Price of gas at an all time high

The price of gasoline really is at an all time high, in case you didn’t know. The prior record was reached in 1981 when gas prices nationwide averaged $1.35 a gallon. To make a meaningful comparison, you have to adjust for inflation. Put another way, you have to translate yesterday’s prices into today’s prices. In the dollar value of March 2008, folks back then were paying the equivalent of $3.17 a gallon today.
        Don’t look for the price to go down any time soon. You don’t have to scratch very deep or look for a dark conspiracy to find the reasons why. They are relentlessly boring: Do you spring wide awake when someone says, “ya see, it’s just a matter of supply and demand …”?
How about refinery capacity? John Schoen of MSNBC said , “There hasn’t been a new refinery built in the U.S. since 1976, the result of extremely tight environmental restrictions, not-in-my-back-yard community opposition, and the high cost of new construction.”
        Refineries are the classic bottleneck. Refineries make crude oil into gasoline. You can have oceans of crude oil but without refineries you don't have a drop of gasoline to put in your car.
        Why not build more refineries? As the man said: For one, they are expensive. The prospects for future profits from such a large commitment are iffy at best. Why? It’s a high-tech operation to squeeze every drop of gasoline out of the crude and to be as environmentally friendly as possible. What’s the incentive?
        The dis-incentives away from a dependence on oil are growing every day. Owners of the aging SUV fleet are being punished for their extravagance. The Priuses, hybrids and new-tech cars are getting a long, serious second look. The press for bio-fuels and gas alternatives may finally lower the demand for gas. Increasing the supply will lower the price of gas. Concern about global warming may prove to be enduring enough to bring about institutional and technological change away from oil. Besides that, nobody wants to live near the new refinery so there are tremendous costs just in getting the site licensed and sanctioned, let alone building the thing. Tell me again, why should I build a new refinery?
        Remember OPEC? Mmmm..maybe not. The Organization of Petroleum Exporting Countries historically has had some influence over oil prices. During the 1973 oil crisis, the Arab members embargoed the countries of the west to counter their support of Israel. The disruption caused long gas lines in the US, a spike in prices, and uncertainty that lasted into the 80s. Since then, there have been oil gluts and the discovery of new reserves has diluted OPEC’s share of the world’s oil reserves. But we are not immune to oil shocks like the 1973 embargo.
        Recently, employees at a refinery in Scotland walked off the job for 48 hours. Nigerian production is down to 75% of its rated capacity because of rebel attacks. Workers at ExxonMobil Corporation have cut production to demand more pay. These events have an effect on markets that is way out of proportion to simple expectations based on actual supply and demand.
        Oil is a commodity that is traded every day on commodity markets around the world. These markets – precisely like the stock markets on which they are modeled – are subject to the same hysteria that can move prices without any regard to the actual physical health of the brick-and-mortar institution they represent. A spike in oil commodity prices – which theoretically may have some bearing on underlying supply – will translate instantly into an increase at the pump. The commodity prices are a real cost to the commodity buyers (refiners) because those are the prices they have agreed to pay – either today on the spot market or at some date certain in the future.
        Furthermore, the prices are “sticky”; what goes up does not necessarily slide right back down – at least not right away. As close as we are to the line – without new reserves or extra capacity – even minor shocks will send up prices. And perceptions and consumer behavior will take a while to turn prices in the other direction.
        When you scratch the surface, weird stuff crawls out of the woodwork. Another theory is that recent action by the Fed has inadvertently had an effect on oil and other commodity prices. The Fed, a.k.a. Federal Reserve System, is the mother ship and federal central bank to all the baby for-profit banks out there … ya know, like Citicorp and Wells Fargo. The Fed is also the watcher of credit and the guardian of the money supply. By reducing interest rates, the Fed may have made non-interest bearing investments, like commodities, more attractive. That raises their price. And that same action causes a “flight” from the dollar which pushes down the value of the dollar in the money exchange markets. Oil, which is denominated in dollars, must rise in price to compensate for that loss of dollar value. In a perverse way, this may be a ray of hope to those pining for low oil prices: commodity prices may be a speculative bubble which one day will pop.
        More sobering than the price at the pump is another ghost returned from the oil shocks of the 70s. This is what we know of oil in particular as a driver of cost-push inflation. Everything sold that must be transported by an internal combustion engine has the price of oil factored into it. This is only true of just about everything but most especially with food.
        Food is also laced with petrochemicals in the form of herbicides, pesticides, fertilizers and pharmaceuticals. And especially worrisome, some food stocks are being depleted because they are being converted instead to oil fuel alternatives. The rising price of food and the decreasing availability of food are something more than an annoyance; they add up to famine.

Comments

[boomertimes]

No - not advocating for more refineries. My little message is just a descriptive essay and listing supply chokepoints is part of the exercise. I wish the price would rise. That's the kindest incentive for developing alternatives before you run out. I'm sorry you don't think your post matters.

[GMNightmare]

You seem to be implying that we need more refineries. Sorry, that won't work for a number of reasons. First off, we don't have much more oil that you think we seem to have. There is no infinite supply. More refineries simply means we run out faster.

Second, building more refineries does not and will never reduce our foreign dependence on oil. The reduction is negligible, a few percentage points more of oil at best. The increased use of oil by increased population could easily snuff out the advantages. Furthermore, oil is a global market. That means any more oil we do make, goes right into the global market. It's a shared commodity. Meaning we won't reduce our dependence at all actually.

Not that my post matters much, you don't seem to have made any kind of point with your little message.