The Truth About High Gas Prices, Or How I Learned to Relax and Pay $67 to Fill Up My SUV

William C Montgomery
by William C Montgomery
the truth about high gas prices or how i learned to relax and pay 67 to fill up my

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.

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  • Engineer Engineer on Jun 06, 2008

    Thanks for the link, William! The money quote: CFTC experts testified that market forces are driving prices. Hmmmm, experts believe it's market forces? I rest my case. BTW, Pch, I see oil prices are back up at $134/bbl. As for your concerns about volatility, sometimes that's just how the free markets work: chaotic and unpredictable, but efficient over the long run. How’s this: between 3 months and 5 years from now. Sounds like Rick Wagoner talking about GM's infamous turn-around strategy...

  • Engineer Engineer on Jul 07, 2008

    William, Here's a good summary why I don't think it's speculators. My favorite paragraph: The uncertain connection between speculation and price trends is clear in recent history. The Commodity Futures Trading Commission reports how much paper oil is bought and sold by commercial users — oil companies, refiners — and how much is bought and sold by speculators. During the first seven months of 2007, speculators as a group tripled the amount of paper oil they owned, buying it from commercial players. But since last August, speculators as a group have not added to their positions — yet this was when oil prices went skyward. Emphasis added. Still going up, as I'm sure you're aware...

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