06 May 2008

Gas prices

Everyone hates high gas prices.

News organizations love reporting that gas prices are climbing. I just watched ten minutes of CNN and the news anchors spent that time worrying that the price of oil could reach over $200 a barrel in the next two years.

Bad news sells. Bad news gets ratings.

What we don't get much of is analysis.

I've got my own vague understanding of what makes gas prices rise and fall, but I'm wondering what you can tell me.


Anna said...

my vauge understanding is that OPEC controls much of the oil in the world, they set their oil prices and much of the market follows. What I do not know is why or how OPEC makes such decisions. I know sometimes political leaders pressure OPEC into lowering them....frankly its all a bit vauge. Mostly, oil is a limited commodity, few people control to resource, thus high gas prices. But the fluxuations are a mystery...can't wait to see what you uncover. Maybe USA Today has some pretty charts and graphs. :) j/k

James Barrus said...

Well, it's easy really. It all begins with the law of Supply and Demand. You'll remember this from your Econ 110 class, right? An unlimited supply of some good or commodity means a very low price. As supply decreases then, obviously, the price increases. the similar thing happens with demand. If the demand for some sort of commodity is very low, the price is very low. As the demand increases, the prices increases. So, lets apply this to gas. Let's take the demand side first.

China has 20 billion people who are now interested in trading in their 1969 bovines for a late model Mercedes Benz. This wonderful opportunity for the Chinese people was made possible by our rather large trade imbalance. We, the American people, are buying tons and tons of junk from China. China, on the other hand, is only interested in pirating our movies, so really, they aren't buying anything from us. That means they have lots and lots of money to spend. Bovines, as you recall, run on grass. Mercedes Benz, unfortunately, run on gas. There's the demand. Lot's and lots of demand.

Now for the supply side. Gas is made from crude oil as is almost everything else these days. Oil, as you know comes from all over the world. Unfortunately for us, 98% of all the world's oil comes from the middle-east and Venezuela. So, it turns out, the guys who have their hand on the oil faucet (controlling supply) mostly hate our guts at the moment and are perfectly happy to limit the supply of oil which, as we know, increases the cost. Since they benefit tremendously from 120 dollar per barrel oil, they aren't really motivated to increase supply anytime soon.

We can't complete the discussion until we also mention the jitter factor. Since oil is traded on the market by people who read the newspaper, any time something happens that might be perceived as affecting the supply of gas, people get nervous. War in the middle east, a oil refinery fire in Ohio, Hugo Chavez has another cow over American colonialism, etc, the price goes up.

Let's talk about something else that I think is an issue--bio fuels. In theory, it makes a certain amount of sense that we "grow" our fuel. Renewable energy is a good thing and all. However, since most material, like corn, that can be used for bio-fuels are also a part of our food chain, does it make any sense to starting burning our food as gas? Doesn't that just increase the demand for corn which in turn drives up the cost of beef, chicken and everything else that depends of corn? Don't get me wrong, I would be happy to see the American farmer become as rich as those Arabian oil sheiks, but at some point in time, I don't think we can grow enough corn to fuel all the cars of the planet. Maybe this is something for our kids to worry about?