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Who is really to blame for high gas prices: Big Oil, Saudi Arabia, speculators or supply?
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A number of factors affect the price of oil but the primary one is good old supply and demand. If demand is high and supply is tight, prices rise, and that is a condition of the present market. While the U.S. has seen a growth in demand in the past year as its economy has begun to rebound, the real growth is in developing countries, especially China. Demand is growing faster than supply.
A second factor affecting oil prices is uncertainty. Oil is bought and sold months before it is expected to be delivered. If traders are uncertain that the oil will be there to be delivered when it is required, then they bid up the price to lock in their share of supply. The protests and street battles taking place in the Middle East where so much of the world’s oil either originates and/or must transit through, has added to the uncertainty.
A third factor affecting the price of oil is the relative strength or weakness of the dollar. Currently the dollar is weak. And with the U.S.’s deficit, and the anticipated lack of political will to tackle it and the long-term debt, the dollar is likely to remain weak for some time to come. Whatever the other positive or negative effects of a weak dollar, since oil is traded on the market in dollars, a weak dollar means oil producers require more of them for each barrel of oil.
U.S. policies can affect all three factors. Continued high prices could dampen or even contribute to reversing the modest economic growth the U.S. is experiencing, then, as happened two short years ago, U.S. demand for oil would fall and to the degree that U.S. demand places pressure on the oil market, prices should fall. Continued or expanded instability in the Middle East, and/or direct action to intervene, by the U.S. alone or in concert with allies, could also affect the supply of oil positively or negatively depending upon the results.
The U.S.’s pain at the pump is in no small part its own making. For years we have forgone oil exploration and production in the areas of the U.S. most likely to contain our largest remaining conventional reserves. And while President Obama is certainly correct, that drilling in the U.S. would not make us energy independent, it would reduce our dependence. Every time the price of oil increases dramatically we have the critics of more drilling argue, that “even if we began drilling now, it would be a decade before the oil was flowing.” In addition they claim, that increased domestic supplies would only reduce prices by some small amount – the amount changes but it is always too small to make a big difference in price.
While, it may take a decade to tap some of the oil in the most difficult regions but we could see oil flow from other areas in two to five years. More to the point, if we had begun drilling in ANWR in 1980 , we would have been pumping oil for 20 years now. And if we had started drilling when George H.W. Bush was President in 1990 during the first Gulf War, we would have been up to to a million barrels of oil a day from ANWR for a full decade by now. The point is to start now so the same arguments aren’t repeated and used to prevent drilling five years or a decade from now when prices spike again. If not now, when, if not here where?
The second half of the argument underappreciates the inordinate effect that new oil supplies entering the world market from the U.S. would have. Though an additional 2 million barrels a day from ANWR and the OCS would only be a drop in the bucket of world oil demand, because it is coming from the stable U.S. it would reduce the uncertainty that impacts global oil prices. This would have an outsized moderating influence on high prices and the volatility in the market – beyond that the simple addition of the oil would have. In commodities markets, where oil comes from counts.
I have written more about this topic, here:
http://environmentblog.ncpa.org/presidents-policies-feed-oil-price-fire/
We have experienced waves of speculation in commodities like oil in the past. It is possible to drive the price up for futures or spot market for some period of time. Eventually if there is not the underlying demand, the bubble will break and prices can fall quite quickly. The higher the price gets from speculation, the higher the risk in holding a futures position or in excessive supplies of oil, so eventually everyone dumps at the same time and the result is predictible. Just not when. I think this is the likely situation today.
The actual impact of high oil prices is to reduce demand as consumers cannot afford to use as much as before. It is not too different from the price of any good, supply eventually has to meet demand at some price; otherwise there are excesses or shortages. If more oil is being produced than consumers can afford to buy, the price will eventually come down, or the producers must cut production to meet demand. By driving prices up, speculators have the effect of reducing end user demand which makes the crash more likely. In fact the best thing a consumer can do in such a situation is to use the least gas possible thereby forcing the speculator's hand.
