Thank you Sir! My I have another gallon.
Might as well - the last time I filled up the SUV in cost me more than my colonoscopy - AND - I am pretty sure I got about the same amount of gas in both instances.
The price of gas has skyrocketed (again) and once again the usual refrains from the pundits and politicians have filled the airwaves. Drill more - eliminate our dependence of foreign oil - crush the Arabs. I wish it were that simple.
First - a few premises:
1. THERE IS NO SUCH THING IS U.S. OIL OR FOREIGN OIL.
All oil, whether produce from Alaska, the Gulf of Mexico or the sands of the middle-east is international oil. That is, all oil - regardless of where it is produced is sold into the international market.It goes to the highest bidder - period.
2. THE COST OF GASOLINE HAS NOTHING TO DO WITH THE COST OF PRODUCING IT.
Just like gold, oil is a commodity that is bought and traded as an exercise in speculation.
In 2002, gold sold for just around $220 ounce. Today it sells for just under $1,800 ounce - or about a 900% increase. The cost of mining gold has barely changed. However, investors speculating on the value of gold have driven a huge price increase over the last decade.
Oil is no different (I think we can actually call it Fuel's Gold). People buying oil are betting that it is going to go up in price and people selling oil are betting that it is going to go down in price. Right now there are about 90 million of barrels traded per day and there are simply more betters on the going up side.
In inflation adjusted dollars, the price for a barrel of oil was:
$40 in 1987
$20 in 1999
$60 i n 2006
$140 in 2007
$45 in 2008
$115 today.
These volatile changes in prices have anything to do with the traditional supply and demand for gasoline. As an example, the world didn't use 233% more gasoline in 2007 than it did in 2006 - yet the price for a barrel of oil went up by that much Conversely, the world didn't use 311% less oil in 2008 than it did in 2007 - yet the price of oil went down by that much. All that happened is that the buying and selling patterns of speculators changed.
3. OIL COMPANIES DON'T CARE IF THE PRICE OF OIL GOES UP
It's an odd situation. If you are in the business of selling tuna fish and the price of tuna sky rockets, you are essentially doomed (Sorry Charlie). Folks will simply start eating salmon. Same is true for most things that are sold in an unfettered market. Oil is different. The primary reason being is that demand is not really all that elastic. Folks have got to buy a certain amount of gasoline to get to work, the grocery store and to school and the alternatives to buying gas to accomplish that are fairly limited.
A barrel of oil costs anywhere between $7 and $50 a to produce, depending on where you are extracting it from. It averages around $30 a barrel. As the cost that the speculators are willing to pay for oil simply as a commodity goes up, gasoline prices go up and oil company profits go up. Nice for everyone other than the smucks paying for gas. Let's look at the largest oil company - ExxonMobil, over the last three years:
Not bad - as your raw material costs go through the roof you make record profits. Why - because it costs you around $30 a barrel to produce oil, the commodity market values it at $100 barrel which in turn causes major increases in gasoline prices. Gasoline need is not really flexible so you sell just as much as when gas was cheap and - wala - you make a killing. This is why most folks pump their gas like this:
4. MORE U.S OIL WILL NOT SOLVE THE PROBLEM
First, oil is an international market and it gets sold to the highest bidder, regardless of nationality. We do not own are oil. The companies that we lease drilling rights to own it.
Second, we are the world's best at refining oil (i.e., turning it into usable products such as gasoline). We import oil and also use oil produced in America in our refineries, However, once it becomes gasoline, it is also simply sold to the highest bidder. Starting in 2008, the US became a net exporter of gasoline. That's right - we export more gasoline than we import. For 2011, US refined oil exports were at an all time high - 395,000 barrels a day - and most of that is going to Asia and Europe.
Simply put, drilling for more oil off our seashores or in our wildlife reserves does not change that equation. That oil will be refined here and then sold to the highest bidder in the world.
5. THE TERROR ISSUE IS OVERBLOWN
A lot of folks use the "we're funding terrorist" argument to stimulate the desire to increase US oil production.
First, most of our imported oil does not come from the middle-east. This is where we get it:
Western Hemisphere (e.g., Canada, Mexico, etc) = 49%
Africa = 21%
Persian Gulf = 16%
Second, it doesn't matter where we get if from. Once we refine it - we sell it right back anyway.
