Gas Prices...This is is Ridiculous?

Question

The price of gas is projected to be double of what it was a year ago. This seems ridiculous to me because there is no way that the demand has doubled (I wouldn't be surprised if it didn't go down).

The only way I could excuse the gas prices would be if our demand HAS doubled while the oil reserves that we export from have simultaneously been significantly depleted.

but I don't think that is what is happening at all

Thoughts?

Answer 1

The oil companies have made all-time high profits in the past two years and their profits will continue to soar as long as consumers continue to accept the situation.

Answer 2

Well, there really is a gasoline shortage - and more specifically an oil "constraint" , on the marketplace.

But I have two words for you , China and India.

China now uses more oil than the United States, this is up from 1/2rd of our usage just 5 years ago.

India now uses 1/4 to 1/3rd as much oil as the US, and is set to use nearly 3/4ths as much by the end of next year.

Basically world demand for oil increased by quite a bit, and it has doubled in China and in India.

This is a great question and my answer here is very similar to one I gave a couple of days ago, but this question is very similar to the one's being asked.so I'll try and give as much information as I can. I apologize for the longish answer.

The demand question, and your observation that there might be speculation in the marketplace is absolutely valid and correct.

Having said that however, China now uses more oil than the United States, this is up from 1/2rd of our usage just 5 years ago. India now uses 1/4 to 1/3rd as much oil as the US, and is set to use nearly 3/4ths as much by the end of next year.

http://www.hubbertpeak.com/nations/2004/

(I apologize for the age of the link)

Basically world demand for oil increased by quite a bit, and in fact it has doubled in China and in India.

But on the broader market, there is a rather total and complete lack of transparency in the oil futures trading marketplace and the bourse/markets for other related commodities are similarly not regulated very well at all.

http://www.mees.com/postedarticles/oped/...

Considering the criticality of the resource, one would expect far, far more transparency and demand upon market accountability.

http://realdealfinancial.blogspot.com/20...

So like it or not, the market is not transparent and completely subject to manipulation. HOWEVER, there are some underlying serious concerns in the overall supply chain for oil and gas.

Both oil and gas are not renewable resources, which is to say - like trees, food, cloth we will effectively reach a point where the demand - potentially far outstrips the supply, at which point purchase price will always increase.

The problem is that we reached that point in the 1990's and really didn't respond in the way we should have , at that time.

Furthermore our government thru both Democratic and Republican presidential and congressional cycles has abysmally FAILED the US citizenry, to address energy policy in anything other than an ostrich-like fashion try to avoid the problem

http://www.eia.doe.gov/pub/oil_gas/petro...

Current prices, not supprisingly then have a LARGE part to do with perception, rather than reality, the perception changed, largely in two major respects.

http://www.theoildrum.com/node/2743

1. In 2005, more or less, planetary production of oil production capacity stopped increasing substantively and has "peaked" at about 85 million barrels per day.

2. It has been known that since the late 1960's and more dramatically after the 1980's that oil discovery has dwindled and has in no way kept pace with demand.

3. In 2006, after much obfuscation and foot dragging, the release of about 4-5 years of total cost expenditures for the discovery of NEW oil fields was released (this tells us how much money Exxon and other companies are investing to FIND new oil).

This is critical because it indicates both the effort being expended and the capability / ease of extraction for the companies to deliver usable reserves from their dollars invested in discovery.

http://www.theoildrum.com/story/2006/1/1...

This is also important because it shows that exploration and redevelopment of existing wells, has quadrupled in 4 years, meanwhile the rate of discovery continues to dwindle.

This is ALL BAD, it destroys the commonly held perception that "if only the (fill in the blanks) would let the oil companies drill we'd have no problems", line of thinking.

So absent the usual suspects of Arab terrorists, environmentalists, the UN, national instability, land use activists, etc, these firms have come up - essentially - empty.

