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Posted by finalflash Promoted 95 days 20 hours ago 1427 views
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A rebuttal to the "How gas prices work" editorial by LifeRiot.
HOW GAS PRICES REALLY WORK
Basically this is a counter argument to what LifeRiot wrote about how gas prices work in his editorial "How gas prices work". I have been yelling this in the comment section for a while, but no one seems to get it, so here's an ed/blog or whatever it's classified as.
Right now, 3 main factors influence the price of oil and all three will be outlined in detail here.
Firstly, let's bring this into perspective. The price of oil around 2000 was around $22 per barrel, and now stands at $130 per barrel in 2008. That is about 6.5x increase to its value per barrel in 2000. Did the price of pumping oil out of the ground rise to make this happen? Or was it because of rising demand? Or was it because we realized we are running out? No, partially, and hell no are the answers to those questions, respectively. The price of pumping oil out of the ground has barely gone up since new reserves are found to offset the old drying ones and older ones are abandoned, making the average extraction price remains about the same. These are period costs and cycle on a regular basis. Did demand for oil go up by 6.5x, I do not think so. If for example, 1 billion people use a regular amount of oil in 2000, they certainly do not use 6.5x that amount now and neither have 5.5 billion more people started to use the same amount of oil as the same crowd from 2000. Could be a mix of the two, but that still isn't nearly enough. And we certainly are not running out for a long time since there are oil reserves everywhere that we still haven't found and can easily find. Current reserves are also set for at least a century.
The first main factor that affects oil right now is the price of the dollar. Yea, the price of the money used to trade oil has a definite impact on its real price. If you were to calculate the price of today's oil in 2000 US dollars, you would have oil around $67 dollars a barrel. This is because the US dollar has lost about 50% of its value against a basket of other powerful currencies such as the Euro or the CAD. The dollar stood at around 80 cents per Euro. Now it stands at about $1.58 per Euro which is insane if you think about it. Imagine it this way, if you bought Euros in 2000 with $10 000, you would have $20 000 right now, or $5000 if you didn't. Same with the Canadian dollar, it appreciated from about US$0.64 per CAD to parity (trading 1 for 1). This is only because the Bank of Canada has been trying to keep it at parity for the last year or so, yet this is becoming harder to do. The Europeans have basically held their overnight rates tight and couldn't give a damn what happens in the US. That in my opinion, is the best policy, and I will explain in a minute why. The Canadians will soon stop this parity upkeep because it is making inflation a problem for us. The US on the other hand, is lending money left and right through the Fed to dead banks and shit to make sure the idiots who made bad bets do not lose anything at the taxpayers' expense. The reason it is a good policy for the Europeans to hold their currency at its current inflation level is because it is thinking in the long term. The US and Canadians are thinking in the short term, trying to keep parity helps the manufacturing industry for now and keeps exchange easier. The cost of this convenience is the increase in price levels in the near future. This is bad because that will cause some reactionary policy when it happens and can induce stupidity in lots of people in high places. So the message here is, the price of the dollar is a major factor in the price of oil and probably the biggest factor in the three listed. Interesting note before we move to the next section, the US GDP in 2000 was about $9 trillion I believe. Now it is $11 Trillion in 2007 dollars. Yet in 2000 dollars, it should come out to be about $5-6 trillion, just so you Americans see the loss of wealth and PPP (purchasing power parity) here. Likewise the Euro group stands at about 8 trillion Euros GDP or so now, but that is measured in 2007 Euros. If it was measured in 2000 Euros, it would be about $16 trillion Euros. So what this means is that their wealth has gone up and they do not know it, and your wealth has gone down and you do not know it.
The second and third major factors are the wars in Iraq and Afghanistan and crazy investors. During any war in the Middle East or nearby, the price of oil spikes. Most of those wars of course ended, and the price of oil reset itself. Though now, the war is an infinite one which may never end (at least in victory for the US). The problem here is that the price of oil may never really reset and keep going up for a while. The price of oil drops during a recession in the US and sharply too. Yet it is still going up during a recession right now, this is because of the war in Iraq. This rise normally happens because oil shipments going through the region face greater danger and risk being disrupted. It is one of the major supplies of the world's oil and hence any threat in the region will cause enough of a disruption to raise prices. In the Iran/Iraq war, the price of oil went up to about $70 a barrel which was unheard of at the time. Similarly, the price of oil has once again risen from about $20 per barrel to about $70 per barrel in 2000 dollars. This sharp rise in price also has a lot to do with jittery investors. They bet on oil futures and inadvertently raise the price of oil on the open market. OPEC doesn't set the price of oil, they just set the amount they export. The crazy investors are the ones who set the price based on what they believe to be the future of oil and the safety of the current oil supplies. If OPEC keeps their oil shipments the same and the price of oil goes up by $5 per barrel in 2 months, that does not mean that demand rose by $5 per barrel, it just means crazy investors think it is worth $5 per barrel more now than 2 months ago. This mainly happens when all is going to hell in a major world super power. The investors that once had steady nerves and saw trends over years now become jittery as hell and see trends in days or even per day. This crazy investing is now also affecting the food market, which is probably going to be the next bubble for a while along with oil. Although we aren't running out of food compared to before (since prices were stable until about a month or two ago), these guys certainly want us to think we are (hint for those out there ready to make a quick buck).
Overall, the demand for oil and lack of oil and the price of pumping oil is bullshit. In the last 50 years oil has hovered around $20-30 per barrel in 2006 dollars. The current price of $130 was reached in about 8 years.......thinking that is because of demand and oil running out is fucking retarded. The real factors have been explained to you above, hopefully you can now spread the knowledge and do something about it.
Citation:
Just look at the first graph on the page for the gist of it, and the rest if you know how they work.
http://www.wtrg.com/prices.htm
Anything else mentioned in this article about monetary policy and shite can be found on reuters, and the value of currency is common knowledge unless you have been living under a rock for the last 8 years.