Inasmuch as oil is a deminishing commodity, it makes sense that world demand for it be reduced. So higher prices are not bad per se if they would reduce the overall usage of oil. Unfortunately, we are not equally able to adjust to higher prices which causes real pain to people. But when oil goes to high levels like today, people do reduce usage, and when they do so permanently such as by buying a fuel efficient car or insulating their house, and this benefits the world and the economy.
I believe in the current oil crisis, we are producing more oil than we are using and therefore will eventually see price relief. The long term demand from the developing world will absorb oil production in time. So folks like us should be aggressively reducing our need for it.
The last few months are an example of speculators driving the market. By most estimates, the Arab Spring has cut oil supplies by about 1%. Yet prices were up roughly 20%. Saudi Arabia has estimated that there is approximately $25 in speculation premiums in each barrel of oil. In the United States, the CFTC has their own figure - about $0.64 per gallon is due to speculation.
The answer is all of the above and then some. Bear in mind that in the late 90's, oil prices dipped below $10 a barrel. An order of magnitude increase over the past decade can't solely be explained by speculators.
In fact, over the past decade demand has grown faster than incremental supplies have come online, leaded to eroding excess production capacity. This makes it easier for OPEC to influence prices, and it increases the impact speculators can have on the market.
We are back to "wishlist solutions" not driven by fundamentals, but with energy we have fundamentals in operation
Like US natural gas and oil prices show, gas is mre abundant and easier produced than oil, so we should prioritize gas for transport (the T Boone Pickens solution)
But Big Government + Government Friendly Corporations + Private Speculators run against this basic choice.
I already gave the example of European country gasoline prices, in plenty of countries right now is close to US$ 9 for 1 US gallon (around 1.60 euro per litre), that is US$ 376 per barrel.
If we backtracked to the late-1990s, in the same European countries, gasoline prices were not so much lower - say US $ 250 per barrel - but the price of crude oil was around US$ 10 per barrel !
So the price mechanism has no real impact, becuase so much of the final price is tax (for governments) and profits (for corporations and speculators)
The primary reason is the devaluation of the dollar. The FED has deliberately driven down the worth of the the dollar and because oil is priced in that currency, the relative price has risen.
The big shock to the US economy will come when the world decides to use another currency or a basket of currencies to price oil.
Are those same speculators responsible when prices go down? Or is that caused by a coalition of non-profits, unions, activists, and philanthropists representing a diverse spectum of religions, races, ethnicities, and sexual preferences?
There are different levels of scale involved in the different causes for the price increases. If there were sufficient oil on the market to meet all demands and then some, then we might see oil prices of $30 a barrel or so. Since one of the goals of OPEC each month is to tailor production to barely meet demand they adjust the price to around the levels that they need with controls on the volumes supplied and that brings prices up to around the $100 region. (It should not be lost in the discussion that despite their comments, Aramco has raised their prices to the Asian market twice in the last two months and have, in the past controlled the supply to that market as a way of exerting overall control)
On top of that there are the price variations that come from those that play in the market, but these are the smaller secondary ripples on top of the supplier waves.
The Congressional Research Service recently studied this question and found that the elimination of petroleum tax deductions would not substantially impact the price of oil.
"The price of gasoline is composed of four components. The largest component of the price is crude oil, 67%, followed by federal, state, and local excise and sales taxes on gasoline sales, 13%, refining expenses, 11%, and distribution and marketing expenses, 9%. If the proposed changes in tax policy result in increases in the price of gasoline, it would generally be through an increase in the price of oil. However, the price of oil is determined on world markets and tends not to be sensitive to small cost variations experienced in regional production areas. In the recent market environment, with the price of oil averaging approximately $90 per barrel over the period December 2010 through February 2011, and the current price over $100 per barrel, prices are well in excess of costs and a small increase in taxes would be less likely to reduce oil output, and hence increase petroleum product (gasoline) prices."
http://democrats.senate.gov/pdfs/20110511-crs-analysis-on-gas-prices.pdf
Lets start with a little play on words: here in Europe its gas prices (that is natural gas) which have been racked up, through an interesting type of State-backed speculation. The large energy corps handling nat gas are allowed and enabled to "oil index" nat gas prices in Europe, and in several countries the State has outlawed shale and frac gas development.
