
Are you suffering from gas pain? And I don't meant the kind you get after eating a can of beans.
I mean the kind you get when you fill up your car.
My time to comment on this topic has come. I have reached my limit people.
The start of the discomfort we are all now feeling at the pump, comes from the price of a barrel of crude oil. Oil is refined to produce (amongst many other useful things) gasoline.
The higher the price of oil, the more you pay for gas. Its that simple.
This week, oil reached a new price of $126 per barrel. To put this is perspective, a year ago it was half that price. In the 90's it was roughly $23 per barrel. To put it in Sean's words, "ridiculous price."
What is causing upward push in prices? Sad news for some of you - not the "evil oil companies."
The truth is that oil is traded on the free market. The price is not set by any oil company. They just pump it out of the ground and sell it. Much like a farmer takes his harvest to market, and the price is determined on the selling floor. So, there are 2 theories out there.
1: World demand for oil is outstripping supply. Economies in countries like China and India are booming, and as a result so is their appetite for crude oil.
2: Market speculation. What this? If I buy a widget for $2, and sell it for $4, I make a $2 profit on each widget. If I sense that in 6 months there is going to be a shortage of widgets, and they will sell for $8, I am going to buy as many widgets today for $2 as I can. That way, later on, I can sell them at a much higher profit. I am "speculating" that the price will go up. It's basically a calculated gamble. Now, what if a lot of people sense the same thing? They are all going to have the same idea as me, and buy up all the widgets they can now. And so, the price immediately goes up, as now widgets suddenly have more "perceived" value. It's the same with oil. Traders are betting that the price will go up in the future, and they will be able to bank the profits. So everyone scrambles to buy as much as they can, and you have a market rally.
What is my opinion? Which camp do I belong to?
I think its a combination of both. Yes, the world is using more oil, demand has increased. All those American jobs we "outsourced" in the 90's into India and China (you can thank unions for a lot of that) are coming back to bite us in the rear. As we exported our jobs, we spread the wealth. Now there are millions of people in once poor economies who have more money and want to live like we Americans do. They want cars, and material goods that are made from, and consume oil. Don't believe me? - next time you go to Walmart, have a look at how many products are "made in China." The upside of this is the emergence of a global economy, that is going to help more of the world's population move out of poverty into prosperity.
On the other hand, rampant speculation in the Commodities markets (particularly oil)
is pushing the price of oil beyond what it is worth. The NYMEX (New York Mercantile Exchange - where oil is traded) has become a casino. Hedge funds, and investment companies like Goldman Sachs - who trade heavily in the energy markets - are pouring billions of dollars into buying crude oil, because they predict demand will continue to rise, and they will lock in huge profits. As more people want in, up goes the price. Just like the widgets.
It has become a new "Gold Rush." The problem with this is that true basic market fundamentals, like laws of supply and demand are being completely ignored as everyone rushes in. Have we seen this before? Remember the Dot-Com boom in the late 90's? Look at current state of the housing market - that was a boom as well. In my opinion, the market is currently in a complete state of panic, irrational thinking, and greed. Just type in "crude oil" into google news at the end of the day, and try to follow the rationale for the "Skyrocketing, soaring, new record oil price" presented by our dramatic friends in the media. Any excuse is used to drive prices up.
One day it's this reason, the next day it's completely opposite.
You cannot tell any rational thinker that the world is using so much more oil than a year ago to justify the price doubling in 12 months. If that were true, we would have to be using twice as much oil globally. Has that happened? No.
We also got ourselves into this predicament by somehow believing that cheap gas is our "right"
It's not, as many of those who currently own a Ford Expedition (rated at 17MPG are suddenly discovering). Don't even get me started on ANWR - you know, the place where we have millions of barrels of our own oil we can't use.
Conclusion, and end of rant.
The days of cheap oil are over, however the market is currently way, way overbought, and due for a correction. We also need to get ourselves off of the "black crack" we have become addicted to - happily supplied to us from countries that hate our way of life, but love the color of our money.
Enough said.
Read this article for some perspective:
http://www.domain-b.com/industry/oil_gas/20080425_oil_boom.html



