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Archive for March 7th, 2012

This past weekend I rolled the bike out of the garage to enjoy the blue sky and 59 degree weather.  Wow, it doesn’t get much better in the northwest for an early spring day!  Never mind that it snowed the very next day!

I headed to the local Shell station and as I topped off the gas tank I tried to recall which of the political candidates detailed how the oversupply in natural gas had caused its price to crash, and then, just when you thought they were about to blame Obama for destroying the income of all those poor natural gas folks, pivoted on a dime and used it as a supporting argument for why $2.50 a gallon gas is very do-able… right, just as the average price of gasoline has increased by 42 cents, from $3.36 to $3.78 per gallon since the beginning of the year.  And that’s from the U.S. Energy Information Administration, and it’s an average of all grades, all formulations, across all regions of the country.

Yet, somehow, the politicians know where there’s enough oil to cause a world oversupply, or something to drive the price down.   Huh?  All I know is that $4 a gallon “creates some very real challenges” for average American families and their household budgets.

The “drill baby drill” makes for a nice bumper sticker. But, the real answer, is there’s no quick fix.  Gasoline prices are linked very tightly to crude oil prices.  The rule of thumb is that a $1 increase in the price of crude produces a 2½-cent increase in the price of gasoline. Lately, gasoline prices have been linked most closely to the price of Brent crude, and since the beginning of the year Brent has gone up from $107 to $123, a $16 increase.   Clearly some of the price difference is also related to oil speculators on Wall Street. Sanctions on Iran may be hurting their ability to ship crude. Additionally, some analysts think that some of the price increase is driven by fear that Iran might cut off oil shipments entirely, or else slow or close the Strait of Hormuz. In other words, some of the pricing might be driven by fear, uncertainty and doubt (FUD).

Clearly demand for oil is pushing up against supply limits, and that’s a permanent condition.  And when supply and demand are tightly constrained, any small bump in demand or disruption in supply causes a big swing in prices for you and I. Last year it was the war in Libya that caused a price spike. This month it’s Iran. But it’s always something and it doesn’t take much anymore to produce a $30 swing in oil prices.

We need to change the conversation.

Yeah, I’ve read about the new shale oil finds in North Dakota too.  It might increase global supplies a bit, but probably not enough to make up for increasing demand from China and other emerging economies. Basically, prices are going to stay high for the foreseeable future.  Like it or not, this is our future.

I recommend buying a motorcycle!

Photo courtesy of Shell

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