One Economist's Take On Energy

I heard part of a radio interview with a local economist that I wanted to pass along to you as a follow up to the recent blog posts I've been doing about oil and the price of gas.  I don't have sources for any of this data, but this guy has been right for as far back as I've been paying attention to him, so I would tend to trust his sources (whatever they are).  Any errors are likely due to my own memory, as I wasn't able to write anything down while I was driving...

This is obviously a complex issue with lots of contributing factors, but one of the biggest is the speculators playing in the commodities market.  They have been effectively bidding up the price of oil for months, creating an artificially high price of gas.  These speculators are often representatives of mutual funds or stocks, and as such they have a responsibility to their shareholders to make money.  Right now, the best place to do that is in the commodities markets, where gold, copper, grains, and other things are sky-high.  This is also partly because the dollar is so weak (which is something I've blogged about before), so as long as the dollar stays low and commodities stay high, we're likely to continue seeing climbing oil and gas prices.  The Fed has begun making noises that the dollar needs to be strengthened to prevent inflation, so as we hear more about talk of things that will improve the dollar (one example is raising interest rates) in world markets, we'll likely see these speculators move from commodities to other investments.

The other major domestic component is the market itself.  When demand for a product drops enough, the cost follows it down.  This is already happening with gas.  There is apparently a noticeable drop in gas sales all over the country, with some places as much as 20% lower than in previous years.  OPEC has recently stated that they're not going to pump more oil per day, and they are correct to do so - the supply of raw oil is already plentiful.  One thing that will help us is new refining capacity.  Voters in South Dakota have just paved the way for a new state-of-the-art refinement facility, the first domestic refinery to be built in about 30 years.  A similar measure is being considered in Arizona, too.  This will begin having an effect in just 2-3 years, not the 10-15 that environmentalists usually suggest.

Now, when we expand our conversation to include international variables, there are some other definite causes.  China and India, in particular, are one of the biggest factors driving up international demand for gas (and thus oil).  The key here is that both nations subsidize their gas prices to encourage progress and advancement.  The cost in China, for example, is about $1/gal. right now.  As a result, the demand is sky-high, and the daily cost of gas for the Chinese government is increasing rapidly.  They will not be able to keep such subsidies up over the long-term, so they'll eventually start forcing their citizens to pay closer to world market prices, which will bring down the demand there, too.  That will, in turn, bring down the price.

Europe is apparently experiencing massive problems over exorbitant gas prices, too.  Their rates of taxation are far higher than ours, and the price in France, for example, is around $11/gal. right now.  Ouch!  Consequently, there are trucker strikes, roads being shut down, and all kinds of other protests to get things under control in Europe.

All of these things contribute to the world market cost of oil and gasoline, and all are pointing toward a drop-off in the near future.  This economist predicted -- and has been for months now -- that will happen sometime this summer, and that we could see a fairly rapid and significant drop in gas prices.  Of course, it never drops quite as much as it rises over time, so it's not like we'll get back to $2.50/gal. prices; it'll probably be more like $3-3.50/gal.  Still, any little bit helps, right?

Ultimately, if we want true energy independence, we need to develop our own sources of energy, and that means both nuclear plants and domestic oil drilling.  We are just about the only nation in the world that is deliberately limiting itself when it comes to oil exploration, and that's the critical problem we face.  We need nuclear power facilities.  We need to drill here and drill now.  Period.

Interestingly enough, he provided a number I've been seeking for weeks in a throwaway line in the interview.  He affirmed my position that the oil industry is not gouging at all, and that a 7% profit margin (which is what it's currently getting - see my previous blogs about that for all the lovely details) is just average for Fortune 500 companies.  He illustrated the point by saying that Microsoft makes about a 36% profit margin.  How's that for gouging?

There's my two cents.