[jpelg]

Gas prices rose steadily all year to the high point where I was paying over US$4.50/gallon (>$60 to fill the tank of my sedan each week). We've been told how discord in the middle east has caused price of raw petro to go up and up and up. Which, of course, has a direct affect on gasoline.

Then this summer, the price of raw petro began to drop. Despite this, gas prices continued to rise, or at least stay high. At that point, we were told that the refineries down south were drastically affected by the severe weather & flooding that was occuring during August, hence the maintained high prices at the pump.

Now, since days after our election last month, gas prices have plummeted, to the point where our national average today is ~US$1.75/gallon!

Can someone explain to me like I'm a semi-intelligent 10-year-old, what the heck is going on here? I'm tired of being dicked around by the oil industry!!!

 

[Old Pa]

1. The per barrel oil prices quoted in the media are futures contracts prices, that is the price for the right to buy a 55 gallon barrel of raw crude sometime several months in the future. Hedging in an end user activity involving participating in the futures market to smooth out some volatility and supply by buying and selling contracts for future oil. Speculating is an investor activity involving buying and selling both contracts and options on contracts to play price volatility for profits.

2. The oil companies do not set the prices for crude oil and affect the price for crude oil only so far as they participate in the futures contracts markets. I am also pissed about the cost of gas (and where that money is going), but blaming oil companies for the price of oil is like blaming cows for the cost of milk; dysfunctional.

3. The pump price of gas bottomed most recently before the national elections and has risen slightly since then despite the continued fall of oil futures contracts prices. Go figure.

4. For a variety of market and regulatory reasons the U.S. petroleum refining infrastructure has not been significantly expanded in the past three decades. Much of this infrastructure is now approaching the end of its service life.

5. Ethanol for fuel has proven to be a real boondoggle with multiple bad unintended consequences such as promoting speculative development, removing grain resources from the world food market, and combining with spiraling fuel prices during the last growing season in the northern hemisphere to increase the costs of both food and fuel.

6. The United States continues to have no effective long term energy policy, largely because of competing political and industry interests. But when has the government ever corrected anything? For example, local ordinances requiring special gas formulations for individual cities and counties have for the past several years taxed refinery capacities refining extra gas recipes and led to local shortages and price spikes without improving the environment in any meaningful way.

 

[hypoicon]

Not bad, Old Pa. However, it also bears mentioning that oil is a global commodity. The drop in oil futures is based on an anticipated global slowdown; commodity producers as a whole have been totally unprepared for the drop in demand. An excess of supply with faltering demand equals lower prices. It will take a while before this corrects and stabilizes. While oil prices were abnormally high for a while, they are now so low that producing the commodity costs more than you can sell it for-- particularly ancillary industries like natural gas.

The horrible side effect of all this is the removal of all incentive to develop sustainable energy solutions. With 40$ a barrel oil, who will need them? That is, until global demand increases again and the price returns to a normal level. Prices this low are bad news for virtually everyone, oil companies included.

Supply and demand is the largest determinate of pricing in any case. Gasoline is complicated by the infrastructure issues that Old Pa mentioned. But in any case, the wild price fluctuations are not directly caused by the government or the producers and distributors. The price fluctuations are caused by the buyers (including you, jpelg). But like a rubber band, you can't push it to make it go which way you want. You pull on it until it snaps. In the case of gasoline, it's primarily a huge drop in demand due to the economic downturn.