Thursday, March 29, 2012

Lets stop with the political hot potato concerning oil.

There has been a lot of talk of late centering around President Obama and the gas price hike we have seen in the US. Many people blame his policies, pushing alternative green energy over conventional energy (like Nat gas, coal and Crude). There has been people in the administration that have actually gone on record admitting as much. Dr Stephen Chu actually said in an interview with the Wall Street Journal in late 2008 (before he became part of the cabinet):

"Somehow we have to figure out how to boost the price of gasoline to the levels in Europe,"

According to the WSJ, Dr Chu would do this by quote: "raising gasoline taxes gradually over 15 years to coax consumers into buying fuel-efficient cars and discouraging sprawl".

Now, we haven't seen that happen as of yet. We already have seen however that the Administration does play favorites when it comes to the agenda or promotions of industries they see fit. We have seen that with Solyndra and GM. While that does point to an obvious flaw or at least a blurred line in the relationship between private industry and the state; it is something that isn't unique to the Obama Administration alone. It is also not he reason gas prices have gone up either these last few years.

Just like playing favorites when it comes to energy sources, the Obama Administration is guilty of a double standard in handling or at least blaming the source for fluctuations in gasoline prices. This was a stump speech in Indiana from 2008, one in which President elect Obama was campaigning on the high oil prices pushing blame on the Bush Administration and the oil companies, staying true to his populist ideals:

There have been examples of President Obama deflecting when it comes to what is happening with the price of gas, blaming everyone from speculators to people driving SUV's. So its pretty clear, the Obama Administration has favored alternative energy over conventional and he has also used double standard logic to defend the rise in oil prices.

Again, these are not reasons why gas prices have went up. As i pointed out earlier this year, we here in the US are now actually a net exporter of fuel for the first time since the 1940's, yet prices in gasoline have only went up. The reason is very simple. Its a global economy and oil is the heart of the global economy, there is very little one country can do to offset the global price that is measured in US inflationary dollars. 

Now, with that said, the biggest reasons we are seeing rises in fuel prices specifically at the pump is also simplistic. The world is consuming more oil, the supply has remain unchanged, thus the law of supply and demand have driven the price up. Just look at the demand.

 As we can see the emerging markets and growing economies are consuming more and more oil and we are consuming less. We are seeing now the fruits of their labor that comes from producing our cheap goods. The emerging economies are showing the world what it means when people say "a rising tide lifts all boats". And to the contrary, ours are staying stagnate or sinking. That's just cause and effect. Now what about supply?

As we can see here and pointed out by Gail Tverberg:

"Since 2005, world crude oil supply has bumped up against what seems to be a limit of 75 million barrels of oil a day. No matter how hard companies try to extract more crude oil, and no matter how high world oil prices rise, they seem unable to extract more than 75 million barrels a day (MBD)."

So again, supply has stayed level, while demand has risen and while some look at the price of gas and the recession and rise in prices during the recession as proof of something to use as an excuse for blaming the administration its clearly not based on fact. Here is the graph that really tells what is happening.

Chart courtesy of Gecko Software

As you can see above, the demand in oil has increased with the price, nothing fishy or speculative about that. Its just simple mathematics. What we seen in the march from 2002-2008 is what we are seeing now. 2008 wasn't some anomaly; it is reality. That is where the economic equilibrium now lies, but the more reckless spending and the more we rely on credit that dilute savings; the equilibrium will only rise in terms of dollars.

This idea that we can spend and borrow our way to prosperity is going to have some consequences; cheap oil is one of them. And when you factor in the emerging economies, it only speeds the rise in prices that much quicker. Call it cause and effect, call it 2+2= 4.... whatever you do call it, just call it what it really is, not what you want it to be. Stop pretending this is some partisan issue when clearly, this long term, cannot be a political football. Now if you want talk about getting Nat-Gas powered cars... that's a different issue. Natural gas is really where our ultimate prize lies.

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