August 29, 2008

Why does gasoline cost so much?

Pissed off about high gasoline prices? Wait until you read this...

Oil prices have dropped approx. 20% since last month, but why is gasoline prices still so high? They're dropped a little, but not by the 20% it should have.

It all kind of stinks of... price fixing. Which is illegal.

Back in July, the U.S. House and Senate held almost 30 different hearings on the role oil speculators have had on bumping up the price of oil.

Here in Canada, Canadian lawmakers have held their own two-day hearing into the cost of gasoline. Much smaller in scope, but important because they narrowed the focus to the price at the pump and how it was radically different from what was happening in the oil market on a regular basis.

When oil prices go up, so does gasoline prices, right? And when they go down, gas prices go down too, right? Wrong. Frequently it seems as thought gas prices just stay high as the various gas companies play a shell game (yes, that was a pun) to come up with excuses to keep the prices high.

"I've been following Hurricane Gustav," says Jeff Rubin, chief economist at CIBC World Markets, when asked about the parliamentary committee hearing. Rubin didn't deny that speculators are playing some role in the price of oil, but the point he was making was that the oil industry loves to keep the prices high, and almost any event in the media can be used as a scapegoat to boost prices. Problems in Iraq, Iran, Afghanistan, Venezuela, Nigeria, the Gulf Coast of the United States, Alaska or in Alberta or Newfoundland Canada can all be used as an excuse to boost oil prices. Competition from China, India and Europe can also be blamed, the weak American dollar, etc, etc.

Its all one big blame game for why the prices of gasoline and oil are so high. Depending on what is happening in the news, even if it isn't hurting oil supplies, can dramatically effect, bolster or maintain high oil prices. The problem lately it would seem is that oil speculators seem to have had a drought of credible news topics.

"It's not about the Bank of Canada, the House of Commons or the Finance Ministry. Instead of playing the blame game, I would redirect our energy towards lessening our dependence on oil," says Jeff Rubin.

Canada, a major oil producing country, isn't likely to do much about it. We're making huge profits off of the oil industry right now. High oil prices? So much the better. We can roll in the profits.

Sure, it will hurt the prices of commodities and inflation will skyrocket, but who cares? Might as well enjoy it as it lasts.

And that's the mantra the oil industry in general is going for. Keep the oil prices high as long as possible to get as much profit out of it as we possibly can.

Sure, as Jeff Rubin suggests, people can cut back on their oil and gasoline usage. Drive less, drive smarter (hypermiling for example) or buy a hybrid car. Its going to be many years before hydrogen cars are available anyway for mass market production.

The rapid rise of oil prices and market speculation is undeniable. In the 20 years prior to 2003 there was plenty of spare oil capacity, and nations who were members of the Organization of the Petroleum Exporting Countries could influence the price occasionally by simply turning the tap on and off. OPEC's power to control the oil prices kept risk-averse speculators out of the market for many years. (Earlier this year OPEC predicted oil prices might reach $170 US/barrel.)

In 2000 the United States ended its regulation of energy markets, letting speculators trade in oil futures without much oversight from the Commodity Futures Trading Commission. In 2003 there were about 50 financial institutions trading oil on the New York Mercantile Exchange. Today that number is closer to 400. In 2007 billions of dollars flooded the commodities markets after the sub-prime mortgage meltdown, turning oil into an asset class and making oil and gold prices skyrocket due to over investment.

Every investor suddenly jumped off the mortgage and banking bandwagon and jumped on the oil and gold bandwagon (gold prices are less effected by geo-politics thankfully). Nothing else could explain a barrel of oil jumping from $70 (U.S.) to $147 and back down to $115 within a year.

U.S. legislators are looking at putting up speed bumps that would reduce the influence speculators have on commodity prices, including limits on the number of oil contracts an investor can hold, and stricter disclosure requirements. If it wasn't for the oil speculators the price of oil would likely be closer to $80 a barrel today.

There's also the Peak Oil Theory that global oil production has reached or will soon reach its maximum and slowly decline as oil resources become more scarce in years to come. That theory has a lot of investors thinking positively about the future of high oil prices...

And lawmakers and regular citizens looking at a future of skyrocketing energy costs and high gas prices.

No comments:

Post a Comment

Comments containing links will be marked as spam and not approved. We moderate every comment. If you want to advertise on this blog it is $30 per link.

Affordable Website Design & SEO

Looking for a quality professional website designer? Why not go where the smart money is?! Toronto Website Design and Toronto SEO. Get free SEO advice from people who really know the business.

Featured Posts

The Sarcasm Symbol
Ever had some confusion online or with your cellphone when someone fails to catch the sarcasm? Well now with the SarcMark you can ge...
Behold, the Scorpion Hydrogen Supercar
CARS - To the right is the future of supercars... it is a hydrogen supercar called the Scorpion. The Scorpion from Ronn Motors in Texas is t...
Documents show Stephen Harper misusing public funds
CANADA - According to 950+ pages of documents obtained by the Canadian Press under the Access to Information Act the Privy Coun...
Pink's Rosie the Riveter
ENTERTAINMENT - What I like about this video is how it meshes different social movements like feminism, veganism, anti-capitalism...
California's Dustbowl
ENVIRONMENT - The photo on the right is a farm in California that has been put up for sale. Its just one of thousands of farms that are n...
Is Steampunk the New Goth???
GOTHIC - Watch out what you see on the subway late at night because while in 2001 you might have seen some pretty freakish goths, by 20...
Do you have enough Ice Water in your diet?
HEALTH - A Calorie (large C) is a measurement of the amount of energy needed to raise the temperature of a litre of water (1 kg's worth) ...
North Korean timeline towards Inevitable War
POLITICS - The following is timeline of events that have occurred on the Korean Peninsula. 1945 - Japan surrenders to the United States a...
Judgment Day is Tomorrow, so sayeth Cult
RELIGION - According to a cult based in California, Judgement Day is tomorrow (May 21st 2011) and Jesus Christ will return to the Earth a...
Sex in Space Forbidden
SEX/TECHNOLOGY - Sex in outer space is a big no-no according to NASA. Not for professional astronauts at least, but the growing numb...

Popular Posts