Monday, July 21, 2008

[Feature] What Makes Gas Prices So High?

How many conservative economists does it take to change a light bulb? None, if the government would just leave it alone, it would screw itself in.

Get it? How about this one...

Three econometricians went out hunting, and came across a large deer. The first econometrician fired, but missed, by a meter to the left. The second econometrician fired, but also missed, by a meter to the right. The third econometrician didn’t fire, but shouted in triumph, “We got it! We
got it!”

Are you laughing yet? If you aren't, you're probably not that into economics. However, you do care about spending $4 dollars per gallon for gas. I am not an economist. I can only guess as to why that last joke is funny. I am going to try, however, to explain to you (and myself for that matter) why gas prices are getting higher and higher.

Gas Prices Go Up if Oil Prices Go Up
This is one is pretty simple. Gasoline comes from crude oil. If the price of oil goes up, the price of gasoline goes up immediately. This is because gas stations make razor thin profits from you buying gas. In fact, gas stations would rather have you buy a slushy and a Kit Kat than to fill up your tank.

Oil Prices Go Up if a)Demand for Oil Goes Up b)Supply of Oil Goes Down c) Speculation d) The Dollar Goes Down

a) Demand of Oil Goes Up- If a billion people all of a sudden wanted cowpies, the price of cowpies (and cows) would immediately jump. Cowpies are useless to you, thus the demand for them will remain low. Oil, however, is extremely useful to you. Unfortunately for your wallet, it is also useful to people in China and India. The more developed these countries become, the more oil consuming products they'll want to buy.

b) Supply of Oil Goes Down- If there's less oil to go around, how are we going to determine who gets to have it? Sell it to those who are willing/able to pay more for it of course. Who supplies us with oil? About 60 percent of the oil we use is imported, most of it comes from Canada, Saudi Arabia, Mexico, Venezuela, and Nigeria. If anything goes wrong with the production of oil in these countries we'll be sure to feel the effects. Natural disasters, like Katrina, can also diminish the production of oil if they strike in an area where oil is being extracted.

c) Speculation- This topic is tricky to simplify so I'm sorry to anyone who thinks I've over simplified. Oil speculators are people who buy oil with no intent of using it. They buy it with the hope of selling it in the future at a higher price. This creates an artificial demand for oil and raises prices. There is a great debate as to how much speculation has affected the price of oil. Some people believe it is responsible for as much as 60 percent of the price. Others believe that speculation has had very little effect. If you want to get deeper into this subject I suggest reading the following articles:
What Is A Commodity
What Is Commodity Trading
Oil Bubble
Oil Speculation
The first two articles help explain some of the basics of the subject, while the latter two talk specifically about how oil speculation is affecting our economy.

d) The Price of the Dollar Goes Down- Back to simplicity. If the Dollar loses value, it's going to take more dollars to buy oil. How does the US Dollar become stronger? Oh dear, that's another subject. Read this, however: Is The Weak Dollar To Blame For High Oil Prices?

The rise in oil prices is a shady and intricate topic. I purposely did not want to make it detailed, but just like Alice in Wonderland, it gets curiouser and curiouser the more you read about it. While experts may not always agree on specifics, I believe most will agree that points a through d contribute to the increase of oil prices and, ultimately, to the increase of gas prices. There are somethings you can do to curb how much you spend at the pump. Here are 10 Green Driving Tips courtesy of How Stuff Works to help you lower your fuel usage.


Jen Shin said...

a) I really enjoyed reading this and already feel 65% smarter!
b) You used my article, booyah!! :D

sang said...

Gas in Haiti is a little over $6 dollars a gallon. Most people barely make that in a day. Most gas stations also have your friendly neighborhood shotgun man to greet you as you pump gas, and they do NOT like to take pictures. . (unless you pay them.