Sunday, May 25, 2008

Fuel Cost - Why so High?

The thing is, we're reacting to the change. We aren't in a panic because automobiles are at an all time high. We didn't panic when homes were at an all time high. Stocks are at an all time high and we celebrate. Education - are you kidding me? That's outrageous, especially considering the rate of inflation for other goods and services. Taxes? We're working until May or so for the govt now - no one's panicing about that. So why panic about fuel? Why shouldn't the price of something as valuable as gasoline rise over time as our monetary practices deflate the value of our dollar, and as the demand for the resource rises, and as nationalization of oil fields (and the resulting inefficient operation of the infrastructure) reduces in rate of increase in supply?

Here's one common sense description of the process from the Cafe Hayek (
Skyrocketing Oil Prices Stump Experts
The article begins:
Confused about oil prices? So are the experts.
Executives from the giant oil companies say it's partly the fault of "speculators" or financial players. Key financial players say it's really a question of limited supply and expanding global demand. Some members of Congress accuse the Organization of the Petroleum Exporting Countries for bottling up some of its production capacity. And OPEC blames speculators, wasteful U.S. consumers and feckless U.S. policy.
Almost everyone points at China's growing appetite for fuel.
Whatever the causes, one of the most dizzying runs in the history of oil prices picked up pace yesterday -- again -- as crude oil prices jumped to settle at more than $133 a barrel, up $4.19 in one day, 18 percent so far this month and more than one-third so far this year. Prices climbed even higher in late electronic trading.
After a few paragraphs explaining the impacts of the higher prices, the Post quotes an expert who does have a theory:
But the bigger question is: What has been driving the doubling of prices over the past year even as U.S. demand has stagnated and global output has continued without any major new disruption?
"The basic story that has brought oil from $20 to $130 dollars is that world demand is growing robustly when world supply is not," argued Jeffrey Rubin, chief economist of CIBC World Markets. "As a result, we need ever-higher world oil prices to kill demand in the [industrialized countries], which is exactly what's happening."
While U.S. demand has leveled off, Rubin said, demand in China is growing at a 12 percent rate, more than the 8 percent rate he forecast. While the extra increase in China is probably because of short-term factors, such as the earthquake or hoarding by the government in preparation for the Olympics, Rubin said even the lower rate would keep world demand growing briskly.
Hmmm. Seems pretty straightforward, doesn't it? Rubin doesn't seem stumped. I'm not sure why this article was written. I think the author wants one reason. China. Speculation. Greed. (Or more accurately, an increase in greed.) But the simplest explanation is that world demand is growing briskly and world supply is not as responsive.
If we want low gas prices, we should lower the costs of exploration and refining. If lowering those costs has environmental costs you don't like, stop complaining and get on your bicycle.