THE PRICE OF OIL AND GAS

THE PRICE OF OIL AND GASOLINE

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The price of our gasoline has been rising recently and this was BEFORE Hurricane Katrina struck the Gulf Coast.

Americans were told that the price of crude oil is going up and that is why our gasoline prices are going up. We were not told why the price of oil was going up but we needed to blame someone. We also needed to have the prices brought back down. Where do we start?

Oil producing countries belong to a cartel called OPEC and this group basically can do what they want with the price as well as supply of oil in the world – it is their oil.

They are too smart to stick the world with outlandish prices and cause a worldwide depression. In a depression, no one will buy their oil because no one will have any money. So OPEC lets the market’s supply and demand rules govern the prices – they just make sure that they at least making a set minimum price per barrel and if not – they fiddle with the supply.

Anyway, China and India have entered a new phase. They are no longer just some poor country basically trying to exist. No, they have now joined the industrial nations and are becoming major players in the worldwide marketplace.

To be an industrial nation you need to be able to produce things and to produce things you need oil. Even if, like India, you provide services, you still need oil because your growing workforce needs oil / gasoline for their own use. So now, OPEC has more customers for its oil and these are HUGE customers.

If the supply of oil remains steady but the demand rises substantially, customers will be willing to bid the price higher just to insure a supply for their growing national economy. Is the situation becoming clearer?

Here in the United States, we have a voracious appetite for oil and gasoline – we always have. We also have not built any more oil refineries to keep up with the demand for gasoline. Why? - Interesting question. As we have learned – controlling supply can affect the price. Yes, a barrel of oil is costing more so refineries have to charge more but how much more.

One economist said that if oil is costing more and refineries raise their prices to cover that cost increase, their profits should basically remain the same. The fact is their profits have soared. This tells us that their increased prices cover much more than the increase per barrel of oil that they pay OPEC.

Gasoline stations work off the same principal. They are charged a specific amount per gallon. If that price goes up, they pass it along to the consumer. This does not explain why per gallon prices can jump $0.50 overnight. Example: a gasoline station purchases x gallons at $2.20 and charge $2.50. The next day the price is $3.00 per gallon even though the gasoline they are selling, they bought at $2.20. This is greed and they can get away with it because everyone else is doing it and we need gas at any price.

Hurricane Katrina exacerbated the already problematic situation by knocking out oil platforms, refineries and gasoline pump lines, in effect, blocking supply. If there is no supply, the station that has some left can charge whatever they want to.

Can our government do something? They can release oil reserves to fill the pipelines temporarily.

Can we increase refining capacity? Yes we can if our government offers some huge tax incentives for companies to invest in new refineries.

Can we produce more of our own oil? Yes we can if our legislators allow drilling in Alaska and in other off-shore areas that are off limits right now.

Can we make ourselves use less oil / gasoline? You have to ask yourself if you are prepared to drive a smaller car or carpool or build and use mass transit.


Janusz