2008-06-26 / This Week's Attitude

This Week's Attitude

Oil Price Speculation Is A Crude Awakening
By Neil S. Friedman


By now, you've probably gotten used to rising gas prices. For months now, prices have reached record levels on a weekly basis. As of Monday the average nationwide price hit at an all-time high of $4.10 per gallon. Some have forecast the $5 threshold could be reached before long, while others maintain prices have peaked.

Consumers are fed up, but, nevertheless, they've grown accustomed to shelling out $70-$100 to fill gas tanks. After all, there's little one can do about it, if you drive a car for business or leisure or both. There are alternatives, such as public transportation, Amtrak or interstate bus travel, but the convenience of a motor vehicle usually triumphs over complaining and higher costs.

Actually, due to high gas prices, business is booming for Amtrak, which set records in May for tickets, revenues and passengers. Amtrak is considered the primary travel alternate in the Northeast corridor between Boston and Washington, DC, and has already reported many long-distance routes for the extended July 4th weekend were sold out by mid-June.

Understanding the economics of the global oil market can be complex even for analysts, so you can imagine how complicated it is for consumers who lack the patience or desire to comprehend it. We're just damned sick of paying higher prices at the pump and elsewhere. When energy prices climb, it affects almost every other aspect of the economy because consumer goods have to be transported to local retail-ers. Inevitably, consumers shoulder the added cost. With higher energy costs there may be a valid excuse, but businesses hardly need an incentive to jack up prices.

As global oil consumption surges, especially in emerging economies, like China and India, where consumers are buying automobiles like never before, the supply of crude oil is inadequate and will almost certainly remain limited - sometimes intentionally - while prices persist at record levels.

Under prolonged pressure from the U.S. and other oil consuming nations, Saudi Arabia, the world's largest oil exporter, announced this week it would increase output next month. However some viewed the news of another 200,000 barrels a day as just a short-term solution that's merely a drop in the global bucket.

Most Americans - including, until recently, yours truly - attribute skyrocketing oil prices to good old-fashioned greed by OPEC and the major oil companies. While that's somewhat valid, another reason is speculators - modern manipulators of energy prices. The price of oil today is essentially controlled by an elaborate system comprised of traders, oil companies and banks, who each have their own private interests - and profits - in mind.

Speculators also operate outside the bounds of federal government regulation, despite efforts by Congress to threaten to clamp down on them. Naturally, Wall Street banks and other financial institutions have pressured Congress to delay any legislation that would restrict trading in oil speculation. Some contend that even if congress did enact regulations, the traders would just conduct their business off shore and overseas where Congressional rulings will have no effect and would have little, if any, impact on the imbalance of oil supplies and demands.

Energy speculation operates on the theory of future oil supplies. When that supply is expected to be limited, particularly with demand continuing to grow, the speculators speculate prices will rise and announce their conjectures. However, companies that produce and sell oil don't wait for the predictions to come true and raise prices immediately.

I always wondered why local gas stations raise pump prices within 24 hours after the price of oil increases. After all, it must take at least a few days before the product is extracted, refined and shipped. But consumers quickly pay higher prices when companies, like Shell and ExxonMobil, literally have us over a barrel of oil.

Due to soaring prices there's been a revival of debate about new drilling for oil off the East Coast and in the Alaskan wilderness. Good ideas if only the companies that undertake the exploration can guarantee the process will not harm the environment. And, if there's an accident in conjunction with the work, they must be held accountable and pay mandatory reparations to clean up any spill.

Nonetheless, why isn't anybody talking more about renewable or alternative energy supplies, like nuclear, solar and wind?

Most of us fear nuclear energy, with good reason, because of its potential hazards. Ever since the Three Mile Island accident in 1979 - and the coincidental release of the movie "The China Syndrome" about a fictional incident - and the Russian nuclear reactor meltdown at Chernobyl seven years later, there have been no new nuclear power plants built in America.

Solar and wind power are used in small amounts in some regions, but it has not led to wide development by energy conglomerates probably because it's free and there for the taking, so there's less profit to be made. But if those sources can be harnessed and developed for practical use on a large scale, the government is obligated to subsidize research for those natural elements.

When it comes to energy prices, oil's well that ends well is never the case. Nor does the theory of gravity - whatever goes up must come down - ever apply. Hell will freeze over before Americans pay less than three dollars for a gallon of gas again.

As energy prices continue to rise, American consumers are getting a crude awakening - and the way things are going they better get used to it.

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