Monday, May 01, 2006

$3 a Gallon is as Good as it Gets

The Energy Sec. says we have 3 more years to come of this sort of fuel expense. Exxon and its Ilk are saying this is just the START of a great year for them (and bad for us!). OH, and the Wall St. Journal expects Oil Prices to top $100 a barrel soon.

We have 3 real choices here: get higher mileage out of our cars, begin using some alternatives to Oil (that actually cost less), or grin and bear it. It doesn't matter what anyone thinks about the environment or global warming. If you aren't sure about the facts there, I can't help you. none-the-less, there are no other alternatives than these, whatever your political persuasion.

Bodman sees up to three years of fuel pain - The Energy Equation - "Gasoline prices have soared an average of 60 cents a gallon in less than a month because suppliers are unable to keep up with demand, a situation that could persist up to three more years, Energy Secretary Samuel Bodman said Sunday.

Bodman said on NBC’s “Meet the Press” that the shortfall was a sign of a stronger economy under President Bush, but he acknowledged that, at least for now, “the suppliers have lost control of the market.”"


The Hud said...

Did you see the Daily Show last week? They had a woman that was the econ reporter from something like the WSJ to talk about oil prices. She went through the whole supply and demand thing and Jon kept asking "but why are the companies making such profit?" And she just kept returning to "oil costs more." After a while I thought it was kind of sad.

Polly said...

Yeah, i saw it, but as i watched i had a revelation (or at least i bought what she was saying) and (this is weird) i think John Stewart didn't understand her.

His question over and over was 'why are they making such big profits since the cost of oil is going up?' and 'shouldn't their expenses go up as well, and the profit margin stays the same?'

not really. he (like most of us) tend to think of these things like other business. costs rise at one end, so the increase is felt down the line. Not so here.

With some few exceptions, Gas comapnies control the production line of product in a way unlike most industries (who else controls the resource from the ground to (literally) your gas tank? it isn't as if Exxon's 'supplier' got more expensive. they ARE the supplier. When oil prices spiked last week, it wasn't because oil suddenly got harder to get. oil was no harder or easier to get than a month before. it was Iran and poliitcal wrangling that made the price of oil rise...not cost of production. you have that in a sustained manner, with no corresponding new expense in prodcution, then you have a good chance for wild profits.

For the last few years, oil production has been at the same level (or maybe a little less). the cost of production has been relatively stable as well. the problem is that its a finite resource, the demand grows daily, that demand outstrips actual production (and production capacity), and THEN you add in that the market spikes when various governments make the market jittery.

All these things affect the price but none of them affect the COST. so, she was right. it's not that it costs more to make gasoline. it just costs more to BUY it.

And now that i have this little rant going, and don't have to make it a post, I'll say this: it doesn't matter if we stop using middle east oil all together. that doesn't fix the problem. regardless from where our oil comes, it will be priced based on the world market. SO, even if we don't get it from Saudi Arabia, let's say...well that doesn't fix the problem of cost.

crap. i have more to add here. maybe i should make this a post. any thoughts hud? buck? anyone else?

The Hud said...

I understood Jon to be making a slightly different point, one that I might paraphrase simply by asking "why don't the recent profits made by oil companies count as war profiteering?" It seemed to me that Jon understood that price of the oil was going up because of futures speculation but what he wanted to know was how the oil companies could justify making such outrageous profits.
That is, Jon was pointing out that we are at war. The President and the oil companies harp on this point. The world market is affected by this war. So, the cost of oil, though finite, is 'articifically' elevated (please don't nit-pick on what constitutes 'artificial' in relation to oil). In WW2 the price of everything rose, or at least would have had FDR not fixed the prices of much of it.
And though I think there might be space here for a discussion of the economic effect of various political positions I think the end question, the "why are their profits so high" question is an ethical one.
Perhaps an analogy would be useful. If I owned a handcranked well in New Orleans that was connected to a untainted supply of water my costs for producing a gallon of water would not have changed in the days immediately following Katrina. But the price that I could charge for that water would change. Except that to charge an excessive amount for my water could be really immoral. Supply and demand explains how it is that the price gets so high but it doesn't explain why we should let it. The ridiculous price of gas (ridiculous by American standards) wouldn't be a big deal except that our government is constantly stressing how we need to make sacrifices in order to defend ourselves against global terrorism; these reasons are used to curb free speech and privacy. And this is why I think Jon (and if not him then me) wanted to know what justified the oil companies making such amazing profits.
Did you notice, by the way, that for almost the entire interview she was talking about the price of oil while Jon was talking about the price of gasoline? The rise in a gallon of gas is not, I think, running proportionally to the rise in a barrel of oil.

Swirly n DC said...

In Rehoboth, DE...gas is 2.70 a gallon.

Not that ANYONE wants to drive to rehoboth for that...but at least it keeps the BEACH REASONABLE FOR THE PEASANTS! :-)

The Hud said...

I know that this is super after the fact but I have been watching, just now, a senate committee meeting on the possibility of oil price fixing where pretty much every senator has been tearing the FTC Chairwoman a new one. Several people, on the oil or FTC side, have brought up teh elasticity of the price of oil, which I take to be the gist of the revelation that you had and virtually every senator has shot that idea down. They mainly point to the recent surge in the "spread" of the price of a gallon of gas and the price of a barrell of crude. Plus it has apparently been suggested that we should put OPEC under the anti-trust laws (wow).

Damn, sometimes I love CSPAN-2

Polly said...

hmm...OPEC and anti-trust. i think Hank would be the one to ask about that.

I think that the real issues of oil consumption are somewhat feeding off themselves. limited resource, the fact that once you get more than 1/2 of any location's supply, the extraction of that last half is MUCH harder/more expensive, and a lack of new oil fields. all of that makes the price go up. only one makes the cost of (current) extraction go up.

On a side note, i'm working with a guy that's working on a possible post-katrina price gouging case. hmmm...