Monday, October 2, 2006

More Gas Fumes

Even if gas prices fall, consumers will continue to be gouged at the pump. The only thing that we can be sure rises faster that the price of gasoline is the skyrocketing profits of oil companies. ~R. Owens

It's just over a year ago I wrote a piece that I didn't want to write. I didn't want to write it because I was sick about hearing about gas prices and the lame excuses coming from the oil companies, the government, and even the media blithering about supply and demand, how every minor event was pushing up the cost of oil, and how we should be happy to be paying idiotic prices for gasoline.

I wrote it because if I didn't my head was going to explode from the buildup of frustration. Well, I'm frustrated again. There have been a number of reasons for this.
  1. I'm seeing more and more articles telling me how I ought to appreciate how low gas prices are.
  2. I've read a couple of ridiculous pieces on how oil pricing works.
  3. Nothing, and I mean nothing, is really being done to stop the petroleum cartel from screwing us again.
I'm not going to fetch up links for this stuff, because a)it's everywhere, and b)I'm going to have an aneurysm if I keep reading some of this nonsense. A typical article by some financial whiz said we should be grateful, grateful, I say, to be paying over two bucks a gallon because, in terms of inflation, based on the record high of 1980, gas should run $3.10 a gallon for regular. Sure, and if you correct 1960's prices for inflation, we should be paying $1.87. Which one makes more logical sense, basing "normal" on a fabricated "shortage" or basing "normal" on what prices ran for decades?

What makes it even more ridiculous is that, in those days of 25-35 cent-a-gallon gas, guess who the biggest, most profitable corporations in the world were? Why, the petroleum companies, of course. In other word, there were screwing us then, too. But, there were more of them then, so there was a modicum of competition. It also wasn't that many years since the breakup of Standard Oil, which kept the oil boys cautious as well. Besides, they made their most egregious profits overseas.

I fail to see how I should be "grateful" to companies that are sticking it to me.

Then there's the pricing articles. Supply-and-demand, my Aunt Fannie's bloomers. Spot market prices be damned. Let me explain just how crude oil pricing is working these days.
To begin with, Exxon and friends do NOT pay $50, $60, or $70 a barrel for oil. They have long term contracts for the oil that they help pull out of the ground for the various oil-producing countries. There's nothing wrong with that; most major commodity users do business this way. The difference is that if you're buying wheat and you have a long-term contract, the price might drop leaving you're stuck paying a premium. You can rest assured that there is no major source of oil available at a price lower than the oil companies pay. The main suppliers are a cartel selling to consumers who are a cartel (and are partners with some of the suppliers), not a situation likely to generate much variation in pricing.

So, who's paying $70 a barrel? Well, there are some consumers of petroleum who aren't big enough to have long-term contracts. They're stuck buying what's left over, which is on the "spot" market. But, the spot market wasn't going high enough to suit somebody, so suddenly focus fell on futures. Futures are a promise to deliver a commodity at a later date. So, you pay me $60 to deliver oil to you at some future date. What I am counting on is that, when that date arrives, oil will be selling at less than $60, so that when I buy it the difference between what you paid me to deliver and what I pay for the oil is profit for me. If it goes the other way, I lose money.

Well, it's futures that went over $70. The thing is, with enough money, you can drive the price of futures through the roof just by buying tons of them, increasing apparent demand. Who's got lots of money? The oil companies. If I were a betting man and had subpoena powers, I'd be willing to bet that one could trace a lot of the speculation on futures right back to the oil companies. Is it any wonder they didn't want Congress to order them to bring in their books?

But here's what's really amazing. Since oil companies have long-term contracts, the futures and the current spot market have no impact on them. Therefore, gasoline has no business going up or down based on those prices, at least not in the short term. Over 6 months or a year, perhaps, but not on an hourly basis. Yet, the price of oil futures gets reported to have increased, and the price at the pump jumps three times in one day. Can you say "gouging"? I knew you could.

By the way, a coworker said to me one day that a friend of his who ran a gas station was telling him how he really wasn't making money on the price increases. Now, it's been widely reported that gas stations went from profits of about 10 cents per gallon to 40 to 60 cents a gallon, so that's hard enough to believe. But, even beyond that, when dealers en masse increase prices based on deliveries of gas they haven't received yet, that's just dishonest.

Recently, in nearby Montgomery, gas prices dropped below $2 a gallon. At least one station owner was quick to say we shouldn't get used to that because prices were only down because of a gas price war. Oh, really? Strange that, since gasoline price wars are illegal in Alabama (I wonder who got that legislation passed, hmmmm?). No, prices are down because the wholesale price of gas is down, buster, and you're still making 30 cents a gallon, in all liklihood.

So why is gas dropping in price? Probably because the petroleum boys have lined their pockets sufficiently for the time being. The cries for alternative energy and fuel efficiecy have gotten loud and are spreading. The oil magnates know when to pull in their claws for a while. If they can keep prices at around $2 for regular, they'll hold off until the next manufactured crises can be used to go for that $3 floor they're looking for. If gas drops significantly below $2, you'll see them move quickly to jack up prices, probably with an OPEC cutback (strangely enough, Venezuela and Nigeria announced cutbacks in production today; hmmmmm).

And what are we doing about this? Well, practically nothing. Oh, there's the push to ethanol, but how is that going to change anything? Guess who makes ethanol fuels? Right, the same wonderful people who are screwing us now. So, now it'll be corn shortages instead of oil shortages. But there's a darker side to the use of corn-based fuels.

If farmers can make a ton of money growing corn, they will do so, to the detriment of other food plantings. Worse, corn is a soil-depleting crop. It has to be rotated with something like rye or soy beans to replenish the nutrients in the ground. Greed will get the better of common sense, and before long, we'll be faced with corn shortages. This is more serious than paying $3 for gas; we're talking 20 bucks for a box of corn flakes, if you can find them. Because of the over-planting of corn, wheat, soy beans, and other crops will also be shorted. In other words, you won't be able to fill your car to go the grocery store, but that won't matter because the shelves will be empty.

Yet, ethanol is being peddled as a pancea.

There are only two ways out of this morass. One is to create a public transport system, like the one we used to have with passenger rail service to everywhere and reliable, clean bus service. That isn't going to happen any time soon, because the cost would be enormous, and you'd have to change the travel habits of Americans, which also isn't going to happen any time soon.

The other way, which has a chance, is to develop vehicles that use little or no gasoline. The ultimate car would be an electric-hydrogen-solar-cell hybrid. There are new battery technologies which will allow for fast charging, long-lived power storage. Honda has a project for producing cheap solar cells. Build a car that uses solar cells to charge batteries while you drive and can switch to hydrogen fuel when the batteries are low (and charges them while you run on hydrogen), and the oil boys will have to cut back on their yacht purchases a bit.

Oil usage wouldn't dry up, but now there'd be plenty for diesel fuel, power generation, and lubrication products. It is a lovely prospect, but it's going to take cooperation from government (whose politicians are deeply funded by guess-who), academia (which gets endowments from ... you know), and some daring entrepreneurs.

Oh, well, a guy can dream.

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