Doug's Darkworld

War, Science, and Philosophy in a Fractured World.

4$ a gallon for gas! Whose fault is that?

with 16 comments

piper-alpha-at-night.jpg

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.)

Written by unitedcats

March 17, 2008 at 6:40 pm

Posted in Business, World

16 Responses

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  1. Another parts of the equation. $4 a gallon gas in California equals $2.80 to $3.00 in many other parts of the country. I just took a trip to California and gas was 75 cents a gallon higher.

    I also remember 25 cent a gallon gas in the 50’s but then a dollar was a lot of money. When you’re working for 75 cents an our a quarter is actually a lot of money.

    Steve Rosenbaum

    March 17, 2008 at 7:42 pm

  2. So I guess we can’t blame Adam Smith for this…

    One other factor that comes into play is the falling value of the dollar, which exacerbates the price rise here since oil is denominated in dollars.

    Ontario Emperor

    March 17, 2008 at 11:20 pm

  3. If we move to a Hydrogen economy it won’t matter if oil goes up to $20 or $200/gallon, we won’t have a dependency on it anymore. Fuel cells are proven technology at this point. Why are we burning gas?

    Michael

    March 18, 2008 at 1:48 am

  4. Americans need to stop whining about gas prices. It’s $7 to $8 a gallon in Europe, and has always been at least twice what we pay here. If you don’t like it, drive a fuel-efficient vehicle or, gasp, take mass transit.

    Avienne

    March 18, 2008 at 6:10 am

  5. (You in the general, of course, my friend.)

    Avienne

    March 18, 2008 at 6:10 am

  6. Add taxes and the oil well to refinery math too. Doug nice post,well rounded but easy read and nice graphic choice. Allows the mind to wonder and work out some of the various symbolism of a burning oil well.

    in2thefray

    March 18, 2008 at 8:09 am

  7. When allocating blame for $4.00 gas, please remember that one of the objectives of the American government in invading Iraq was to destroy OPEC. Wolfowitz and Perle and the neocon nobs both in and out of the American government wanted to privatize the petroleum industry in Iraq, believing that the privately-owned (READ AMERICAN COMPANIES) petroleum industry would resign from OPEC and flood the market with huge amounts of petroleum. They would destroy the OPEC quota system which is used by members to keep the price of petroleum from falling too far or from oscillating too wildly.

    You have to ask youself why the Bush administration did not pursue this objective once it had invaded Iraq and seized control of the oil fields. Who benefits?

    jasper

    March 18, 2008 at 1:44 pm

  8. Just as a reference point, the ratio of barrels of oil per ounce of gold has remained the same.

    Please everyone do not overlook the fact that the American Central bank has lowered rates so much that it takes that much more fiat currency to get a willing seller.

    Look to the fact that the US currency is being debased to explain the ‘rise in price’.

    ET

    March 18, 2008 at 7:45 pm

  9. It’s always a mistake to try to predict the future by extending current trends. There could be an oil, gold and Euro bubble that bursts. As they say the time to panic is when others are greedy and the time to get greedy is when others are panicing.

    Steve Rosenbaum

    March 18, 2008 at 8:47 pm

  10. I never really drove that much i just ride my bike everywhere its fuel effiencent and i get an exercise when im doing it lol

    tyler

    May 6, 2008 at 6:50 pm

  11. it all boils down to PRICE GOUGING! There is no shortages, literally millions of gallons are sitting in tanks not being used, while greedy oil company ceos just lie their ass off and say they are doing something to help…yeah, they are getting rich off of us and laughing about it. Get real ppl, We are being Lied To!!!!!! Dont believe the Bullshit excuses you hear!

    Jsn

    May 22, 2008 at 2:28 pm

  12. Also, The word “Recession” is real and we are already in it!

    Jsn

    May 22, 2008 at 2:31 pm

  13. I guess there may be many variables at work as to why gas prices and the cost of a barrel of oil keep rising to a record hig on a daily basis. I think a lot of questions will be answered once the two oil men who happen to be running this country into the ground finally leave the white house. It is no question that president Bush has run this country into the ground and if all our trouble(economy/gas and oil prices)go away or are repaired with the abscence of the oil men then we will all(finally) have the answer as to why the gas prices are at $4.00 a gallon and our economy is failing (recession). I just hope the oil men leave the white house before we face another Great depression. Ecomomist have stated that in order for the US to strive and be competitive in the world economy, the price of a barrel of oil should never go past $50.00 per barrel. To avoid a recession we must stay below $70.00 a barrel yet our wise president Bush has done nothing when we are at $120 to $130 dollar per barrel. If things don’t change and change soon we could be heading toward another depression. The only difference between the great depression of the late 20’s is that we and the country were not so in debt. Americans have nearly 940 billion dollars of revovlving(credit card) debt and our nation have almost 10 trillion dollars of debt and growing by the day. I prey for our children sake that we find the solution to our probem, if not they will pay a much greater price for the Bush Legacy.

    Robert from Miami

    Robert

    June 5, 2008 at 9:04 am

  14. Is “supply and demand” another way of saying profiteering? Is the pain we’re about to endure in regards to increased costs across the consumable board the result of us being SUV and McMansion stupid or there corporate pirates that might bear more responsibility for today’s mess? I wish I could be sure, I’d love to blame most this mess on a bunch of capitolist pigs and their failed political movement. Peace, Willy

    Willy T Patriot

    June 18, 2008 at 7:40 am

  15. The actual cause of this is the same thing that caused a killer (literally; millions of people died because they could no longer afford enough:)FOOD.
    http://www.huffingtonpost.com/safer/reining-in-speculation-on_b_602997.html
    Unregulated derivatives allowed speculators to think that the price of oil, or food, since everybody always needed them, would never go down. Housing USED to be that kind of investment but as that bubble popped, THERE WAS FLIGHT to oil and food derivatives. That was the cause of the gas-price spike and of a worldwide food-price spike.

    Of course in proof that for enough money, any starving academic will say anything, see also
    http://www.un-foodsecurity.org/node/599
    which tries to explain it all away as everything but what it was.

    george

    September 6, 2010 at 12:14 pm

  16. http://www.guardian.co.uk/environment/2009/aug/19/food-supply-risk-speculators

    The financial sector is being re-regulated in most places but food commodity futures are still vulnerable to speculative attack. I don’t know what’s going on with oil now.
    Deja vu all over again??
    http://www.washingtontimes.com/news/2009/jun/10/oil-price-spike-spells-trouble-for-economy/

    george

    September 6, 2010 at 12:23 pm


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