the last 200 years. Between the revolution and World War II, a pound was consistently worth about $4-5. Since 1980, the pound has been worth less than half of that.
The dollar is currently weak in comparison to its values of the last two decades because it reflects investor concerns about the US’ global entanglements. The value of the dollar reflects the full faith and credit of the US government, which is stretched given its current commitments abroad.
The dollar began to fall just as the war in Iraq began to sputter. This is no coincidence — the markets see how the US is doing there, and they don’t like what they see. Ending the war should restore the value of the dollar, as investor confidence in US performance is restored.
In Saudi Arabia, they pay 45 cents a gallon. We’re being jipped!
Oh, geez, another one of these:
miked :
It is true that the big bad evil oil companies make about 10 cents/gal in profit. The Feds take 18 cents/gal and the states take even more, New York and Pennsylvania top the list at over 31 cents/gal, while the lowest is Georgia at 7.5 cents/gal, the average being about 20 cents/gal. That means that the Feds and the States combined (not counting local taxes) are making 3x the profits of the oil companies.
Sigh………
Golly gosh, so what do you suppose government does with these “profits?” I’m always utterly dumbfounded by people who whine about gas taxes. “Do you drive on a road to get to your place of employment?” Are you saying that you don’t comprehend that GAS TAXES paid for the construction and maintenance of that road?
Should we all just forge our way on our own, getting SUV’s that truly can slog through wagon trails? Should you buy a boat to get across any river or other waterway that may lie between your home and your business?
Crimony!
Our fuel taxes are incredibly minimal compared to most other urbanized countries, and in most areas, they haven’t even begun to keep up with inflation. In my state, they haven’t risen for about fifteen years — how well would you be coping if you didn’t have any form of a pay increase over the past fifteen years?
Of course, I suppose those who whine loudest about gas taxes probably scream the loudest about traffic and congestion slowing them down — gosh, I guess these people must expect that some kind of Road Fairy comes out at night and builds shiny new roads, free of charge.
Again, I just can’t fathom how someone who would visit a site like this one — “automotive-centric” — could possibly whine about gas taxes. Automobiles really don’t fare too well unless they have roads to drive on, wouldn’t you think? Personally, I appreciate the roads and bridges my small gas tax contribution helps fund.
You may now return to your discussion of the price of a barrel of crude oil.
@ romanjetfighter :
May 19th, 2008 at 11:38 pm
In Saudi Arabia, they pay 45 cents a gallon. We’re being jipped!
No – that’s government subsidy, doesn’t work in America. (Well, McCain and Clinton have proposed some jiggery with the Holiday Gas Tax, but generally government subsidies for gas is a no-no in the US.)
In Iran they had to hike the price up after decades of selling heavily subsidised gas to Iranians, couldn’t afford to do so any more.
“the actual Constitution requires that monies used within the United States BE silver or gold”
From http://www.usconstitution.net/constfaq_a8.html#Q154
“In Knox v Lee, 79 U.S. 457 (1871), the Court ruled that paper money was not unconstitutional: ‘The Constitution nowhere declares that nothing shall be money unless made of metal.’ The Court argued that the Congress can manipulate the value of precious metals to the point where it can be rendered as inherently worthless as paper (the Congress could enact a law that says that 10-dollar silver coins weigh 400 grains in one year and 500 grains the next, effectively devaluing the silver). The Court even noted the arguments of the Framers against “emitting bills,” but wrote that the Framers, one, could not anticipate all governmental needs, and, two, they allowed the Congress to do what was necessary and proper to carry out its powers. In this case, that includes printing paper money.
So, said the Court, even though paper money is not expressly permitted by the Constitution, it is also not expressly forbidden, and in spite of the extra-constitutional opinions of some of the Framers, the ability to print paper money is a necessary and proper power of the federal government.”
Consider, also, that money is a medium of exchange–a form of payment. When one buys something, one can pay by check or credit/debit card as well as by currency. All these forms of payment are, therefore, money. Most of the money in America exists in the form of bookkeeping entries by banks.
I love the griping. Indian drivers are paying more for their gasoline and diesel than American drivers …
http://www.slate.com/id/2191491/
When measured on an inflation-adjusted basis, the current price of gasoline is only slightly higher than it was in 1922. According to the Energy Information Administration, in 1922, gasoline cost the current-day equivalent of $3.11. Today, according to the EIA, gasoline is selling for about $3.77 per gallon, only about 20 percent more than 86 years ago.
Given the ever-increasing global demand for oil products—during the first quarter of this year, China’s oil consumption jumped by 16.5 percent—and the increasing costs associated with finding, producing, and refining crude oil, it makes sense that today’s motorists are paying more for their motor fuel than their grandparents and great-grandparents did.
