$4/Gallon Gas NOT That Bad?!...

A recent article in Slate tried to make the case that $4/gallon gasoline WAS “still a BARGAIN.”

SEE: http://articles.moneycentral.msn.com/SavingandDebt/SaveonaCar/Why4DollarAGallonGasIsABargain.aspx

Close, BUT not quite.

Comparing America, an automobile-dependent nation, to other nations that are smaller and far less automobile-dependent (ie. England and Norway, both as large as some American states) is absurd. The ONLY real comparison for the price of gasoline in America is to compare current prices to past prices adjusted to inflation.

Since the all-time U.S. high (adjusted for inflation) was in 1981, at appx. $1.35/gallon, and given the inflation rate (0.85 dollars/85 cents = $2.10 in today’s dollars), our U.S. high in today’s dollars was about $3.46/gallon, BUT that was in the wake of one of the most crippling oil crises in history, with Iran holding U.S. embassy workers for 444 days and the world wondering about severe disruptions in the supply of oil.

So $4/gallon is a pretty high price for gasoline under normal conditions. Even accounting for today’s “far from normal conditions," it’s still a high price.

The author also notes that "even back in 1922, a gallon of gasoline cost the current-day equivalent of $3.11, adjusted for inflation." Again, at the start of the automotive era, with fewer people driving, the cost of refining gasoline, relative to the demand cycle reduced the gasoline maker’s ability to make “bulk profits,” so the price per unit (gallon) was higher than under the eventual high demand/bulk profit scenario that became the norm in America.

Of course world demand has more than quadrupled and supply hasn’t kept pace and our refusal to drill offshore and in ANWR has made the higher price inevitable, but despite the reasons, $4/gallon gasoline is still a very high price...and yes, it may be going up even further, due to our own energy ineptitude.

A more apt statement would be, “$4/gallon gasoline is high, but not nearly as high as we should expect to see, given our current dismal energy policies.”

Oh NO! Even Bill O’Reilly Doesn’t GET IT!!!

Bill O’Reilly is generally a pretty fair minded commentator in my view and I say that despite the fact that he’s far more Liberal than I am (he opposes the death penalty, supports a guest worker program for illegal immigrants, etc.).

He’s an Ivy League New Yorker, after all, so how “Conservative” is he really going to be?

He has been a stalwart crusader for tougher sanctions against pedophiles, although I surmise he opposes the death penalty for repeat child sex offenders, which I support, and his crusade in favor of Megan’s Law and Jessica’s Law are admirable.

One area that I’ve always had a huge problem with Bill O’Reilly over is his views on “energy policy.” For a long time, he’s advocated American companies selling American oil to U.S. consumers at slightly above cost – it supposedly costs appx. $20/barrel for Energy Companies to take oil from America’s reserves, so Bill O’Reilly would suggest selling it to the American people at $25 to $30/barrel.

What’s wrong with that?

What’s wrong with it is that we exist within a global economy. Should Exxon-Mobil and Chevron be forced to sell U.S. at below world market prices (currently nearly $125/barrel), foreign oil companies would still sell theirs at world market prices, still reap huge profits AND eventually buy out/take-over America’s energy companies!

When O’Reilly interviewed Ben Mezrich this past Wednesday night (4/23/08), the author of the book Rigged about how the oil futures market sets world oil prices, Bill O’Reilly showed a startling degree of ignorance by asking, “OK, so who’s the guy who sets the world price of oil? Somebody has to set it at $125/barrel, it just doesn’t arrive at that number.”

Ben Mezrich replied, “It would be great if there were one such person-”

O’Reilly then stated, “Look, there’s got to be that one person. If you don’t know him, that’s fine, neither do I.”

What Mr. Mezrich didn’t get a chance to say was that there is NO ONE person! Commodities futures markets are an open auction, where the price of various commodities are bid up and down according to various investors/speculators “bets” based on the exiting information at hand.

Commodities futures markets are as open an economic democracy as you can get. Anyone can come in and invest on futures of any given commodity from corn to unleaded gasoline.

