The Price of Gas

[coffeeseven]

$9 diesel means no food at the stores. Plant your Victory Gardens deep.

[John Edward Mercier]

I think we'll see that long before the $9 diesel. The current cost of food is enough to light a fire under many. But there are still many things we'll need to import to maintain status quo.

[Russell Kanning]

$9 diesel means no food at the stores.

why?

[Russell Kanning]

The Coming Collapse of Oil Prices

by Dom Armentano
by Dom Armentano

         
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Bold economic predictions are dangerous, and I've been wrong before, but here goes: Oil prices are about to tumble.

There are several important reasons to believe that crude oil prices of roughly $130/barrel are simply not sustainable. The first is that world-wide economic growth, and hence the demand for crude oil, has slowed markedly due to the credit crunch and the bursting real estate bubble. The second reason is that the Federal Reserve has finally decided to stop lowering interest rates and/or creating credit as if it were the Tooth Ferry; a stronger dollar will mean lower oil prices. Third, the already record high crude oil and gasoline prices have created strong incentives for consumer and business conservation and that has lowered overall demand.

Yet the most fundamental reason to expect prices to fall is that the gap between the price of crude oil and the cost of producing it is just way, way too large to be sustained long-run.

According to the Energy Information Administration, the average cost (in constant dollars) of finding, lifting, and storing onshore domestic and/or foreign oil between 1980 and 2004 has been approximately $20 per barrel; between 2004 and 2006 that average cost rose to approximately $25 per barrel and is slightly higher now. (The cost of producing offshore oil is more than double onshore costs). Yet the price of crude oil has risen to approximately $130 per barrel (doubling in the last year alone) creating large profits for most producers and integrated oil companies.

Marginal suppliers around the world with costs above $30 per barrel but still far below current prices now have overwhelming incentives to uncap wells, engage in secondary and tertiary techniques to recover more oil from existing wells, drill additional wells, and otherwise expand production. (Houston is currently booming with oil production investment as is Brazil). Any serious output expansion will take time but the increasing supply coupled with lower demand will lead inexorably to lower prices; indeed, sharply lower prices.

To be sure, speculators have helped bid up the price of crude oil. Most of the speculation centers around legitimate concerns about "supply disruptions" and some wider war in the Middle East Gulf region. My guess is that roughly 20% of the current price is a supply disruption premium while another 10% is associated with our own debasement of the currency (the dollar) by our own central bank. (This can be proven by comparing oil prices in dollars with oil prices in Euros). When (if) these speculations prove unwarranted, oil prices will decline sharply into (my guess) the $80 per barrel range. But if we get a new war, all bets are off.

Public policy can encourage this bursting bubble scenario. The Democrats want to tax the oil companies or use the antitrust laws against them. Big mistake. More taxes get you LESS oil and "concentration" in the oil industry is not really the problem. The on-going Congressional hearings "investigating" oil prices and profits is a charade and is purely political theater. The very same federal and state governments that complain about high oil prices continue to tax gasoline at a rate (40 cents per gallon) far higher than the profit rate for the oil companies. So much for government concern about consumers.

On the other hand, public policy can and must change to allow energy companies to explore for and develop domestic and offshore supplies of crude oil. Obstacles to expanding and building new oil refineries domestically must be removed, and quickly. Alternative energy sources, if they are cheaper, must be allowed to proceed (including and especially nuclear) but direct subsidies to ALL energy companies (including to oil companies, if any) should end. We need the contributions of wind, solar, etc., but only if and when their real costs and prices are comparable with oil and natural gas. Competitive energy suppliers will work to produce in our interest if we free up the markets and let them.


May 26, 2008

Dom Armentano [send him mail] is Professor Emeritus at the University of Hartford (CT) and the author of Antitrust and Monopoly (Independent Institute, 1998) and Antitrust: The Case for Repeal (Mises Institute, 1999). He has published articles, op/eds and reviews in The New York Times, Wall Street Journal, London Financial Times, Financial Post, Hartford Courant, National Review, Antitrust Bulletin and many other journals.

Copyright © 2008 LewRockwell.com

[Lloyd Danforth]

Dom is an old friend of mine, when there were about 6 libertarians in greater Hartford. We would attend debates he had with the statist profs and 'ask the right questions'

[Russell Kanning]

I was thinkin  .... Hartford huh? hmmm

[coffeeseven]

$9 diesel means no food at the stores.

why?

I've been saying for years if you want to bring this country to it's knees just mess with the diesel fuel. Food from overseas comes mostly by ships with diesel engines. The big trucks that deliver food inland are mostly diesel. The profit margin for delivering that food will be completely destroyed by the cost of fuel. Once it's no longer profitable for the shipper to deliver the food......I doubt they will do it out of the goodness of their hearts. Couple that will the USD falling against every other currency in the world.

Bad juju.

[Russell Kanning]

they charge more

[coffeeseven]

they charge more

For a while, yes. Mr. Grocer can't afford to eat that additional cost, it gets passed on to you and I. The amount of money spilling into our pockets has not been equitable with consumer good's price increases for a long time and the gap is getting wider. There is a breaking point. Diesel is almost $5 here. That IS the "charge more" point. If diesel doubles from where we are now we are looking at stoppage.



"If it gets up to like $5 (a gallon) like they say it will, the truck's gone. You'll never break even again," he says.

Source: http://blog.pennlive.com/lehighvalley/2008/04/skyrocketing_diesel_fuel_price.html

[John Edward Mercier]

Last weeks report showed a drop in crude and gasoline stocks (storage), with an increase in distillates (heating oil/diesel). But while crude oil and gasoline stocks are in the middle of the average for this time of year, diesel is in the lower portions.

China and India have set pricing... and absorb any fall in excess crude supply.

[Russell Kanning]

diesel has gone up 5X in the last few years .... they rise prices automatically.
You might not be able to afford it ... but there will be food in the stores even if the price of fuel goes up. I bet they already pay $9/gallon in Europe ... they have food. It might not be as cheap as here, but unless the mafia gets in the way farmers will try to sell their food to consumers.

[David]

I agree with Russell.  Gov't price controls, and actuall food shortages will be about the only thing that will stop food from being delivered.  Food is such a major item, only those things could empty shelves long term. 
The biggest short term exception I can think of, is shipping companies that contractually binding set rates, and are unable to raise their prices to match their costs of operation. 

[Russell Kanning]

why would any shipping company not have fuel surcharges or be able to change prices?

[kola]

food prob?

grow your own and buy from local farmers.

next!

Kola

[Lloyd Danforth]

diesel has gone up 5X in the last few years .... they rise prices automatically.
You might not be able to afford it ... but there will be food in the stores even if the price of fuel goes up. I bet they already pay $9/gallon in Europe ... they have food. It might not be as cheap as here, but unless the mafia gets in the way farmers will try to sell their food to consumers.

http://uk.reuters.com/article/domesticNews/idUKL2735299620080527