Who's responsible for $4 a gallon?

April 29, 2008 7:24 PM

Can anyone show me some articles or books that explain or theorize why gasoline prices are so much more expensive than a decade, two decades ago? I'm a bit dense, so concise is ideal.

I realize this is a really massive and complex subject, but I'm looking for anything you've read, especially recently, that made you think "Ah...so that's what's going on!"

Additionally, if you can add to/correct the reasons that I can think of why gas is so pricey. I don't know which ones are the biggest reasons.

1) China and India's populations are still growing, but more significantly, their middle classes are growing, increasing automobile use.
2) The supply is low and/or the amount being pumped out of the ground is decreasing.
3) OPEC is gouging buyer countries much like the 1973 embargo but not as obviously.
4) The wars in Afghanistan and Iraq are making the Middle East unstable, and in turn that makes the price go up (...but...how exactly?)
5) In the U.S., there are limited oil refineries and the oil companies can't keep up with demand. (so says the oil companies, IIRC)
6) U.S. oil companies are simply raising prices to make more profit.

Anything else?

posted by zardoz to law & government (20 comments total)

Falling value of the dollar. Inflation.

It's probably at a real all time high by this point, but you have to also factor in that we are far more efficient per gallon of oil than we used to be. Even if the price is highest, we are getting more done with it, so it doesn't seem as high.
posted by gjc at 7:33 PM on April 29

I would say you pretty much have it there. One could quibble about the gouging or profit taking, but that is hard to prove one way or the other.
As far as 4) goes I would say it has to do with futures. Investors buy futures based on the assumption that gas prices will rise if there is turmoil in the countries supplying petroleum.
On most levels it would appear to be a classic supply and demand problem complicated by the
futures market.
posted by archaic at 7:36 PM on April 29

Try adjusting for inflation. (There are lots of sites like this out there, many are partisan or trying to make an associated point, but the graphs on all are similar.)
posted by gimonca at 7:38 PM on April 29

Hah! Jinx!
posted by gimonca at 7:39 PM on April 29

Oh, and one more

7) I've heard about speculators essentially causing or worsening this price hike...how does that happen, exactly? Wall Street traders driving the price up?
posted by zardoz at 7:45 PM on April 29

Nice Wall Street Journal graphic about this.

But basically it's the result of growing demand (China, India, a lot of other places) and relatively fixed supply (instability in Middle East, lack of investment in Russia, Latin America, lack of refining capacity).

Your reasons 3 and 5 aren't really true. OPEC doesn't have much excess capacity. And oil companies are making out because market prices are high, not due to any dodgy backroom deals.

And the falling dollar, as gjc says. It's certainly not (yet) due to peak oil. There's a lot down there still if we could dig it out fast enough.
posted by TrashyRambo at 7:50 PM on April 29

1) China and India's populations are still growing, but more significantly, their middle classes are growing, increasing automobile use.

Yes, but it's also their growing industrial sectors. As economies advance all over the world, they buy more stuff, and that stuff is made in factories that guzzle oil.

2) The supply is low and/or the amount being pumped out of the ground is decreasing.

Sort of. While the world is still sitting on a shitload of oil and gas reserves, energy companies are as lazy and cheap as the rest of us, so they sell they stuff they can get to fastest and that costs the least to refine first. As that stuff goes, then they start spending more to pump out the harder-to-reach-stuff and to refine the rough stuff. For instance. The US has tons of oil in the mountain west that we don't pump because it's hard to refine. As prices go up, however, it may become worth it to start getting that stuff out of the ground.

3) OPEC is gouging buyer countries much like the 1973 embargo but not as obviously.
4) The wars in Afghanistan and Iraq are making the Middle East unstable, and in turn that makes the price go up (...but...how exactly?)

These two go together, I think. OPEC is taking advantage of the instability to jack up prices. OPEC is split on whether to pump all out or restrict production. The US lobbies them heavily, but lots of the OPEC countries aren't terribly happy with us. Those countries internal politics have a lot to do with it, too.

5) In the U.S., there are limited oil refineries and the oil companies can't keep up with demand. (so says the oil companies, IIRC)

This is true. I recently read an article somewhere that explained why they don't want to just build new refineries, but I can't think of where that was. Some google-fu might give you a lead.

6) U.S. oil companies are simply raising prices to make more profit.

It's more that they take advantage of the stress on the market. They always charge the maximum price consumers will pay. As people get used to paying higher gas prices, they can get away with taking more profit. So if oil is $25 a barrel and you're paying $1 a gallon. You're going to get pissed if you suddenly have to pay $1.20. But with oil over $70 a barrel, if you're paying $2.50 per gallon, $2.70 won't seem as big of a jump. In both cases, it's 20 cents per gallon more, but the psychological effect isn't as great.

Also, they make greater profits when the market is volatile. Watch the prices at your local gas station. When oil prices go up, gas prices shoot up, but when oil prices go down, gas prices... ease they're way down, slowly.

--

All that said, the most recent rise in price is due largely to the worthlessness of the dollar. The treasury has printed billions of dollars to try to ease the credit crisis, devaluing the currency and making every gallon of oil more expensive.
posted by odragul at 8:23 PM on April 29

1) Chinese/Indian demand may be an incremental factor, but oil is used far less in emerging markets (circa 30% of world oil supply goes to the BRICs) than most commodities (over half of copper/zinc/nickel, IIRC)
2) Inventories are lowish, globally, but production has been flat, rather than decreasing.
3) OPEC probably isn't keeping much capacity back. They're making money hand over fist, but I wouldn't say they're "gouging".
4) There is probably a bit of an instability premium in oil prices. "How" is a question with a complicated answer.
5) The refining business is most certainly not the cause of high gasoline prices. Oil is scarcer than the capacity to refine it. The oil price is the issue.
6) Impossible (or very difficult) as NOCs are growing more powerful. And though the US boasts Exxon, Conoco (whose reserve base is chiefly Russian!) and a few others while Europe has Statoil, ENI, Total, Royal Dutch, BP, et cetera. There's no conspiracy here. Too many players.