Reasons include very heavy investment by State-friendly big energy companies in Europe, in very high price LNG and pipeline gas development in extreme environments like he Shtokman project http://en.wikipedia.org/wiki/Shtokman_field
Results: nat gas prices in Europe to final consumers are often 12 to 14 USD per Million BTU. Sometimes more than that. Compare that with US prices.
The same way, European State taxes on gasoline are so high that the barrel price for crude oil can vary +/- 50 USD but the filling station pump price will only move a little. Plenty of European motorists currently pay 9 USD per US gallon ( that is $378 per barrel). In USA you would likely have civil war with gas at 9 dollars !
No doubt, the speculators. Why do we keep hearing the news bits like, "Investors concern on Libya increased the oil price", "Investors concern on middle-east unrest" propelled the oil prices..
While I agree historically with what Mr. Burnett indicates in his well written piece, I disagree with the conclusion. I would very much like to see the US start to treat oil less like a throwaway and more like an essential resource that should be conserved for those uses for which it is best used. That means that we want oil for running trucks, airplanes, as a material used in plastics and many other products, but we don't want it wasted by thousands of people driving an large SUV to work. By making oil so cheap, we encourage wasteful use and therefore the sale of small cars that could have occurred over many years has been far less than optimum.
Tapping ANWR and other risky sources of oil just uses our reserves in wasteful ways. I would rather keep this oil in the ground, use less expensive oil sources now and hopefully through conservation efforts and use of other fuels, never need to tap these reserves. Perhaps I am dreaming, but when the govenment sponsored the cash for clunkers program, many people stepped up to buy a smaller car. The high price of gas will encourage the same, and over time we will use less oil. I ran into a person recently that was finally converting a 1920's oil burner in his house to natural gas, a multiple thousand dollar project. Why, there had been no need to do so until his heat costs were so high that he was forced to stop wasting fuel.
America's oil reserves should be responsibly drilled starting with those that are less environmentally sensitive. I am not against our oil industry and drive two cars that use gas. But it makes no sense to drive ourselves in a frenzy of drilling while doing little or nothing to drive consumers into less wasteful habits. If nothing else, having to pay more for oil will force people to think before driving 80 MPH down the expressway, making multiple trips, failing to carpool and taking the SUV rather than the Prius.
I will add some more
Big Government plus Big Energy Corporations (oil, gas, coal, electricity) do not want low prices for energy, the first to get taxes, the second to get profits.
Like I already said, in plenty of European countries right now, gasoline prices are around US$ 375 per barrel ($9 per US gallon).
Crude at around $100 per barrel is the tax-base for Big Governments and the profit-base for Big Energy. Why would either of them want lower prices ?
Speculators, conversely, are not interested in either high or low prices - they want volatile and variable prices, to buy on the lows and sell on the highs, or short sell on the highs when large market makers give the signal they are planning to stage a price crash, or make uncovered or naked calls when the same market makers signal they are going to bid up prices of the "underlying asset", in this case oil.
To be sure Saudi Arabia wants high crude oil prices, but its netback on petrochemicals - using crude and petroleum products to make petrochems - is much higher, and what this producer and other producers want is stable and relatively high prices, which they will not get in a speculation-based pricing system. For this reason, and the simple geological reason of depletion, they have taken their feet off the gas pedal (or the crude pedal, hoho) for E&P, exploration and development, and focus more on the downstream value added sectors, refining and petrochems. This is OK as long as world oil demand grows very slowly, but anytime it doesnt there are inevitable price surges
I can add this to my argument that Big Government is certainly part of the problem, not the solution when we are talking about high gas prices.