Gasoline is also a fairly minor expense when you consider the overall cost of car ownership. In 1975, gasoline made up 33.4 percent of the total cost of owning and operating a car. By 2006, according to the Bureau of Transportation Statistics, gasoline costs had declined to just 17.1 percent of the total cost of car ownership. Of course, fuel costs have risen by about $1 per gallon since 2006, but even with those increases, fuel continues to be a relatively small part of the cost of car ownership. By contrast, the fixed costs of ownership—insurance, licensing, taxes, and financing—have increased nearly fivefold since 1975. Maintenance costs have also quintupled over the same time period. Given those increases and the relatively low price of fuel, it’s not surprising that Americans are opting for big vehicles with powerful engines. Considering the overall cost of owning a vehicle, fuel expenses just aren’t a very big deal.
(snip)
American gasoline is also dirt-cheap compared with gas in other countries. British motorists are currently paying about $8.38 per gallon for gasoline. In Norway, a major oil exporter, drivers are paying $8.73. In 2007, out of the 32 industrialized countries surveyed by the International Energy Agency, only one (Mexico) had cheaper gasoline than the United States. Last year, drivers in Turkey were paying three times as much for their gasoline as Americans were. The IEA data also show that in India—where the per capita gross domestic product is about $2,700 (about 6 percent of the per capita GDP in the United States)—drivers have been paying more for their diesel fuel and gasoline than their American counterparts.
William C Montgomery:
Market fundamentals don’t support the current high oil prices… world oil prices will come tumbling down
It’s not so simple, William. Why don’t you speculate against oil, if you’re so sure?
I think the main issue is: the price of oil is ultimately controlled by the OPEC monopoly.
How does OPEC set the oil price?
When the oil price declines they lower production; when the oil price rises they do nothing. This has had the effect of a steadily rising oil price over the last few years.
OPEC can do this as long as they have market power.
What determines that?
Primarily OPEC market share and economic growth.
As long as OPEC retains or increases market share and oil consumption continues to rise with continued economic growth, there is no reason why OPEC would lower the oil price.
Simple.
In the past OPEC had competition: from Alaskan oil, or North Sea oil or Russian oil. That competition is not so stellar any more. Norway can’t turn on 3 million b/d any more just like that. Non-OPEC production is pretty much stagnant or growing only slowly.
What about consumption? Despite high prices consumption is still growing (ironically, in OPEC countries themselves!).
But this, of course, is key. Consumers need to stop complaining and instead need to stop buying.
What about alternatives? If everybody would believe William Montgomery, there would be no sense of urgency behind alternatives or conservation and everybody would still be into trucks.
Even GM doesn’t talk like that anymore.
All the traders that got laid off at Enron had to go somewhere.
http://dir.salon.com/story/politics/feature/2002/01/30/hearing/
Dot 1: Feinstein reported that Enron controlled 50 to 70 percent of the trading market for natural gas deliveries into Southern California from May 2000 to June 2001, and it did so through bilateral sales, which require no public disclosure of their details.
Dot 2: Natural gas prices drive electricity prices, and California energy prices went through the roof, from $7 billion in 1999 to $28 billion in 2000 and $27.7 billion in 2001.
Dot 3: At the end of 2000, the price of natural gas delivered to the border of Southern California was $59.12 a decatherm. In the New Mexico coal town of San Juan — just an Arizona away from the California border — the price was $10.12 a decatherm.
Just apply this to the broader crude oil supply market.
Record losses spurred Exxon to merge with Mobil, and Chevron to merge with Texaco.
I’m fairly certain all of those companies made profit in 1998/99. The Exxon/Mobil merger was to save on other overhead, including capital expenses. Companies at the brink of extinction do not post substantial profit.
Less-than-impressive profits, and serious savings in the face of declining oil discovery, is what spurred these mergers.
ExxonMobil, Chevron, et al make in the neighborhood of 10 cents per gallon– whether gasoline costs $1.50 a gallon or four bucks.
I’ve been seeing this more and more, along with the comparison to banking. You should be careful with this, as it does not include reinvestment in different areas. They make considerably more per gallon of refined gasoline(and during refining), but this is reinvested into discovery/extraction.
Total company profit is different from profit by division.
Additionally, the impact of buying back shares(or ESPP type accounts) is not factored in – I think they spend about $5-8b/Q, which would add in a couple of cents. I think repurchase actually exceeded reinvestment for the past few years.
If it costs $1-$30 to extract a barrel of oil(generally available industry numbers), how on earth do you say that the 28 gallons/barrel of oil only make a profit of 10c? And that’s without the diesel, distillates or NG(making up B.O.E) making a profit.