World energy markets, not Big Oil, drive the price of gasoline
Robert Damean Cendo, Cumberland
Now that summer is here, gas prices have again gone through the roof. And again we hear that Big Oil is conspiring to raise prices and gouge us! And again Congress is setting up an investigation into price collusion and gas price gouging.
Why do people seem convinced that gas prices are controlled by Big Oil? Actually oil prices are set in commodity trading pits, along with corn, gold, pork bellies, and any other commodities for sale! This happens on world wide basis. It's impossible to control these prices, even OPEC, which controls 40 percent of oil production, can't do much to set the price! Oil prices are dependent on supply and demand. Today the world can produce 85 million of barrels of oil at full production, which certainly sounds like a lot, but the world presently uses 84 million barrels, which is large increase of oil usage from a few years ago! With China doubling the number of cars on the road every few years, expect the usage number to only go up!
So as oil usage goes up, if production is static, the price will go up . Any shortfall of production such as Israel bombing Iran, rebels in Nigeria, the Venezuelan president, will lower production below the amount used, and further drive up prices!
Also, most oil production isn't owned by Big Oil, but by countries like Saudi Arabia, Kuwait and Iran. American Big Oil only produces about 10 percent of world oil. So when oil companies want to refine oil, many have to buy it! Large integrated oil companies like Exxon own some oil, but must also buy some to run their refineries.
To get this oil, companies basically bid against each other for supply! As supply becomes tight, they have to pay more! The oil price that you hear on the evening news is really the world spot market for oil! Recently that price went to $75 per barrel. This price is sort of a target for what the most expensive price refiners pay for oil! It's set by these traders who take into account the world supply, world demand, and something called a fear premium, meaning what would happen to oil price if a large oil supplier went off line! Many traders think oil is really worth $50, and the extra $25 is a so called fear premium, fear that suddenly supply will decrease.
Bottom line is that we have plenty of oil today, but what will happen tomorrow?
The other big factor in gas prices is refining capacity! Even if we have lots of oil, can we turn it into gasoline? The U.S. hasn't built a new refinery in 30 years, but we certainly use more gasoline then we did in the past! We need to build more refineries, but nobody wants one in their back yard.
Instead of wasting time having meetings on price fixing and price gauging, let's really do something! To address our energy problem, we need to increase production and decrease usage.
There are actually many ways to increase energy production right here in the U.S., instead of importing. Drilling for oil in a tiny corner of Alaska, can get up to 3 million barrels a day, which is more then we import from the Middle East. Inconveniencing a few Caribou is a small price to ask. Deep water drilling off the coast of Florida, California, and the East Coast will yield oil. Also increasing the use of wind, solar, and especially nuclear, which I believe is the safest and cleanest, will help.
Most importantly, however, we need to decrease oil and energy use. Buying more efficient cars, switching our power plants to coal or nuclear ! The only problem with lowering energy use is it also drops the price, people then soon forget about conserving, go out and buy a Hummer. That's what happened in the last decade!
As China and India increase their energy demands, world supply will only get tighter. And finally, if you think $75 oil is ridiculous, just wait until after we bomb Iran, and they block the gulf access where 25 percent of all oil passes, then we'll have oil at $200, gas at $10, If you can find any! Remember to keep your car gassed up and make friends with the corner gas station owner!(Phil and Louise for me)
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