Oil Prices -- is this capitalism, or something entirely different?

[FaustWolf]

"Oil prices advanced Friday as traders, unimpressed by [Saudi] efforts to boost supply, kept buying on the expectation that prices would keep setting new records."
http://news.yahoo.com/s/ap/20080516/ap_on_re_mi_ea/bush_mideast

I'm sure there's others here who know way more about the oil industry and financial markets than I, so please correct me if I'm wrong, but it appears that the main culprit in the US' current gasoline price dilemma is not OPEC stinginess, or even America's lack of refining capacity as I had previously believed, but rather speculative investing in oil as a commodity. If the above quote is any indication, we've entered a dangerous self-reinforcing trend: people are investing in oil because the price is high, and the price of oil is high because people are investing in more barrels, or whatever unit oil is being "traded" in. Investors are doing this based on expectations -- a pipeline in Nigeria gets destroyed, a horrendous earthquake strikes China, Ahmadinejad makes a thinly veiled threat, a hurricane approaches refining centers, and investors bid up the price of oil due to expectations of future supply shortages.

In Econ 101, we learn that consumer expectations about the future availability of goods may cause the demand curve for said goods to shift, resulting in a change in price absent a concurrent shift in supply. The underlying implication is that it is the relationship between production and consumption that determines the price of any good, and the fact that consumers and producers are brought together by markets is the essence of capitalism and its much-touted efficiency.

Much ado has been made about Hubbert's Peak and the obviosu energy needs of India and China. However, it appears that the price of oil is not currently being driven up by a shortage, for "Saudi Arabia [and by association, OPEC] does not have customers that are making requests for oil that they are not able to satisfy." Instead, it is my understanding that an intermediary commodity market has more impact on oil price than what goes on at the pump.

Maybe I'm alone on this, but the fact that commodity investors, and not the demand of end consumers, are determining the price we pay at the pump blows my mind. If the causal link between supply and demand is broken in such a way, can we really call the result capitalism? And does anyone happen to know whether all commodity prices are determined in this way? Given the sudden increase in corn prices lately related to ethanol demand (despite the fact that I have yet to see a single ethanol pump in my neck of the woods, at least), I'm guessing it's the same situation for corn.

And how are non-US Compendiumites faring in terms of gas prices? It's about $3.81USD or so where I'm at. I'm assuming European car owners are hurting even more due to huge gas taxes.

[BROJ]

I agree with just about everything you said, Faustwolf, however, ethanol(an alleged idea of an oil executive in an attempt to feed off of the chaos to make a quick buck.) production actually hurts the economy just as much as the gas shortage. Case in point: it not only drives up food prices, it actually costs more than gasoline due to the fact that it packs about 70% of the 'punch' of gasoline(gas~3.80 ethanol~3.30), such that it actually costs ~$4.71 to do what gasoline does.

[placidchap]

And how are non-US Compendiumites faring in terms of gas prices? It's about $3.81USD or so where I'm at. I'm assuming European car owners are hurting even more due to huge gas taxes.

European countries have been extremely high relative to the US for years now.

Here in London, Ontario gas is about 1.27 a litre...so about 4.83 a gallon (The loonie and dollar are still floating around par, right now the loonie is a bit more than the dollar, so I didn't do any exchange rate adjustment)...but I ride the bus so it has little effect on me personally (at least for now)

It is higher in Quebec, not sure of the number though.

[FaustWolf]

Yes BROJ, I agree that the American people were blindsided by this whole ethanol business. One of the selling points to my understanding was that ethanol worked out in Brazil, but they use sugar cane there. From the frying pan into the fire we go! Should automobile manufacturers be focusing on hydrogen fuel cells instead, or what is it that you're going to be working on?

Interesting, I didn't know that Canadians referred to their currency as the "Loonie" until now. 

[placidchap]

Yes BROJ, I agree that the American people were blindsided by this whole ethanol business. One of the selling points to my understanding was that ethanol worked out in Brazil, but they use sugar cane there. From the frying pan into the fire we go! Should automobile manufacturers be focusing on hydrogen fuel cells instead, or what is it that you're going to be working on?

Interesting, I didn't know that Canadians referred to their currency as the "Loonie" until now. 

Well it is refered to as the dollar here too...It's jsut that the dollar is called a loonie...but I think most refer Canadian money in terms of dollars.  Just curious...do you know of the loonie and/or toonie? a.k.a. 1 and 2 dollar coins...?

