We are all concerned about the rising price of gasoline and how it makes us all feel the pinch. The politicians and media want us to believe that the oil companies are to blame. The proof is clear: the blame for higher gasoline prices should be placed on Uncle Sam. by Kenn Jacobine
(libertarian)
Sunday, April 27, 2008
Recently, I received an email that requested I boycott Exxon and Mobil stations in order to help bring the current high price of gasoline down. Here is the thinking behind the email: because Exxon Mobil is the largest oil company in America it can set industry prices at the pump. In other words, because of its size, it can set prices artificially high to maximize profits knowing full well that smaller gasoline retailers, who are also interested in big profits, will set their prices commensurate with Exxon Mobil. By boycotting Exxon Mobil, demand for its gasoline decreases thus forcing the company to cut prices. As Exxon Mobil cuts prices, so must others to remain competitive. The hope is that the lowering of prices at the very least puts a halt to rising prices at the pump and ensures that Americans can purchase gas this summer for less than four dollars a gallon.
The originators of this movement should be commended for their clever idea and for taking matters into their own hands instead of instinctively turning to the federal government to solve their problem. However, their attention is mis-directed as it should be focused on the U.S. government and not Exxon Mobil as the cause of high gasoline prices.
For instance, in 2002, the year before the U.S. military invaded Iraq, crude oil prices were $22.81 a barrel (see chart below). Today they are around $118.00 a barrel. The cause for the dramatic rise in price (the largest one in such a short period of time in history) certainly has more to do with the war in Iraq than anything else. As the war drags on and America's presence in Iraq becomes more entrenched, the price of crude increases even more. Investors are concerned that at some point the violence in Iraq caused by the U.S. invasion will spread to other Middle East oil producing nations thus cutting off worldwide supplies.
A perfect example of this fear happened last Friday. Oil prices per barrel reached a record high of $119.55 on the news that a U.S. military ship fired on Iranian ships in the Persian Gulf. This, of course, is not the first time that the U.S. military has had a confrontation with Iran near the Gulf. As the Bush Administration continues to instigate armed conflict with Iran, the price of crude will continue to rise on the fear that the Persian Gulf soon will be filled with missiles instead of full oil tankers.
Then, there are taxes. The average price of a gallon of gasoline in the U.S. right now is $3.60. According to government statistics, federal, state, and local taxes make up twenty percent of the price of gas. Do the math. Without any taxes, the price of gasoline would be approximately $3.00 per gallon. Eliminating taxes would provide a significant $6.00 savings for every ten gallons purchased. Imagine how much money could be saved per fill up by owning an SUV? Now, I do not condone eliminating gas taxes. After all, they are technically user fees, which I support over taxes. They go to repairing roads, which people who buy gas and pay the taxes use. But, it should be noted that a large portion of the price of gas goes to the government at all levels and not the oil companies.
Finally, the price of gasoline has been affected by the value of the dollar. The value of the dollar has been dropping for some time due to the Federal Reserve Bank printing too much money. Investors sense rightly that we are on the verge of inflationary times, because of the Fed's actions, so they have been dumping their dollars in favor of commodities. One commodity they are buying to hedge against inflation is oil. Money flowing into oil makes its price rise. The dollar's performance last Thursday speaks to this truth. The value of the dollar improved on Thursday based on speculation that the Fed is concerned about inflation and may not cut interest rates further. At the same time, oil dropped by $2.24 a barrel. However, as mentioned earlier, conflict in the Gulf the next day, spiked the price to its highest level ever.
We are all concerned about the rising price of gasoline and how it makes us all feel the pinch. The politicians and media want us to believe that the oil companies are to blame. The proof is clear: the blame for higher gasoline prices should be placed on Uncle Sam.
The views expressed
in this article are those of Kenn Jacobine only and
do not represent the views of Nolan Chart, LLC or its affiliates.
Kenn Jacobine is solely responsible for the contents
of this article and is not an employee or otherwise affiliated
with Nolan Chart, LLC in his/her role as a columnist.
Posted By: Scott from Oregon
Date: 2008-04-27 10:30:25
Well thought out.
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I keep telling people to stop complaining about the oil guys so much and look at the value of the dollar. Then follow the drops of blood back to the crime scene, and you'll find Bernanke sitting there fiddling with the system...
There is no single cause for the high price, one could also toss in increased demand by China and India etc...
... but a dollar worth less on the international market means less can be bought for that dollar overseas... If the value of the dollar doubled, oil would be 60 dollars a barrel and we could start blaming the war...
Gas prices are rising and will continue to rise forever. I can almost promise you will be paying $5 next summer. The world peaked in "crude" oil production in the year 2005. The shortfall is being made up by natural gas which currently can not be used in cars, trucks and airplanes. Oil producing nations are getting even richer off high oil prices and consequently are exporting less and using more as they grow their own societies and transition from strictly oil producers to well rounded economies. Our major oil companies are holding a small percentage of reserves compared to the nationalized oil companies who make up OPEC and others.Exxon, Shell and the rest of them have not grown their reserves for the past 4 years. The last year the  world found more oil than it consumed was 25 years ago. China increased consumption by 25% this quarter and continues to import more as their economy grows at >9% per year. Unconventional sources of oil (candadian oil sands, western states shale, tight rock gas, etc.) do not even come close to the flow rates of "light sweet crude". In addition they consume almost as much energy as they provide. Ethanol from corn is an example of this phenomena. Unconventional oil and tar or heavy oil is much more sour and it's refinery needs are different than light sweet crude. We do not, nor is there expected to be in the near future the rifining capacity available for these kinds of oil. The refineries we do have are very old and have been running near 24/7/365 for decades. They can and do blow up from over use. 80% of the oil infrastructure (pipelines, rigs, deep sea platforms, refineries) which are all made from steel are rusting and need replaced. Not repaired. Replaced. We're talking 10's of trillions of dollars in capital investments. In short we are f***** because no one wants to talk about this let alone do anything about it. There is nothing on the drawing board that even comes close to replacing oil as and energy source. If it were discovered tomorrow it would take 20 years at best to transition to it. There is almost no credible authority that disputes that we are 30 years away from total depletion. Why aren't we working night and day to mitigate the crisis?Â
One more thing about the dollar. Yes since oil is mostly traded in dollars a weak one causes inflation but I saw an authority on CNBC the other day. An ex Saudi Aramco geologist, Saddad al Husseini, who said that the fair price for oil if it weren't for the weak dollar would be $90 per barrel. What would $90 represent if the dollar was strong? So what else has happened since 2000? Leave out the effect of a weak dollar and you still get a 300% increase in 8 short years. The fields in Iraq are back to pre war production levels. So ...what's up? I'll tell you what's up. There are more people, making more money and consuming more products and more oil. Consumption goes up despite higher prices. While production capacity has leveled off at 75 million barrels of crude and will likely decline. Since every product depends on cheap oil to keep costs down. Inflation is running wild.Â
