On Oil and Gas

After breaking $4 a gallon for a short time in may, the steady decline in gas prices over the last five months has come as a breath of fresh air to commuters and consumers everywhere. The current average is hovering around $3.46 a gallon.

In such times it is far too easy to look at the current price and gain false hope in a recovering market. For example in July 2008, gas prices were pushing $4.12 a gallon. In a highly unusual dip the prices fell to nearly $1.60 a gallon in less than 6 months – something that has never happened in at least over 7 years.

Why? Well, the price of light crude on the WTI at the time was at an all time high in July, and made a very sudden decline from $133/barrel monthly average to $41/barrel monthly average in less than 5 months – right before elections. While it was noticeable at the time, it was hardly used then as a political statement; mainly because until that drop in July – gas prices were far higher on average.

However it is said today that before Obama took office, gas prices were only a mere 1.80 a gallon – this is absolutely correct. However – this fails to address the amazing swing it had to take to get there, and never once addresses the policies and global events happening to cause it. Instead everyone on the right goes out and makes it seem like it was all their doing for having such low gas prices (which by the way was not taking into account the $2.60 average it hung onto right before the major rise then drop of the price of gas).

So the truth is that we have been here before, that the drop in gas prices is nothing new, and it is certainly not here to stay. It can’t.

To start with – the price of gas is a major factor for any company that relies on shipping anything to remain afloat. If the prices are high then it will cost them more to ship – a cost they pass on to the consumer.  When the price is low, the consumer is happier at the lowered price reflected in the purchased good. Either way, it is very rare when the price of gas does not reflect the cost of oil.

In regards to the long term affects of gas prices on the economy as a whole, one must always take into consideration the possibility of another price spike, or flop. For instance if gas prices are low, and you choose to use the excess income of your company to hire new employees, then you have provided jobs. However companies rarely do this for 2 reasons. 1 – What are they going to do when the gas prices spike again and they can no longer afford to keep the current staff employed? 2 – In the event of a decent layoff, they are still saddled with the cost of paying unemployment benefits to the newly unemployed – a cost that no company thinks is worth the risk. This is why companies rarely expand due to gas prices simply dropping, and why lower gas prices will not save the economy.

So the next question then becomes what makes oil prices rise and fall? It certainly has nothing to do with supply and demand as neither has made any real drastic changes in over a decade that is not correlated to each other.

In an effort to explore this – one must look at the stability of the countries who export oil to us, and the local policies we have on production here at home.

To start with, we will explore the cost affecting factors involved with the importation of our oil. We import anywhere from 45-60% of our oil depending on which source you choose to believe. I will be going with 50% from here on in to illustrate a point.

We consume about 19.1 million barrels of oil a day here in the US. – 10.0 of which are imported. The top importer to the US is Canada – and has been for some time. Canada provided double the amount of oil to the US that the next two on the list did – Saudi Arabia and Mexico. I can safely say that it costs less to import oil from Canada then it does Saudi Arabia – less international tension, and far shorter distance to transport. Unfortunately due to NAFTA and hundreds of other trading regulations and restrictions, it is hard to say exactly where the costs are most affected. This by the way does not include overseas conflicts between the US and the countries neighboring those who export to us.

Until solar energy and many other alternative sources can be made cost – effective, we will have to face the fact that we are stuck with oil whether we like it or not.   Our total oil reserve is 22.7 billion barrels which would last about 3.2 years (this includes the recent discovery found in North Dakota) assuming current consumption around 19.1 million barrels used a day.  This means that unless we feel like blowing all of our known reserves, we will have to import some kind of oil. The only way around this is refining other energy production sources to make them worth the cost.

A quick note – with our government currently using tax money and debt to pay off failed alternative energy companies that have contributed nothing – eating up billions in lost resources, an alternative source will continue to elude us.

The rises and falls in oil and gas prices affect the economy on the whole. On the flip side, it is foolish at best to measure economic strength and weakness based upon short term price changes related to the price of oil. Oil is a commodity – not a consistent, stable source. The biggest mistake we can make as people at this time is to allow a political party to take credit for the lower cost of oil – or its resulting effects. The truth is that it impedes the oil trade, production, and refining, while at the same time taxing them to pay for its puppet alternative energy companies.

Also, the nation’s military burns through over 375K barrels of oil alone per day – roughly 225K overseas, we have to ask when enough will be enough. I mean seriously – name me one private sector anywhere in the US that burns the same amount – just one.

The final point is that yes, alternatives to fossil fuels would be a great step forward in creating a more stable economy. In addition, it would also allow us far more self reliance to prevent an unhealthy dependency on the unstable countries in the rest of the world. If we really wanted to help things out, here is what we would do:

1 – Cut taxes across the board as well as with oil companies – preferably to 0. Let the people then decide, engineer, and build a better world with the additional funds.

2 – Put an end to these nonsensical regulations – for starters they make it harder for smaller companies to start out. Besides – many of the larger companies fail to meet the regulatory standards, operate anyway, pay the fine, and then receive government bailouts when they fail and cause damage…just ask BP.

3 – Stop putting politicians in charge who favor such nonsense under any guise. Their reasoning is always the same – for safety, for welfare, for protection etc. Yet at no time has it ever meant any of this criteria.

So yes – take advantage of the gas prices when they are low. Trust me – they sure don’t plan on staying there.

Sources –

http://www.bloomberg.com/apps/quote?ticker=USCRWTIC:IND http://gasbuddy.com/gb_retail_price_chart.aspx







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