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Controlling America's Rising Gas Prices

Despite the rapidly rising gas prices, Americans still enjoy some of the cheapest fuel prices in the world. Even when compared against prices from three years ago, America is only now approaching the prices once bemoaned by those abroad. Only a handful of nations maintain prices ridiculously below those paid by Americans and those prices are typical of a state-controlled oil program. Despite this fact, Americans continue to complain and point fingers while demanding "somebody do something" about the prices. Once the price of gas is sliced up, there are only so many options available to reducing it.

One option is to increase the supply to meet demand as proposed by Shell Oil’s president John Hofmeister, "The presidential candidates should be out there on the postings saying let’s increase domestic production by 2 to 3 million barrels a day. That would be something that would put money back into this country, jobs back into this country, and it would bring more supply toward the Americans who need it." A knee-jerk reaction by most Americans would be to assume that this plan simply pads oil company revenues. Despite their seemingly enormous profits, Hofmeister contrasts those profits against those found elsewhere in the economy, "If we had made $7.8 million on $114 million of revenue, nobody would call that excessive, because that’s 7½ percent. We made $7.8 billion profit on $114 billion revenue — same 7½ percent. So to me that is not an excessive number when banks and pharmaceuticals and IT companies earn a whole lot more." This course of action may very well come to fruition as congress is set to propose cutting off oil routed towards the strategic reserve and directing it towards consumers.

Another avenue of price relief, which has become virally popular to consumers via the Internet is a suspension of the federal gas tax. This measure has been proposed by all three Presidential candidates as a means of shaving 5% off the price of gas during the summer to not only give consumers and businesses a break, but free up money to stimulate the economy. If you ask an economist, it’s just bad policy formed to placate an ill-informed voting constituent. Estimates indicate the government would stand to lose $9 billion and up to 300,000 jobs while crippling funds for commerce and infrastructure. Economists argue history shows tax savings do not go to the consumer but end up with the commodity supply retailers, "I don’t think it’s brilliant economics; unfortunately, it may be good politics. The smart people say ’It’s stupid,’ and the people who aren’t as schooled say ‘At least it will do something for me.’"

But lastly, one of the root causes of the increased oil price is a run away commodities market on the trading floors. At the moment, the price for a barrel of oil is not actually being driven by the demand to put gasoline into a vehicle, rather it’s driven by commodities speculators creating a demand for barrel options. Earlier this year, it was shown the price of oil was pushed over $100 by a single trader seeking notoriety. The same principle is driving commodities prices more aggressively now, "The guys who screwed up the mortgage markets are bringing their awesome skill sets to bear on physical commodity markets." Investors were looking for something tangible to sink their money into after pulling out of the fixed income catastrophe of mortgage backed investment vehicles. The Fed’s interest rate cuts may have prevented an all-out market crash, but it created a bubble for traders to purchase commodities like oil, food and precious metals. The sudden trader demand boosted prices leading to a bubble effect of traders securing themselves an option to buy at prices X, Y and Z which in turn continued to drive the price higher. When the interest rate is driven too low, a period of heavy inflation ensues similar to what was seen in the 1970s. It is widely believed the Fed’s interest rates cuts will be put on hold for awhile to stabilize the commodities market and limit the weakening of the dollar – all of which impact the price for a barrel of oil.

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I have to agree with John Hofmeister. It’s really irritating to hear people whine about how the oil companies are rolling in profits while the common man suffers. Dude – they are a business … making money is what they are supposed to do. If there was not money to be made, they wouldn’t put their time and effort into it. You work for money don’t you? So SHUT UP with the oil conspiracy theories! They could be making a helluva lot more in profit but if the stats are correct, their earnings match industry so it’s normalized.

The problem is entirely with the damn traders on Wall Street. Unfortunately, the solution is not very conducive towards the promotion of capitalism and would be even further detrimental to the economy to lay such seeds of unrest regarding nationalizing traded assets.

Very nice analysis, Vnutz. What’s missing from your article is the impact of a weak dollar. With the dollar getting weaker and weaker (driven in part by low interest rates here and higher retun abroad) and the barrel of oil priced in US Dollars, it was only a matter of time before the oil prices went up. I am sure the Europeans pay a lot less for this increase…

Some food for thought:

- Warren Buffet did invest in railroad companies….

- Europeans always paid more on gas, and they are doing quite alright…

- You don’t actually have to live in a suburb 2 hours from your work place… think about it… you really don’t. You will be find in a small condo in the local downtown. Just look at the rest of the world. (disclosure: I don’t own a mcmansion, I rent an apartment).

So on this final note, I don’t buy into the whole Apocalypse Now scenario. People will adjust their living standards accordingly. Even if that means abandoning the Suburbia. Or taking the bus. Or asking the local governments to improve public transportation, first.

I’m not sure about other places, but it seems everyone in the States groans when Shell or Exxon report their profits. As VnutZ pointed out, though, the percentage profit isn’t near that found among others, such as Microsoft or Google. The key is the very small amount of revenue involved in developing software – at least when compared to oil exploration, production and processing.

The point I want to make, though, is even if the big oil companies were making the largest profits in any industry, this doesn’t mean they have any control over the price of a barrel of oil – because they own less than a fourth of the world’s oil. Who owns the rest of it, you ask? Governments. Nigeria. Venezuela. Saudi Arabia.

So, the next time you have a problem with oil prices, leave the big oil alone and set your sites on nationalized oil.

I understand your reasoning but it can’t be as simple as that. There are so many other factors contributing to the scenario. There’s the basest factor of greed. I’m not pointing a finger at the oil companies but at the trader – out for himself, to earn the biggest buck at the expense of everyone else. How blatantly selfish! Hope he celebrated well that night!

There is also the factor of expectation. As a society our population expects to have the best and most of everything. After all, we are the Americans. As our world gets ever smaller through travel, media, global commerce and national dependancies, the rest of the world expects to be a party to some of the ‘best and most’ also. Supply and demand basic concepts depict that not everyone can have everything at the same time. There have always been "haves" and "have nots". Americans are used to being among the "haves". It is a shock for them to become part of the "have nots."
Even the poorest among us have been better off than most in the rest of the world.

As pointed out by another commenter, there is the weakened dollar and all the impact that has. There are weather factors – causing demand in unexpected arenas and delays in the production process.

And, of course, there are emerging countries and their increasing need for oil. The number of cars alone that has increased in India, China, and Korea has put a drain on what is available at current production.

As prices climb, people will discover there are alternative ways of getting things done. This could be a fine example of "necessity being the mother of invention". As things get more difficult, there should be creative ways of needing less oil – or, at least, putting what is available to better and more efficient use.

Crying for the government to ease the burden of gas/oil prices, won’t fix the problem. Short term "fixes" will merely delay the inevitable and cause more of a backlash effect then necessary.

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