Try these figures:
After a declining trend in the 1990s, US national debt dramatically increased from US$ 5.7 trillion in January 2001 to $10.7 trillion at the end of 2008, and then $14.3 trillion through April of 2011. The debt has reached 98 percent of 2010 U.S. Gross Domestic Product.
The approximately US$ 3.6 trillion added to the national debt since the end of 2008 is more than double the market value of all private sector manufacturing in 2009 ($1.56 trillion), more than three times the market value of spending on professional, scientific, and technical services in 2009 ($1.07 trillion), and nearly five times the amount spent on non-durable goods in 2009 ($722 billion). Just the interest paid on the government's debt over the first six months of the current fiscal (October 2010-April 2011), nearly $245 billion, is equal to more than 40 percent of the total market value of all private sector construction spending in 2009 ($578 billion).
Now compare this with "extreme high oil prices" and the cost of oil imports to the US - the world's biggest oil importer country.
Using Commerce Dept figures for gross oil imports (before re-exports) the US imported 333,831,058 barrels in March 2011. For the 31 day month, March this averaged 10.768 Mbd (mln barrels per day). Month average oil prices were record-high since Sept 2008, at US$ 93.67 per barrel, giving a gross oil trade deficit before re-exports (notably refined products), of US$ 31.3 billion for March 2011.
Taking interest paid on US Fed debt as approximately $ 490 billion-per-year in 2011, and easily able to increase, the present debt servicing cost very comfortably covers 1.5 times the total gross cost of all US oil imports at a record-high average price of $ 93.67 per barrel.
Taking the growth of debt since December 2008, about US$ 3600 billion, this covers almost exactly 10 years of gross total oil import costs for the US at current columes and current oil prices.
Andrew, The price of oil is the same the world over (more or less, given different trading locations, etc.). It's all priced in USD. So, $100/bbl oil for the USA is also $100/bbl for Europe, etc. The real issue with gas prices in the rest of the world is twofold: the fact that oil is traded in USD, the world's reserve currency, coupled with taxes. The fact is, whenever a UK company wants to buy oil, it first needs to perform a currency transaction to trade GBP into USD, then buy the oil. The costs of that currency transaction can drive up the cost. This is one reason that China is agitating for the USD to be removed as the world's reserve currency. Finally, add on top of that the costs of the European welfare state and you have a recipe for high gas prices in Europe.
Here in the USA, the average profit per gallon for folks like Exxon is 2 cents. The average federal and state taxes per gallon are 48.1 cents. Conclusion: the big, bad oil companies really aren't the problem. If anything, the government is. Read more here:
http://www.dailymarkets.com/economy/2011/04/27/gasoline-taxes-vs-exxon-profit...
and here:
http://www.exxonmobilperspectives.com/2011/04/27/gas-prices-and-industry-earn...
But really, the real problem is that energy is the single biggest determinant of standards of living. The ability to transition to a modern economy is dependent on energy consumption. Oil is one of the most plentiful, energy-dense resources available to the world. As China and India continue to modernize, the rate of world-wide oil consumption continues to rise. While the USA is still the biggest consumer of oil, China and India have the biggest rates of increase.
Simply put, the biggest long-term factor in oil prices is increasing world demand as 2nd-world economies become 1st-world economies. The resulting supply-vs-demand imbalance drives prices up.
I like reading all the answers but the fact remains that big oil has reported record earnings for the last year.
Speculators. Their is no lack of supply; the amount of oil and natural gas discovered in the western hemisphere in the past 10 years could power America for the nest 100 years at current consumption rates. And while Saudi Aramco could probably sell oil cheaper, it would not be in their best interest. Additionally, it would be incredibly difficult for then to overcome the masses of speculators that have been pushing prices higher.
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