Both Qatar's oil minister and the head of OPEC can see oil hitting $200 a barrel before the end of the year and one analyst says gas could reach $7 a gallon within four years. That could mean cataclysm for the global economy.
Article from Wired.com. Photo by John Perkins.
The world got a little relief today when BP reopened its North Sea pipeline. But the price of gas is averaging $3.60 a gallon and the price of oil is flirting with $120 a barrel with no relief in sight. Market forces don't seem to be functioning in their normal order. OPEC controls only about half of the world's oil supply. Ordinarily, when prices spike skyward, the world's non-cartel spigots open wide. Why isn't this happening and who's to blame?
Oil Companies. Admittedly, obscenely compensated oil executives are laying low these days. Big Oil is rolling in profits. The Bush Administration's tax subsidies to oil companies, which were intended to prod exploration, should infuriate commuters. And yet the profit margins of oil giants are only slightly higher than the average for the S&P 500. And much of the wealth from these companies is pumped back into the economy in dividends, employment, capital spending and the like. Big Oil shouldn't get a walk (and windfall profit taxes make more sense than ever). But it's only a small part of the problem.
China and India. It seems to be a global fact that an automobile signals your arrival into the middle class. Without question, demand for oil in these countries is putting an inexorable upward push on gas prices. This isn't going to change in your lifetime, and it should sound the alarm for North Americans and Europeans that their middle-class lives will be threatened unless they develop alternative forms of energy -- fast. But the increasing demand for oil in China and India is a long-term trajectory. It doesn't explain recent spikes. And in the short term, it's self correcting. As oil prices spike, economies slow and the demand for oil eases. So does its price.
Ben Bernanke. Oil is currently priced in U.S. dollars. The Federal Reserve has feverishly tried to calm credit markets in recent months with lower interest rates, which are a kind of Valium for bankers. As interest rates drop, so does the value of the dollar. So it takes more dollars to buy a barrel of oil. Without question, the credit crisis is a more pressing concern than high gas prices. Credit, after all, is the life blood of an economy. It is widely expected that tomorrow the Feds will reduce interest rates again. But many analysts believe this is the last cut we'll see for a while. Fighting inflation -- including rising gasoline prices -- is becoming a priority. When interest rates begin inching up again, it will be bad news if you're taking out a car loan, good news at the pump. In the meantime, just be glad you don't have Ben Bernanke's job.
Speculators. It's never a good omen when fear swallows reason on the trading floor. But this seems to explain part of what's happening with the price of oil. Or maybe it's just greed. Whatever. The good news is that these speculative frenzies tend to end quickly. And ultimately, it's traders' fingers that get burned, not consumers.
Suppliers. Here's the mysterious missing piece in high gas prices: Saudi Arabia, Kuwait, Qatar and other OPEC members try to keep supplies tight and prices high. But England, Norway, Russia and other non-OPEC countries open the spigots to take advantage of high prices. This usually brings prices down. But supply disruptions have become rife -- even with OPEC countries, such as Nigeria, thanks to an insurgency that keeps shutting down its pipeline. Norway's production has dropped by 25 percent since its peak in 2001. Britain's has dropped by 43 percent. Alaska's Prudhoe Bay has dropped by 65 percent from its peak. Russia's is down and so is Mexico's. It's enough to make you think speculators are on to something. When does fear resemble reason?
It doesn't matter what gas cost.
They said, "When gas gets to $2/gallon people are going to park their cars and not drive anywhere unless it's a necessity." They said the same when it was approaching $3/gallon and they're saying it now that it's approach $4/gallon.
In economics you'd call it inelastic. That is, the demand isn't really affected by supply/price.
Friday night at 11:30 PM I'm sitting at a traffic light with 20 other cars all out doing leisure driving despite gas costing $3.50/gallon. SUVs are still best-sellers and quad-cab full-size trucks have been the latest fad in "family cars."
It seems no one really gives a shit what gas costs. Oh, they bitch at the pump (to their fellow customers and the gas station clerks who have absolutely NO control over the price), but they keep pumping and they keep doing their leisure driving.
When a McJob-having teen still has gas money to put 300 miles on their car every weekend entertaining themselves and killing time, then I may worry.
When I see as many people picket GM demanding affordable non-petroleum cars as picket WTO meetings to defend tariffs and oppose free trade, then I might start thinking people really give a shit.
For now, it's just a bunch of people pissing and moaning while they fill their tank so they can drive 20 miles round trip to eat an overpriced meal at their local Applebees.
Bad news for the Oil Companies - the gas prices are dropping rapidly: http://www.msnbc.msn.com/id/12400801/
Hopefully we can get them a stimulus package soon so that they can finally make some "windfall" profts.