Saturday, October 21, 2006

On oil and gasoline prices

Ezra is exactly right here - volatile oil prices are at least as worrisome than a moderately high, but stable, price. (Anyone say carbon tax?) The problem is that both the volatility and the high prices are the results, fundamentally, of the same circumstances - an industry with near-zero spare capacity at any point in the supply chain.

Oil demand is near 100% of oil production. Oil refining is similarly tight, after decades of surplus refining capacity. The market, doing it's invisible hand thing, knows all this. The high prices during the summer reflected anxiety over the possibility of a bad hurricane season, insecurity in Iraq, and other things.

The bad hurricane season that had been predicted by agencies like NOAA turned out not to hit the precious, precious oil, so speculators who'd bet on at least one bad storm started selling their contracts in late August - and hence the price decline. Such as it is.

(For a far more detailed explanation of all this, see the always-excellent Jerome a Paris.)

Once again - at the risk of boring people through repetition - I find it incredibly amusing that everyone's breathing a sigh of relief that oil's down to $60. The speculation that drove oil up to $75 a barrel is largely gone, and oil is still at a price that was unthinkable before the Bush Adminstration. I suspect - and I am prepared to be happily embarassed if wrong - that $50 is the new floor for oil prices. And I'm honestly not optimistic that we'll see even that.

The long-term problem is that the same circumstances that drove oil up to $75 this year could happen again next year, or the year after, or any time in the future unless we both increase oil production and refinery capacity. The idea of the industry investing in refining in a big way to decrease its own profit margins is a bit far-fetched for me, but then I'm a cynic when it comes to the oil industry. (I know, shocking but true!)

I'm generally skeptical about the idea of a substantial increase in global oil production, in any case, so we have many more years to look forward to of high prices, high volatility, until and unless we substantially reduce oil demand to bring some slack back to the market.

1 comment:

Adrian MacNair said...

I'd be happier to see greater investment and production of alternative fuel sources before oil becomes too expensive. As one who has been forced to begin driving for the first time in his life, I find the prices exceedingly unjustifiable. There are simply too many drivers out there from the Ford motor company mentality that people want BIGGER and BETTER, not fuel efficiency. Now that Ford has taken a tumble due to rising oil prices, even the rich HUMVEE drivers are beginning to grumble.

As per usual it'll be small fries like myself who'll get hit the hardest. The rich will be able to get fuel-alternative cars for $40,000, or hybrids. Meanwhile the government will begin instituting gas taxes for revenue, forcing people onto public transit (which may a good thing). Cars are giant money pits, and yet the ironic thing is that we use them to transport us to our places of revenue generation (work). At some point we'll have to weigh the cost-effectiveness of spending $800 a month to get to a place that we earn only three times that amount at.