4$ a gallon for gas! Whose fault is that?
The price of gas has been rising steadily since 2002, and is now hovering around $4 a gallon in California. This is of course clearly un-American, possibly even a terrorist plot. People have laid the blame for this unpleasant situation on everyone from OPEC to the oil companies to Muslim conspiracies to Bush. I mean, it’s got to be somebody’s fault, right?
Well, after much study, I think I can lay this to rest. It’s reality’s fault. There’s something called the “law of supply an demand.” In essence, the scarcer something is compared to demand for it, the more it is worth. Since 2002 the demand for oil, especially in the booming economies of Asia, has gone up and up. And it’s not like demand has been slacking off much in Europe and America as well. At this point, for the first time in decades, everyone who can produce oil is pretty much cranking out as much as they can. There’s no slack in the system anymore, and by all expectations demand is going to continue to rise .
While I am not a big proponent of Peak Oil, the fundamentals of their case are sound. The last big easy deposits of oil were found decades ago (North Sea, Mexico, Alaska) and while a lot of oil has been found since, it’s mostly of inferior quality and in difficult areas either geographically, politically, or both. So unless there is some miraculous discovery of oil somewhere, or there is some big drop in demand…the price is going to keep going up.
In fact, instead of asking why the price is rising, the real question should be, why did it stay so low for so long? In reality we’ve been lucky, oil prices were held down for years by the collapse of the Asian economies in the nineties. We had an extra ten years to prepare ourselves for the day when gas prices rose, as all logical analysis said they had to someday. What did Americans do to prepare? We went out and converted to giant gas-guzzling SUVs. So if Americans want to blame someone for high gas prices, first they need to look in the mirror. Ironic, nu?
A few other notes are in order, as with everything, it’s not a simple matter. Venezuela and Iraq are producing less oil than they could. Who to blame for that is debatable, though in Venezuela it’s mostly mismanagement. In Iraq, well, Bush and company thought that they would be able to get Iraq’s oil back on line, but it hasn’t yet materialized. Sabotage is part of it, but mostly it’s because the Iraqi government has yet to sign papers giving American oil companies the legal right to exploit Iraq’s oil. Obviously no American company is going to invest in oil they don’t have any legal right too, and even if they did sign the papers, there’s no guarantee the security situation is going to permit large scale cheap extraction of Iraq’s oil. So Iraqi oil is not going to pull us out of this oil shortfall anytime soon.
OPEC is a very loose knit cartel, whose members mostly cheated on their quotas anyhow and were only roughly held in line by the Saudi threat to dump oil on the market and crash the price. Since the Saudi’s can’t do that anymore, they are at full production, there is little chance OPEC will agree to do anything. And why would they, they are all pretty much pumping as much oil as they can, and the price is just going up! OPEC is benefiting from the rise in oil, but they have done nothing to cause it. Yes, the oil companies are making nice money, but they did nothing except supply what people were willing to buy. They’d love to find more oil, and they sure have looked. It’s not their fault the supply is limited. Though granted some of them can be fairly criticized for encouraging wasteful and profligate use use of oil, but that’s not the same thing as conspiring to raise the price. Like with OPEC, oil companies have no need to conspire to raise the price.
The other reason oil is going up in price is tied into the maximum production issue. Since everyone is pretty much at full production, even a moderate disruption somewhere in the system could have very far reaching effects. This basically means that it is a lot more expensive to insure oil deliveries…and the cost of higher insurance is passed right along.
This also leads to the disquieting observation that with no slack in the system…war or terrorism now could seriously disrupt the world’s supply of oil. A few years ago blowing up a few pipelines would have been no big deal, the Saudis could just increase production to make up the shortfall. Nowadays an attack on a few key oil facilities would make the price of oil spike wildly. This more than anything is probably why the Bush administration hasn’t attacked Iran, Americans might swallow $5 a gallon gas…but $20 a gallon gas would be a whole new world, with job losses and price spikes spreading through the economy like so many flaming dominoes knocking each other over.
Drive safe everyone.
(The above image is claimed as Fair Use under US copyright law. It is not being used for profit, is central to illustrating the post, and is arguably a historically important image. Credit and copyright: Cardiff University Engineering Department. It’s a picture of the Piper Alpha fire in the North Sea in 1988, the worst oil rig disaster in history with 167 lives lost.)