This article is interesting. I almost posted it to Mefi but it didn't quite make the cut.
posted by Kwantsar at 8:32 PM on April 29

Please forgive the grammar in #6. I'm not as stupid as that sentence.
posted by Kwantsar at 8:33 PM on April 29

A decade or two ago the greenback was a good currency. The change is a result of the massive current account deficit being run by the US. So the quick answer to your question is: US consumers.
posted by pompomtom at 8:33 PM on April 29

Also, very very few factories or power plants guzzle oil. It's woefully uneconomic versus coal, and no worse on carbon.

And the dollar can't be blamed absolutely. This chart is a bit dated but it looks roughly the same today.
posted by Kwantsar at 8:39 PM on April 29

I've just finished this. He claims there's not much oil left.
posted by larry_darrell at 8:48 PM on April 29

Adjusted for inflation, gasoline is lower than one might expect.
posted by Brian B. at 9:14 PM on April 29 [1 favorite]

(also, glib-but-still-accurate-response:

Q. Who's responsible for $4 a gallon?

A. Anyone who pays $4 a gallon.)
posted by pompomtom at 10:11 PM on April 29

As odragul says - one major factor is that all the easy to reach reservoirs have already been exploited and are in decline or need of remedial work to maintain supply.
Places like the middle east have been such big players because the reservoirs are easier to exploit.
Peak oil is the term you should be searching. Consumption is increasing faster than reserves can be replaced, and the new fields are generally tougher to extract from i.e. Deepwater, High temperature, high pressure, heavy oil/tar sands.
Cost of not only exploration, but extraction has consequently increased, as have raw materials due to India and China's booms. It takes a lot of steel to build a rig, case a well, build a pipeline, construct a seismic vessel. Same is true for cement, proppant for fracturing reservoirs and stimulation fluids.
Also, due to the cyclical nature of the industry (boom & bust), it's getting tougher to recruit trained personnel and retain them. People are simply less willing to sacrifice time away from home on an oil rig than they were even 10 years ago. As the existing workforce that has survived the previous cycles retires, the industry is facing what is called the Big Crew Change, which means that there's a lack of experience so demand and cost for the experienced personnel as increased drastically.
So not one facotr, but a confluence of several factors.
posted by arcticseal at 10:54 PM on April 29

oops, one factor
posted by arcticseal at 10:55 PM on April 29

"7) I've heard about speculators essentially causing or worsening this price hike...how does that happen, exactly? Wall Street traders driving the price up?"

Because gasoline is traded on a market, the following can occur:

1- yes, speculation. If I think gasoline will continue to go up, I buy a future or an option so that I (hopefully) will be able to sell it at a profit later.

2- hording/bubble. "OMG, I have to get some now because otherwise it will keep going up!!"
posted by gjc at 7:31 AM on April 30

This very topic was discussed on the radio program Marketplace last night (in an analysis of Bush speaking on the subject). Here's the full transcript, but here's the conclusion, which identifies the devalued dollar, and yep, speculation:

Ryssdal: Alright, so to review, if it's not supply and demand, it's not refineries, it's not gas on the market, what is it?

Moon: Well, most analysts say it's a combination of a couple of things. They say as long as the value of the dollar keeps sinking -- and oil does get priced in dollars you know -- the price of oil has to go up then, so that the sellers can make up the difference in their purchasing power. That doesn't entirely explain this, though. Last year, for example, the dollar dropped a little over 10 percent, but at the same time, oil prices were up around 50 percent, so the major factor here seems to be the wave of investment dollars that are flowing into the oil market, the speculators driving prices higher. Here's a number for you: about $9 billion was invested in oil futures back in 2000. Well, that's now up to $250 billion and even the head of Exxon Mobil blames wild speculation for all this.
posted by alb at 7:37 AM on April 30

Seconding Larry Darrel's suggestion of Simmons' Twilight in the Desert. I'd also add Yergin's The Prize for a bit of historical perspective (it was also an excellent PBS min-series documentary) and Deffeyes' Beyond Oil.

Yes, speculation is playing a part, as are currency fluctuations (the petrodollar is the US dollar) and inflation. But the basic problem is one of supply: Saudi Arabia is no longer a "swing" producer, able to lower the price of crude dramatically by opening the taps. Research suggests the taps are all the way open: they are producing as much as they can, and the price is still going up. To borrow a phrase from Simmons, if Saudi Arabia has peaked, the world has peaked. We still have other oil resources, including unconventional oil, but none of them can be exploited quickly, easily, or cheaply enough to maintain the global flow. The world is currently producing roughly 88 million barrels of oil per day, and it's highly unlikely we'll ever get higher. At the same time, demand is growing. Ergo, rising prices.
posted by Bora Horza Gobuchul at 8:26 AM on April 30

You're going to get pissed if you suddenly have to pay $1.20. But with oil over $70 a barrel, if you're paying $2.50 per gallon, $2.70 won't seem as big of a jump. In both cases, it's 20 cents per gallon more, but the psychological effect isn't as great.

Well that and one represents a 20% increase in prices while the other represents an 8% increase in prices.
posted by biffa at 7:50 AM on July 31