Posted by: Opey | May 22, 2007

It’s Going to be a Long Summer…

Now that commencement is over, it’s time to get back on the quest for current topics that spark a fervor in people’s hearts and minds. Today’s post definitely fits into that category. As is the case with most college students, I don’t drive a car all that often and only have to fill up my moped around once a month. So, imagine my surprise as I drove through Madison with my family over the weekend and saw gas station after gas station with prices approaching and eclipsing $3.30/gallon. As any good student of economics or finance, I quickly jumped onto a computer and checked out the commodity markets to see where oil was. To my surprise, oil was “high”, but not to the outrageous levels that I had predicted, and the price was dropping at a somewhat-steady clip. As I write this, oil is actually up 60 cents to a total of $65.78 per barrel. That mark is high, but it still seems to lag behind the level that gas has reached and is well behind the ~$79/barrel mark of a Summer ago. Many other intelligent people have also noted this discrepancy, so I thought I would dig around and try to compile as to why gas prices have been out of touch with oil the past few weeks/months. Just yesterday, gas was said to have eclipsed the inflation-adjusted levels of the oil shock eras during the 70s and 80s. For a student of international political economy, that is quite alarming, because the oil/gas shocks have been said to be one of the most influential international events in the past century, in terms of political and economical change. That fact sheds additional light on my previous post regarding just how important an understanding of IPE and globalization is becoming in this day and age, but I digress. The sectors of petroleum and gasoline have reached a new evolutionary step. “Forget everything you ever learned or ever read about the connection of crude oil prices to gasoline, because there is a disconnect today,” said petroleum industry consultant Tim Hamilton. “All the price of oil does is establish a floor of what the price is going to be in the country.” In a CNN article (Link), Hamilton says we must focus on the supply chain to determine the direction of prices now.  Our reserve levels and refining capacity are still well below pre-Katrina levels, with no dramatic increases in sight.  In addition to that, everyone knows that our demand has not lessened, and the great oil-consuming, Chinese dragon is just beginning to consume their fill.  It boils down to Econ 101.  When supplies of a product are low, all else being equal, prices rise.  When demand for a product is high, again all else being equal, prices rise.  When you combine the two, it acts as a multiplying effect.  That being the problem, some possible solutions are rather clear.  On the demand side, increased vehicle efficiency, faster development/increased subsidies for alternative fuel sources (working on ethanol and biodiesel now and working long-term towards electric and hydrogen) and some sort of increased gas/carbon tax would lessen demand.  On the supply side, we could attempt to drill more offshore or the federal government could regulate oil production and refining much tighter (mandating refining production/capacity standards).  Simply choosing to not fill up your tank one day or riding your bike to work for a week isn’t going to cut it.  We, both consumers and government officials, need to act now, en masse, to curtail this problem before we see $5 dollar gasoline, which I believe is just over the horizon.

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