4. Katrina / Rita - When the hurricanes hit in 2005, an interesting "marketplace experiment" occurred, the costs of gasoline in the central southern states, went from 2 dollars or so a gallon to well over 6 dollars a gallon - anything OVER 8 dollars was generally considered "gouging" but under 8 - no problem. Surprisingly, when you factor in the devastating effects of the hurricanes, oil and gas companies figured out where the ceiling was for the collective pain threshold - around 8 bucks a gallon, before the economy is effectively destroyed as a result.

http://www.ftc.gov/opa/2006/05/katrinaga...

This however, started the ball rolling, regional prices soon recovered, the Gulf rigs and refineries were repaired and brought back online but the market had shocked , while national prices touched 3 to 3.15 or so in places, the south kicked when they were down and prices were considerably higher.

http://rwebsdesigns.com/blog/index.php?p...

So since 2000-2001 and especially after 2005, prices have increased about 10-20% every six months. As Vice President Cheney says, it's the "new normal".

After this lengthy explanation, it's helpful to understand that while certainly there is speculation and marketeers whom are driving up costs , those increases are only - probably about 20% of the overall cost, so 80 cents out of every 4 dollars are going to some hedge fund or whatever.

This is not good, but its not the dominant factor either.

I personally suspect that after the Bush administration, and especially after the new administration (be it Republican or Democratic) sets a new energy policy, we will see prices stabilize around the three to four dollar mark. But we still have another 8 months to go, and at the current rate, that's a price point somewhere around 5 dollars or so.

Lastly - but certainly not importantly, HISTORY is a good guide here, We can look very much towards the early 1970's and possibly the early 1980's as a model for the economy today. This is NOT an entirely complementary statement, but, the situation is NOT as grim as it was back then.

Despite the popular concern for price at the pump, many of our industries and even some of our commercial transportation systems are significantly more efficient than they were in the 1970's so while costs have gone up we are not SO badly situated as we were - back in the day.

Furthermore, there is a popular hysteria that we are "running out of oil", this is totally wrong, we are running out of EASY to recover oil, but this is not the same as running out altogether.

Many folks suggest that drilling in various US reserves (ANWAR or off the coast) would be good, and in about 10 years, drilling in every site possible, it certainly might add a million or so barrels to the supply per day, but we are still using 50% more oil than we produce worldwide and we use an increasing amount (14 million barrels per day presently).

So an extra million barrels won't make a real significant difference at the end of the day, until we actually start using LESS of the stuff in the first place.

To be fair, there are other oil resources available - notably a trillion barrel equivalent of oil-shales and tar-sands in Canada and a similar quantity in Venezuela. But there is an important cost/supply side problem to be concerned about.

Currently if you find oil (Light Sweet Crude), for every dollar spend developing your well, you earn back 20 bucks (at the least), and with prices being as high as they presently are - probably quite a bit more.

With tar sands and shales, the math is decidedly less cool (for producers), to create usable oils from tar-sands requires desulphurization, and a complicated process of turning shales into oil. This reduces the return on investment from 20 to 1 to something like 2 or 3 to 1. It's still worthwhile to perform the extraction, but in a very limited fashion.

Furthermore, the energy used for current oil extraction is pretty trivial after the initial wellhead is drilled. In the case of tar-sands and such there is a production input of energy (to cook the oil out of the sands essentially), this means that it costs a significant amount of energy to get your oil produced in the first place.

So that trillion barrels is more like 600 billion barrels after you adjust for the inputs for energy consumption to bring it to market.

I recommend "The End of Oil" and "1000 barrels a second" for two good books which both (despite their titles) go to pains to not get overly dramatic about the resource situation.

Answer 3

Supply and demand. Worldwide demand is up. The supply has not increased. Add a weak American dollar and the prices we're seeing are not suprising. If anything, we've been lucky they haven't gone up sooner. On the plus side, this now makes alternative forms of energy more viable as the relative cost decreases. American oil companies don't control enough of the world market to push the prices as high as they are. And given how much oil they do produce and refine, its not suprising their profits are at record levels. If you look at the percentage of their profit margin, it is not quite so scandalous.

Answer 4

The price of gas in the US depends on the global price of gas. Our demand might not have gone up, but every other industrial nations demand HAS gone up. You should start biking.