Gas prices are so confusing. Isn't price determined by that whole supply and demand thing? Shouldn't the fact that we're using less and producing more be lowering the price of gas? I mean here we are, finally exporting more oil than we're importing, consuming 1.2 million barrels a day less than we did just a year ago, trading in those old Hummers for Priuses (Prii?), and even at the cheapest station in town (which luckily is right down the street from me) gas is still costing $4.29/gal. So What gives?
In the 1990's we were apparently importing two-thirds of the oil we consumed, and according to a report released Monday, in just the last six years that number has gone from 60% down to 45%. That's really impressive! And that's because we are producing a lot more petroleum than we used to --- Surely you've heard of Tar Sands and Fracking by now. So that's the supply side of the equation, right? More supply. And what about demand? Americans are driving less. Certainly many people have now abandoned suburban home ownership (not necessarily by choice) for urban rentals, reducing gas consumption, and maybe all the millions of people whose jobs evaporated in the last few years are no longer driving to them every day. Some economists have posited that the housing crisis was actually caused by the doubling of gas prices between 2005 and 2008, which meant the cost of commuting to all those new homes in very far flung subdivisions suddenly made a lot of people less able to afford their mortgages. And since everyone is feeling a bit less flush they're buying less stuff that has to get shipped all over the place, so less business activity = less overall fuel usage. So even though the 36 NASCAR races held each year consume about 2 million gallons of gas, demand is down.
So if we have an increase of supply and a decrease of demand, that must mean lower prices, right? Well, no.
Some people in the investment world have said that high oil prices are a good thing because that means there's more business activity and the economy is getting stronger. But that would be ignoring one big factor: Iran.
Perhaps you've heard we're having a little spat with Iran over this whole nuclear weapons capability thing. But wait, you say, America produces almost twice as much oil as Iran does, and of the amount we import, a quarter comes from Canada, like 12% from Saudi Arabia, and the rest we mostly get from Brazil and Africa. We don't buy any oil from Iran! Why is the threat of a war there making the price of oil go up here? Well mostly because Iran controls the Strait of Hormuz, which is this very important passageway between the oil producing Persian Gulf and the oil consuming world, and about 35% of the oil that gets shipped around the world passes through it. So in response to the sanctions many countries have put on trading with Iran, Iran keeps threatening to close off the Strait, thereby holding the world by the balls. As long as this threat exists, the price of oil stays high for everyone. The U.S. may be the biggest petroleum consumer, but we're certainly not the only oil consumer, and the price of oil is determined by the world market, not just America. Knowing this, Hedge funds have made a fortune speculating on the price of oil, driving it up even further (thus pissing everyone off even more).
The U.S. has some of the most sophisticated refineries in the world, able to convert various types of oil to a huge range of petroleum products, and with domestic oil production booming, they're all doing really well right? Strangely, no. Wait, but shouldn't everyone in the oil biz be making money hand over fist right now? The price of oil is so high, that some refiners can't afford to to keep buying the raw material they need to convert to usable petroleum products. In fact, several refineries have shut down after losing too much money to high oil costs. Sunoco recently had to shut down refineries in Pennsylvania that had been operating for 120 years, firing huge numbers of workers, because they could no longer keep them afloat. Refiners make money when their costs are low, and with Brent crude trading over $120/barrel, they can't make a profit with $4 gas.
What we do know is this: The United States holds only 2% of the world's oil reserves, but Americans consume 25% of the 88 million barrel daily output of crude oil. How's that for a little perspective?
But we're optimists, right? And we want to look for the silver lining in all this, don't we? So what are the benefits of high oil prices? Well, higher shipping costs mean more stuff ends up getting made closer to where it's sold, and more manufacturing jobs at home, so that's a good thing. And less oil consumption means lower CO2 emissions, right? Nope! Our carbon emissions actually went up as a result of increased refining activity. Also the incidence of used cooking oil theft from behind restaurants has skyrocketed because more folks are converting it to biofuel to use in their cars. Biodiesel capacity in the US is now up over 1 billion gallons annually, and the "yellow grease" goes for 30-40 cents a pound. Is that really such a bad thing? Stealing is bad.
So what should we be doing about all this? Should we elect that guy who says he can make gas cost $2 a gallon somehow? Or should we make sure our children major in petroleum engineering in college, because it's the top major for employability and earnings upon graduation, yielding a base salary of approximately $100,000/yr for new graduates? Should we explore iffy new ideas like walking? Should we rethink the idea of driving to the gym to ride a stationary bike while watching a NASCAR race on a tv monitor?
Or should we just stop complaining so much, because in Amsterdam the cost of a gallon of gas is $6.48?
Thinking back on the bright side, when we run out of fossil fuel, it will be easier to avoid seeing unpleasant relatives who live far away, and no cars means no worrying about your daughter dating a guy who drives a van. And won't life be nice without jet-lag? I mean If god had intended us to fly wouldn't he have given us more oil?
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