During the GOP campaign, Newt Gingrich announced his new plan to lower gas prices to $2.50 a gallon. And how is he planning to do it? - basically by opening more Federal land to drilling. Of course that won't work as that oil will simply be refined here and sent on it's way to China. Unless Newt has been inhaling too much of the fumes, I am pretty confidant he knows better (I'm pretty sure that the only way he generates $2.50 gas is from eating two $1.25 Burrito Grandes from Taco Bell - ah the mexcellence). But - what the heck - promise $2.50 a gallon gas to get elected.
Although you're not suppose to mix oil with water - let me offer this example:
Pretend that rather than being provided by your local government and that water was treated as a commodity. It's provided to you by 4 large water companies. Let's call them BPee, Conago, Hexxon and Shill. These companies get their water by entering into lease agreements with the Federal government to give them access to our lakes and streams. They remove the water, ship it to their water refineries for purification and then sell it at water stations all over the world.
For decades, the cost of water is relatively stable. However, because people who aren't actually in the water business are now able to buy water for investment purposes, the cost of water starts to sky rocket. Droughts in Africa and Asia add fuel to rising water prices. China's growing need for water is increasing world-wide demand and Arab countries have started to import large amounts of water for agricultural purposes.
Americans are now paying tens time the amount for water that they paid just 5 years ago. BPee, Conago, Hexxon and Shills' profits soar as they collect huge bonuses and claim that it's not their fault - world wide demand for water has driven up the prices. At the same time, water speculators are making huge profits on their water investments. Water consumers are just getting hosed.
Pundits and Politicians clamor for taking more water from our lakes and resoviors in order to stem the tide of rising prices. Environmentalist who want to conserve the water for fish, wildlife and future human needs are the scourge of the earth. They lost the battle and US water extraction doubles. Sadly, it all gets sold on the international water market to the highest bidder.
Of course, none of the above occurs because, unlike oil, our government treats water as an essential component of our lives and well being. So - they provide it, regulate it and ensure that US supplies are directed towards US needs. We simply have not reached the same paradigm with oil despite the clamor that energy independence is a critical national security issue.
If one believes that higher gas prices are fine and that is just the nature of the free market system - okay dokay - I'm at peace with that. I'm not at peace when those same folks (like Newt) who tell me that all we have to do is drill more to lower gas prices. However, Newt - if you really think that $2.50 gasoline is essential, here are some things we could do that would actually have an impact of prices:
1. No longer allow speculative investments in oil from folks who aren't in the oil business.
Basically, the buying of oil contracts should be limited to businesses that are in the business of refining and selling oil as well as those that rely on the supply of oil as a critical component of their business (e.g., Airlines would be allowed to buy long-term oil contracts). This will have the impact of normalizing the price of oil as a commodity. There will be a nice market balance between those who extract it with those who need it to make their products (e.g., gasoline, etc). This will eliminate the speculation price spike caused merely by hedge fund managers who are making bets on the future price of oil. In other words - we won't treat oil like gold anymore.
2. Regulate it like other energy utilities (e.g., electricity, natural gas, etc).
Although electricity and natural gas are provided to us by private corporations (e.g., Edison, Pacific Gas and Electric, etc.) the prices they may charge are approved by quasi-governmental organizations. For example, in California, electricity prices are approved by a Public Utility Commission. In these cases, the corporations that provide the energy must justify their rates (i.e., the actual cost of their operations plus a profit margin). The only real difference between natural gas and electricity versus gasoline is that the former goes in our house and the latter goes in our cars. However, at the end of the day - they are all energy.
3. Ban the export of US produced oil and gasoline.
If indeed gasoline prices are spiking because there is not enough American oil to meet our demands, that the export of oil that is extracted from are sea waters and land should simply not be exported. If we didn't export the oil and we still needed more - drill to your hearts content. Of course, we don't need it and the minute an export ban went into place the oil companies would probably declare that there is an excess inventory of American oil.
Anyone or all of the above would decrease the price of gasoline. What wouldn't is more drilling.
So, the next time someone tells you that we need to drill for oil so that we can have energy independence - all you have to ask them is - who's oil is it? If it ain't yours or mine - it ain't going to solve your or mine problem. As The Who appropriately belted out once:
WE WON'T GET FUELED AGAIN!!!!!!!!!