Why The Cost Of Gas And Oil Production Are Leaking Into Politics In 2008.
Wednesday, August 13th, 2008 Subscribe To Our Feed
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 price of oil 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 many have found themselves with insane profits, or miserable losses.
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 Gasoline Stock.
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 price of oil 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 slight correction in prices that was in fact beyond their control 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 Oil Production, they could effectively shut down the United States 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.
If the gasoline tax proposed in politics became permanent the plan would be much better suited 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 prices at which physical goods trade on the open financial markets) since they do not actually produce the good. They only act as the throughput and output, not the input. 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 in the last couple of 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 the input costs are too high for the refiners.
We are so reliant on crude oil drilling to run our economy that it is important not to overreact to short term volatility. Those investors who are able to cut through the noise and analyze the facts will be rewarded with great returns in the long run.
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