People of all kinds, from all economic strata are free to bid, invest, speculate on the price of any given commodity. You can “Buy” or bid, or invest/speculate on the price of that commodity going up, or “Short” and bid, invest/speculate based on the belief that that commodity will go down.

Behind those bids or investments/speculation are the market parameters (supply and demand for each commodity) and those market parameters play the same role in the mercantile exchange/commodities markets as do corporate fundamentals (the fiscal health of a given company) in the stock market. When more and more people believe that the market parameters for oil and unleaded gasoline point to a price rise for those commodities, the price of those commodities is bid upward until such a point, where no one will bid it any higher.

Right now, the U.S. has huge reserves of petroleum in shale oil, oil sands and both offshore in huge underwater deposits and in ANWR in the Artic, that it is not bringing to market.

Over the past decade or so, both India and China have modernized and industrialized and are now using far more oil than they did before.

That growing DEMAND amidst an artificially tightened SUPPLY has created market parameters for oil and gasoline futures that would indicate rising prices.

Even though world oil supply has risen sharply over the past decade, world demand has far outstripped that supply.

In the U.S. outrageously high federal and local gasoline taxes, federally mandated “summer blends” and policies that have (1) made building new refineries both more expensive and less profitable and (2) limited access to our huge supplies of oil and natural gas have all conspired to raise gasoline prices.

And yet, if even Bill O’Reilly, who’s father worked as an accountant for a major Energy Company, doesn’t get how this system works, how can we expect regular folks or even lowly politicians to get it?

Right now the world market is acting exactly as it should. In the face of rising demand outstripping the supply of a given commodity, the price of that commodity rises.

That is GOOD!

What it does is it makes the cost of that commodity so prohibitive that we are forced, as consumers, not to waste any of that commodity we own.

When government moves in to artificially lower the price of a commodity under those conditions, it winds up SUBSIDIZING waste, and ultimately makes the problem WORSE, by further driving up demand!

Ironically enough, the U.S. government could do something to bring down the price of oil and gasoline, by moving to INCREASE global supply, by bringing more of our own oil to market!

But we’re NOT doing that.

Looking for “the one man to blame” for setting the world price of oil so high” is as foolish and fruitless an endeavor as searching to find Santa Claus or the Easter Bunny.

This is for ALL those dopes who claimed “Bush is manipulating oil prices before the election”

The same nitwits confidently assured everyone that “As soon as the election is over, oil prices will begin rising back up the $3/gallon level, almost certainly reaching that level again by winter.”

I guess they were wrong.

Very wrong!

In fact, oil prices have fallen by a third since peaking at $78.40/barrel back in July and are already down by nearly 9% this YEAR!

An analysis by Standard & Poor's Investment Policy Committee recently concluded that the declining price for oil may have only just begun. The committee reported last week that a price break below $55 a barrel might open the door for a drop to the mid-$40s, where it could stay for three to six months.

There are other analysts, however, who argue that although unusual weather has put a damper on oil futures, demand from fast-developing countries such as China -- and the watchful eye of the Organization of Petroleum Exporting Countries -- will prevent a severe price hemorrhage.

Craig Pirrong, a professor of finace at the University of Houston's Bauer College of Business says, "I'm not a believer that if you break a magic barrier you'll automatically see a certain drop, but $45 a barrel could happen," adding that, “Many commodities like copper are softening dramatically, indicating that the boom is over. With the economy softening worldwide, oil in the mid-$40s is not unrealistic."

The most bullish proponents like Pavel Molanchov, an oil analyst at Raymond James Financial in St. Petersburg, Fla., tend to believe that oil prices are reaching bottom. "We think the mid-$50s is the floor because OPEC is defending a $60 floor, and if they want to defend that level, they will," Molanchov defends that view by pointing out that oil fundamentals are more bullish than they were a year ago because of strong global economic growth.

SEE:

http://articles.moneycentral.msn.com/Investing/Extra/WhereOilPricesAreHeaded.aspx