Beyond Origins the Discussion

Why The Gas Price And Crude Oil Drilling Are Raising Fuel Prices In 2008.

August 12th, 2008

Crude oil has one of the most complex and variable pricing mechanisms in the commodities market, and for that matter in the entire market. The cost of gas is affected by a host of different factors, and it can be extremely difficult to determine which factors have the greatest impact on the actual spot price at any given point in time. As you have no doubt seen recently, the crude oil markets have been extremely volatile and investors have begun to express confusion over where the markets are truly trending.

In highly efficient capital markets with an inelastic demand coupled with a constrained supply, markets will adjust backwards to the old prices within a few days or a week at the most. The only difference between now and before is the extra $0.47 or so would now be going to oil producers, oil suppliers, refiners, and the owners of the gas stations. But this potentially small gain in the commodity could mean major profits for any investor that is holding a Oil Stock.

If the gasoline tax proposed in politics was put into effect, the policy plan could be much more effective because it would help the refiners and gas station owners boost their profit margins. As ridiculous as that may sound to you, that is exactly what needs to happen. Contrary to popular believe, the refiners and gasoline station owners are actually getting killed because they are at the mercy of the commodity spot market prices (the value where open fiscal markets trade physical goods) since they do not actually produce the good. “Big Oil” only acts as a middleman and output, not an input as many believe. In the oil business they call this middlestream and downstream. Believe it or not, many gas stations are closing around America because they simply can’t keep up with the pricing increases. The %KEYWORDCAP2& has gone up substantially more than gasoline during the last three years, and it has come to a point where many of the gas stations and refiners are actually losing money every time they sell you gasoline. The reason for this is not because eventual buyers.

World crude oil supply is somewhere between 84-85 million barrels per day while world crude demand is somewhere between 86-87 million barrels per day. The most recent numbers show that through April the United States was using 19.96 million barrels of crude oil per day, which is nearly a quarter of the demand present in the entire world. The United States only produces roughly 30% of the crude oil it uses domestically, which means we are importing roughly 14 million barrels per day. It’s easy to see how at the current prices of ~$130 per barrel this can add up very quickly. Until some portion of demand is completely destroyed to balance out supply and demand, don’t expect a relief in the cost of gas and don’t expect this argument to go away.

The interference of politicians is not something new for the commodity markets, especially oil, even in crisis mode, the politicians simply will not stop playing their games. Don’t believe for a second that once oil makes a short term pull back that the politicians will not take credit for the changing market prices that may favor the public because there is no doubt that they will. It will be much more humorous to see the look on their faces and hear their bumbling excuses when crude breaks $200 a barrel and gasoline is over $6.00 a gallon. But even without a mid-term effect on the price of energy-related commodities, these issues are a matter of national security. If we go to war in the future with a country who has control of the Crude Oil Drilling, they could effectively aggravate problems in the United States economic system without firing one bullet or using one soldier. Our “Strategic Petroleum Reserve” only has about ~700 million barrels, and including current online production, that would last us just 50 short days. The government should have never stopped filling the SPR as it has placed our country at extra risk.

We are so reliant on offshore drilling to run our economy that it is important not to underestimate the elasticity of demand in this case. Those investors who are able to cut through the noise and analyze the facts will be rewarded with great returns in the long run.

Entry Filed under: Business