Sunday, August 14, 2005

Oil's Upward Spiral

Oil prices topped $67.00 per gallon this week, driving gas prices in the US closer to the $3.00 mark and significantly increasing inflationary pressures. Analysts point to a many diverse causes for this rapid increase in price. (Sunday Herald: The black art of oil pricing).

Three major factors are pushing the price upwards:
  • US Refineries are unable to keep pace with the demand. Recent problems that forced plant closings at Conoco and BP have increased supply pressures.
  • China's 9.5% growth rate is putting additional pressure on the demand side.
  • Major oil producers Venezuela, Russia, Norway, and Iraq are not producing to capacity.
Thanks to these bullish pressures, oil speculators are also artificially driving the price upward by a good 20% - 25%. Watching the futures market will be a good indicator of when prices will stabilize.

To bring oil prices back under control, several steps must be taken:
  • Political pressure must be applied to Venezuela, Russia, and Norway to increase production. With the increased demand, increase in the supply is necessary. Iraq will not be at full production until the political situation there stabilizes.
  • The US must increase refinement capabilities. This means improving the capacity of refineries already in operation and also building new refineries - something the environmentalist lobby strongly opposes.
  • Oil production in the US must be increased. Tapping into the Arctic oil fields in ANWR will provide approximately a 30-year supply of oil. That should be enough time to implement the final point:
  • We must develop a viable energy source that is not dependent on petroleum.
You will note that gas rationing or fuel conservation is not listed as one of these options. That's intentional as I don't believe it has any long-term effect on price. Rather, implementation of conservationary measures may actually be detrimental to our economy. Better to focus on increasing supply rather than reducing demand.

The ultimate answer is to eliminate our dependence on oil - foreign or domestic. Until then, we must take whatever steps necessary to curb the upward price spiral.

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3 comments :

Alan Fraser said...

Your logic is interesting in that you open with a sequence demonstrating the problems in supplying the demand but close by saying that trying to do anything about the demand is potentially detrimental to the economy.

Well, yes, it would be detrimental to the auto manufacturers who have steadfastly ignored any concerns about foreign oil and have been making bigger and bigger vehicles with each model year. I want a tax on those vehicles commensurate with the damage they are doing to the entire country.

Kannafoot said...

I cite three primary causes - China (demand); US refineries (supply); and national production (supply). I doubt we're going to convince China to use less oil, leaving the supply side of the equation.

In any case, I am always in favor of increasing supply, not decreasing demand.

As to the issue of taxing vehicles, how would you impose that tax? Based on weight? Many states already do that. Based on miles driven as CA wants to do? That only punishes you for driving, not for driving an inefficent car.

In most states, you're already taxed heavily based on your car's performance. The amount of state tax added to the price of gas is outrageous. That tax clearly penalizes the person with a lower performing car. As we've seen with similar taxes - the cigarette tax as an example - it will do absolutely nothing to deter anyone.

Alan Fraser said...

"US Refineries are unable to keep pace with the demand. "

There are only two options: Increase supply or reduce demand. The pigs in their Hummers, Escalades, Expeditions, etc., have reveled in conspicuous consumption and now the entire country is going to pay the price for it. They're not the sole source of the problem but they're certainly the most visible symptom of it.