Oil prices are on the minds of Americans as they attempt to fill their cars up this fall. According to kspr.com “[o]il gave up early gains and hovered around $92 per barrel on Wednesday after the government reported a bigger-than-expected increase in U.S. crude supplies. Supplies rose by 2.9 million barrels last week. That was almost double what analysts had forecast, according to Platts, the energy information arm of McGraw-Hill Cos.”
But are oil prices all about supply and demand as is commonly heard on cable news? From an economics point of view, here is why commodities are bought and sold at an open market. As a businessperson, you thought prices may go up you buy shares, or hedge your bet, at a certain price point based upon projected needs for the future usage of your business. When you need the commodity, you exchange your shares for the actual physical goods at the price you’d already previously paid. This way you can create a stable business plan and avoid any unexpected events (Iran attacking other countries with nuclear weapons would be a big one).
You might believe that it’s simply a supply and demand issue. Yes, it’s true that with China and India growing so rapidly that worldwide oil demand has increase. But supply has kept up with demand and is in fact capable of outpacing the current growth in demand. Multiple studies have shown this to be true. It could be argued that organizations like OPEC could increase the supply way more than necessary just to drive prices down, but obviously they do not have the financial incentive to do so. They’d just lose potential profit. So where should we point our fingers?
Nowadays you have commodities traders manipulating oil prices and other commodities solely for profit; they never even have a need for the physical goods they’re buying the rights to! To my mind, this only became a problem when the markets became completely digital, yet the rules guiding those markets stayed the same based upon the presumptions of a pre-digital era. Investors are driving the price per barrel based upon how current or possible events may influence oil supply, not based upon how things really are now but in the FUTURE! The oil companies can of course influence prices on the market, but, for the large part, they’re just happy to sit back and watch investors push the price of raw oil higher and higher.
Check out Gasbuddy.com for historical charts. Back in 2008 when gas prices were high at around $3.91, the crude oil per barrel was around $140. Last year the average gas prices got to a high of around $3.91. But here’s the thing: The price per barrel only got up to around $110. What’s going on?
Maybe you think the politicians might be to blame. Actually, taxes on gas are lower now than 4 years ago, and they are far lower percentage wise compared to many other countries. US Federal Gas Taxes have not gone up in almost 20 years, and they’ve actually gone down slightly. According to this site — Energy Almanac — the crude oil cost is back up to the 2008 levels, yet the price per barrel is significantly lower. Why?
August 11, 2008
Febuary 6, 2012
As you can see, the crude oil cost is the same, the refinery cost/profit is less than half, and the taxes are different but overall they are several cents cheaper. I don’t want to speculate on the reasons behind this, or point any fingers, but it “appears” that the price increase has occurred between the local markets and refineries. This is probably due to the US not having enough refineries in comparison to other developed countries.
So where do gas prices need to be? Oil exploration costs HAVE gone up significantly. All the easy oil is gone, and oil exploration companies are going deep sea and into shale. So sub-$1.00 gas prices are a thing of the past. Compressed natural gas seems to be the next wave of the future, with Lithium battery plug-in hybrids and electric sports cars already here.
Looking at how oil prices are influenced, what do you think should be done to drive oil prices down?