Finally going to head up north to our condo in Charlevoix, Michigan. It is Memorial Say weekend and we are just getting an early start. The weather promises to behave.
We will be driving my new Lincoln Navigator SUV and so gas mileage has been discussed. Actually, gas mileage is on everybody’s mind these days as prices here approach and are nearly at $4 / gallon. This is probably double what we paid the last time we went up to the condo.
Economists are watching this summer driving season to see what effect these prices will have on the tourist / vacation economy and believe me in Michigan, it is a huge industry.
When discussing gasoline pricing with my fiends and relatives, I sense that they don’t really know why these prices are going up and what determines them and/or controls them.
Most Americans blame the oil producing Arabs, our government, greedy American oil companies, etc.
Not knowing where to direct your anger is frustrating; we need somebody or something to blame!
That may not be all that easy to do since many factors play into why you pay the price pay to fill up your car that you do.
First, the oil producing nations (OPEC) do not actually set the price of a barrel of oil (42 gallons / 159 Liters); they just set how much oil is pumped on a daily basis. In setting how much is pumped, they set the price per barrel, how? Well, if they consider the price too low, they produce less; I don’t think the price has ever been too high for them but they will occasionally try to lower a very high price by producing more oil if they feel the exorbitant price is hurting the world economy. That means if countries are hurt economically to such an extent that they can no longer buy as much oil as they need; the oil producers will suffer lower sales – kapish?
In our day and age, two powerful economic powers have entered the world market for oil. These nations are new players: China and India. In the near past, they were barely making it with China’s closed Communist system and India’s non-system that produced nothing but plain, abject poverty. Things have changed and now they have a ravenous appetite for oil to power their factories, etc. and compete directly with us and the rest of the world for that limited supply of oil – and they can pay for it.
Are you starting to see the picture? OPEC could produce more oil, increasing inventories and therefore keeping prices reasonable but they won’t because they don’t have to and there are no overwhelming reasons for them to do anything at this point.
But who in the hell sets these ever increasing prices for a barrel of crude oil? It is the marketplace; the oil marketplace where buyers buy and sellers sell. This is too involved to explain in this place but investors buy oil futures promising to deliver oil for a specific price. Buyers can also buy oil on the “spot” market which means they buy oil cargo on ships for a specific price and deliver it to a buyer for a specific price.
The prices are set naturally by “supply” and “demand”; the price goes up when there is a great demand but a limited supply – common logic!
So you see the price of oil has nothing to do with the cost of producing the oil.
The oil that is made into the gasoline we use has a long road to travel from oil well to refinery to our gas station BUT the reason the gasoline costs more for us is because the crude oil is costing more; it just goes down the line.
Will the price go down as usual; don’t bet on it. China and India are not going away or getting less industrious. Hell maybe other countries are on the verge of an economic boom that will require them to buy more oil.
Now that you know why gas prices are on the rise, we will talk about what can be done about that and how the higher prices will impact our lives here, in a later blog…
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