[BROJ]

Should automobile manufacturers be focusing on hydrogen fuel cells instead, or what is it that you're going to be working on? 

Until we find is a method which doesn't lose so much energy in the process of making hydrogen, it will undeniably be another money pit. As for the technology I'll be working on; it will accept all 'raw' energy(solar, wind, nuclear, hydroelectric, petroleum-based, etc.) and down-convert it to consumer usable energy and create a battery backup in case of power failure as well as being able to sell the excess, unused energy produced, otherwise wasted, back to the power companies.

[Radical_Dreamer]

Yes BROJ, I agree that the American people were blindsided by this whole ethanol business. One of the selling points to my understanding was that ethanol worked out in Brazil, but they use sugar cane there. From the frying pan into the fire we go! Should automobile manufacturers be focusing on hydrogen fuel cells instead, or what is it that you're going to be working on?

Interesting, I didn't know that Canadians referred to their currency as the "Loonie" until now. 

Well it is refered to as the dollar here too...It's jsut that the dollar is called a loonie...but I think most refer Canadian money in terms of dollars.  Just curious...do you know of the loonie and/or toonie? a.k.a. 1 and 2 dollar coins...?

Makes it hard to take an economic crisis seriously though. "The loonie is down 15 cents? Oh no!"

[ZeaLitY]

Well, necessity is the mother of invention. I've got an optimistic outlook (more optimistic assuming McSame isn't in office in 2009).

[Burning Zeppelin]

I'm starting to become dissatisfied with neoclassical economics, but I'm not well read enough in the altenratives to start debate on something different. However, what I do know is that current economics are obsolete, and we should start looking at some of the unincluded factors in a good economy, such as well-being, social justice and the economy.

Something that made me laugh though was when I was in Egypt. My tour guide told me that big tour companies often take 8 buses with them, so that if one breaks down, they won't have to wait for another (these are long journeys). I asked him if it was very expensive, and he told me that fuel was as cheap and chips there (not his exact words).

[ZeaLitY]

Ever been to Jordan?

[Daniel Krispin]

Yeah, something is very weird about all this. All around my city we have oil reserves second in the world only to Saudi Arabia, and gas has shot up from 99c/litre to 129.3c/litre... why here, when we are the most affulent province because we have all the oil, is gas so expensive? We have the economy from it, but we don't see much of the benefit. And housing... through the roof because of that same economy. Want expensive places to live? I think Edmonton is worst in Canada.

[Radical_Dreamer]

Canada probably has some non trivial fuel taxes. Hell, even I can get behind fuel taxes. Vehicles that use more fuel tend to wear the roads down more, so a fuel tax to pay for road maintenence and construction is pretty fair. That, and higher fossil fuel prices are, in the medium to long term, a good thing.

[Daniel Krispin]

Canada probably has some non trivial fuel taxes. Hell, even I can get behind fuel taxes. Vehicles that use more fuel tend to wear the roads down more, so a fuel tax to pay for road maintenence and construction is pretty fair. That, and higher fossil fuel prices are, in the medium to long term, a good thing.

Nah, the wear from vehicals doesn't have much of anything to do with the taxes... I don't think the government sees all too much from the oil, either (there's been a big issue regarding supposedly foregone governmental revenue), and what's there isn't for road upkeep. You've gotta remember, we're a winter city. That is, we have winter for almost half the year - temperatures from 30C above to -40C below. The icy and all really stresses the road, and does vastly more damage than any amount of car wear could ever do. We've got pretty bad roads here, and we're pretty well used to it.

The problem is is this sudden increase in price. Why? Why has it jumped up 25%? And here of all places. If it were a matter of supply, why, then at least we here should be alright because we have the oil itself. But it's just as, if not more, expensive for us! That's what's all so annoying about it. That our province, which had a several billion dollar budget surplus because of oil (shoulda been more, though... there's an inquiry into that) can't have cheaper gas than the rest?

[Hadriel]

To an extent, it is a supply problem; even with current production levels, the demand is only going to keep growing, which naturally drives the price up.  Further, there isn't enough oil left to keep producing it economically at a rate sufficient to satisfy projected future demand, and the oil companies certainly aren't going to eat the cost for the good of the rest of us.  Unfortunately, there isn't much of anything to interdict the moonshot in cost, especially with speculative investing.  Much of the problem that got us here is down to simple overconsumption, not to mention America's crippling, odious failure to invest in nuclear energy and other forms of alternative power.

[Burning Zeppelin]

Ever been to Jordan?

Nope. I'm guessing it's very cheap there too?