Filling up your tank hasn’t been a pleasant experience for motorists this year. Prices have progressively risen since the first of the year, with the current national average of $3.76, up more than $.34 since the New Year.
There’s much conjecture as to the cause of these steep price increases from oil futures trading to greedy oil companies; however the answer is actually quite simple: Iran and Syria. While Syria doesn’t have an impact directly on the supply of petroleum, it does have an effect on the tenor of the Middle East. Since Syria is the primary partner of Iran and Iran produces a significant portion of the needs of Europe it raises tensions in region. Meanwhile Iran’s posture towards U.N. sanctions involving its endeavors to create a nuclear weapon and its increasingly adversarial tone towards the West has had a very negative effect on the oil markets.
Syria has thumbed its nose towards other Middle East countries and is seemly unmoved by U.N. declarations, slaughtering more than 6,000 of its citizens. The recent uprisings against Bashar al-Assad have grown and so has the government’s crackdown against its own people.
It is speculated that should Iran not allow full open and unimpeded inspections of its nuclear facilities that it may have sufficient fissile material to make one or more nuclear weapons by the end of this year. Iran has recently demonstrated missile systems capable of carrying a nuclear payload throughout the Middle East; however Iran’s target has never been in question: Israel.
When Iran began threatening to close the Straits of Hormuz last fall we began to see a rapid rise in oil prices. At first the price-at-the-pump did not rise precipitously as an abundance of petroleum on the market had a depressing price, but the constant aggressive tone of the Iranian government began to take its toll. Rather than a slow increase in oil prices, after the first of the year the price for a barrel of oil rose at an alarming rate.
Oil traders feed off other oil traders. When the futures market believes the price of oil will continue to rise traders purchase futures for their respective clients to stake a supply before prices jump; the effect of all this buying on the oil futures market further drives up the price. The market predicts that either the demand has increased due to the sale of contracts or concludes a potential impediment to supply; both directly affect the market price of petroleum products.
One of the great misnomers about the price of gasoline at the pump is that oil companies take advantage of the world market price spikes to jack up the price of gas; this is false. Oil companies price their refined product based on the predicted price to replace the raw crude oil. When an oil company refines 100,000 gallons of crude oil, they take into consideration the cost to replace those 100,000 gallons, often already purchased on the futures market. Knowing that their raw product, crude oil, will cost them more they pass the extra cost onto the consumer; every business does this.
Some in the media and many consumers believe that oil company record profits indicate an artificial inflating of the price-at-the-pump, but that’s simple naivety. Oil prices have grown more than the price of gasoline since last summer. You may ask then why are oil companies reaping record profits? The answer is simple: they sell more. If you build a widget and your cost is $1.00, and you turn around and sell it for $1.25 you make a $.25 profit; sell a million widgets and you make a $250,000 profit. If your cost increases to $1.10 and you only raise the price to $1.30 your profit per item drops to $.20; but if you sell two million widgets your profits grow to $400,000. Oil demand is constantly growing, not just for the production of fuel, but lubricants and many other consumer products. With the development of China the demand for petroleum products has soared allowing oil companies to move much more product.
Oil prices are to some degree speculative. While demand can be predicted fairly accurately, geopolitical forces cannot. If production grows at 5 percent annually but demand grows at 7 percent an increase in price is a predictable; however if the supply of oil is compromised due to natural or manmade events, such as a war or other disruption of supply, costs become unpredictable.
Oil is purchased on a world market and no single supplier controls the price. The market is constantly weighing demand and supply; when a potential change in the balance is predicted prices move.
We’ve been experiencing this roller coaster ride in prices ever since 2001. From 1980 till 2001 fuel prices rose at a rate less than the rate of inflation. After the 911 attacks, the war in Afghanistan and Iraq, prices have moved far faster and we’ve experienced a number of spikes that haven’t coincided with current supply. Population growth in China and India, as well as other emerging nations, is far more predictable. The effect of growing demand creates a linear increase, but geopolitical effects create wild swings in market prices.
Middle East instability is the number one reason for our current dilemma and pointing fingers at oil companies won’t do anything to bring sanity back to the oil markets. Unfortunately, stability and the Middle East is a riddle with no answer. Middle Eastern countries have been at each other’s throats for thousands of years; the built up animosities may never be resolved. As long as the U.S. is dependent upon the world oil market for supply we will always be captive to the machinations of lands dominated by tribal motivations.
Solving the U.S. energy cost dilemma means two very simple themes: we must reduce our need for foreign sources of oil and we must develop our own energy supplies. This solution means removing home-grown political influences. The Democrats hate the oil companies because they donate to the Republicans at a far greater rate. Republican’s hate green energy because supporters of renewable energy fund Democrats more than Republicans.
Politicians thrown out the “all of the above” phrase like any other of their other promises that are only meant to sway votes; if you read between the lines it’s actually, “all of the above, but primarily those that give to me.” When politics interfere with markets the consume loses.
The first step in energy independence is barring all energy companies from donating to political campaigns. Would a law prohibiting such donations be constitutionally legal? Probably not due to historical rulings about the freedom of speech. Then what can we do so that we only institute policies that enhance American energy independence? Remove the donations from the equation by taking lawmakers out of the picture. Allow commonsense Americans, not legislators, to decide how, when and what funding and regulations can be applied to all forms of energy. This “American Energy Board” could be made up of average citizens randomly selected for a 2 year term to review and decide upon the implementation of any government action involving energy production in the U.S. No election nor re-election to be purchased, a finite term of service; hence no influence from political donations. This citizen board would not formulate laws or regulations, would not provide funding, only vote up or down on the actions of Congress. Will anything like this ever be enacted? Probably not, because we keep on sending people to Washington who only care about their future, and not the future of the nation.