By Allen Penticoff
Up against my deadline once more, I was going to write about the carbon footprint of manufacturing a car. However, oil and gasoline prices are a topical subject, so I’ve decided to revisit this area of our economy.
I am writing Monday morning, March 7. Oil prices per barrel rose 2 percent by 6:44 a.m. from $104.25 to $106.82, then settled back down a bit to $106.60. At 7:11, WTI Crude was stabilizing at $106.61, while BRENT Crude was $117.90. Forecasters at www.Oil-Price.net are predicting that a year from now, the price of WTI Crude will be $123. A year ago, crude oil was trading for $68.01 per barrel.
So today, we are looking at a 64 percent increase from last year at this time. Did the world suddenly begin running out of oil? No. Did some big refinery or pipeline shut down? No. So far, all that has happened is that some small oil-producing countries have had some political unrest. They’ve not even curtailed production. And whoever new steps in to replace the departing leaders will be keen to sell their country’s oil as well. Most of these countries have little else to export.
I did some number research (all 2009 figures) on our oil imports. The U.S. imports something over half the oil it consumes. Of that, 14 percent was from the OPEC countries of Algeria, Angola, Ecuador, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela. We get our oil from a slew of other countries, too. Of those that are in turmoil, Egypt supplies us with .08 percent; Tunisia .005 percent; Libya just .67 percent (but 2 percent of world production); and Yemen zero. In contrast, France supplies .46 percent and Russia a rather large 4.8 percent.
So, what we see is that the oil flowing to the United States is not significantly affected by the turmoil, even if the flow from these countries came to a complete stop. Other nations, such as Saudi Arabia and Russia, can increase their production and make up the difference. The reason for oil price increases lies, once again, entirely within the community of commodities gamblers. In the casino economy, we now have people sit at their computers all day and make bets on whether oil will go up or down. A dollar either way can make these traders millions of dollars. They never see the oil they are buying (their worst fear is to get stuck with it)—they gamble that they can sell it eventually to someone who can actually take possession of the oil or to someone else who thinks the price will go higher at a price above what they paid for it.
In a way, it is sort of a Ponzi scheme. Last one out is ruined. If you’re an actual oil company buying the oil, you just pay the price and pass on the increase to your customers. However, in our casino economy, it no longer matters that the fuel you are pumping at the gas station was made from oil that cost $90 per barrel, the price now reflects what the present cost of oil is, or is expected to be.
Gasoline and diesel are traded as commodities as well. As I write this, unleaded gasoline is trading at $3.05 for April delivery. So, for whatever gas is selling for in April at the pump, the difference is what covers overhead and profit of delivering it to you.
Be glad you don’t live in Italy. They get 28 percent of their oil from Libya just a few miles away across the Mediterranean Sea. Some expect Libya’s leader, Muammar Gaddafi, to torch his pipelines and oil fields when he loses to the populist democratic revolution, as Saddam Hussein did when he lost the battle for Kuwait. This is where the traders get excited. Now, the oil from elsewhere (probably Russia) will be needed to replace the oil that goes to Europe. That puts a bind on the whole supply chain. Our demand will decline some as the price goes up, but the world supply will be running on the edge of what it can make at this point in time.
This chain reaction will affect everything. Unable to drive less, our fuel expenditures will cause us to eat less (maybe not a bad thing), go out less and shop less. Food prices go up since nearly all our food comes from far away. Stock prices will go down. Tax revenues will go down, hurting our state all the more. It can easily spiral out of control. Instead of taxing ourselves more on fuel to pay down our debt and encourage efficiency, we rode the swell of low oil prices by running out and buying more personal trucks and SUVs.
This is why it is important for us to evolve our transportation needs to natural gas and electric power, which are North American-sourced commodities. These prices are relatively stable, and will continue to be so. We can make electricity from wind, sun and flowing water. The sooner we do so, the better.
From the March 9-15, 2011, issue