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The Real Price Of Oil

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In one of the first articles I posted at Blogcritics.org – three years ago – I wrote the following: "All good things must come to an end… this looks like its the beginning of the end for oil as a source of energy". At the time fuel prices were just beginning to really start to take off and my conclusion then was that our only hope was to give up on the idea of private car ownership.

There was no way, I argued, that as a world would we be able to maintain the level of oil production required to fuel the fleets of privately owned cars without significant damage to the environment and the economy. I also noted that it was a completely unrealistic expectation – as a culture we are so wedded to the idea of car ownership bequeathing status upon an individual that we would never surrender the keys to our vehicles.

At the time I think the price of gas at the pump in Canada was flirting with seventy cents a litre – roughly $2.80 a gallon – now here we are three years later and the price has pretty much doubled as it skitters around the $1.40 per litre mark – $5.60 per gallon. Now, even if the only economic impact on us were reflected in the amount we were paying out at the pump, that would still take quite the bite out of a family's budget. I don't know how many times people have to fill their gas tank in a week but let's say it's twice a week and your tank holds forty litres, it means your dishing out a hundred bucks a week to keep your car in fuel.

The thing is that what your paying at the pump is only a fraction of the total that's being sucked from your wallet because of the escalating cost of oil. I'm sure you've noticed that your grocery bill has risen substantially over the past few years and a good deal of that has been because of the rise in the price of oil. At each stage in the line, from point of origin to the grocery shelf, the cost of fuel has impacted on the cost of production, and therefore on the price charged for the final product.

A farmer is having to pay more for the fertilizer he spreads on his field because of increased shipping costs and increases in the manufacturing costs caused by the rising fuel prices. He's also having to pay more for the fuel that runs all his equipment, that heats his barns, and that ships his product to market. If the product is packaged in a factory, frozen, canned or processed, those costs have increased due to the amount that it's costing the factory to pay out for powering their equipment and shipping the goods to market. Finally, the supermarket you shop at not only has to absorb all those costs, it's also having to pay more just to stay open because of the cost of fuel.

All those costs show up in your grocery bill, resulting in your dollar buying far less at the grocery store then did it even a year ago. However, you don't have to worry, because according to the people who monitor inflation, food costs aren't important enough to be factored into the annual inflation rate that they use to tell you how healthy the economy is. Haven't you ever wondered how the annual inflation rate can only be one or two per cent when your grocery bill seems to have jumped by twenty per cent? Well, now you know why.

It turns out though, that we've only just begun to feel the economic impact of the rising price of oil. According to a survey of Canadian businesses released by the Bank Of Canada, (the Canadian equivalent of the American Federal Reserve, responsible for setting national interest rates),  over forty-two percent of companies in Canada said yesterdayyesterday price increases for customers will pick up steam over the next year. Consumer prices have remained fairly stable until now because of competition and companies being willing to swallow the costs. (Canada has also been helped out because the increased worth of our dollar against the American has kept manufacturing costs lower last year)

However that's all about to change and we're about to see the cost of everything start rising. With consumers already starting to restrict their spending habits because of the increased costs at the pump and in the grocery store, it only stands to reason that an increase in the cost of consumer goods is going to slow the economy even more. So if you were a business, you'd be thinking about drawing your horns in, spending less money, and looking for any way possible that you could cut costs so that you could at least minimize these increases.

Yet the same survey that showed businesses getting ready to jack prices up has them saying that their sales are going to increase this year, and they are spending money accordingly. "Business expectations are being set up to end in tears" says Derek Holt, vice president of economics at Scotia Capital, "They may be doing the entirely wrong things". Which is as nice of way of saying that they have their collective heads up their collective asses as you can get. When you factor in the fact that both the American and Canadian economies are already grinding to a halt we could be heading into not only a recession, but a period of high inflation as well.

In spite of all our attempts at finding new sources of oil, whether the tar sands of Saskatchewan, the Alaskan tundra, or offshore drilling, it's not going to be enough to sate our demand. Prices are going to continue to escalate and our economies will continue to stagnate until they grind to a halt. Instead of making idle promises about "securing" oil supplies, countries need to start figuring out how to wean us off fossil fuels before it's too late.

Now about your car…?

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About Richard Marcus

Richard Marcus is the author of two books commissioned by Ulysses Press, "What Will Happen In Eragon IV?" (2009) and "The Unofficial Heroes Of Olympus Companion". Aside from Blogcritics his work has appeared around the world in publications like the German edition of Rolling Stone Magazine and the multilingual web site Qantara.de. He has been writing for Blogcritics.org since 2005 and has published around 1900 articles at the site.
  • http://www.republicofdave.com Dave Nalle

    While there may come a point where the oil starts to run out, the evidence suggests that this is not actually it and that this ‘crisis’ is largely artificial. The current limits aren’t set by the market or the raw availability of crude, but by bottlenecks in production, government restrictions on drilling and an unwillingness to do the things necessary to accomodate increasing demand on the part of producers and governments.

    dave

  • http://bloggingontheedgeofsuicide.blogspot.com/ Jet in Columbus

    Dave, the vast majority of real estate set aside for oil drilling (particularly in the Gulf of Mexico) has not even been touched, nor have geological studies been done.

    A question no one seems to answer is why, and if it’s true, why not-instead of opening up other areas.

    It’s like the old companies being served a steak dinner only to have them ask for seconds before taking their third bite out of the first serving.

  • http://blogcritics.org/writer/dan_miller Dan Miller

    Yes, fuel prices are too high, yes something should be done about it, and yes viable alternatives to fossil fuels would be great.

    However, the only solution suggested by the article is that countries need to start figuring out how to wean us off fossil fuels before it’s too late. By “countries,” I assume that the article refers to the governing bodies of those countries. By “us,” I assume that the article refers to, well, “us.” What a glorious idea!

    Even though it is common knowledge that governments are really great at telling “us” how to behave productively and well, just how are they to wean us? The article offers no guidance, and I have none. It is easy to wean a foal or puppy, I know how to do it, and have actually done it; just separate the baby at the appropriate age from its mother for a while and let it eat the sorts of stuff which foals and puppies past the weaning stage are happy to eat. Actually, human intervention isn’t even necessary: mares and bitches can deal with the weaning process themselves.

    Asking the big they to wean the big us probably wouldn’t work in the present context; they don’t have the foggiest notion how to do it. When was the last time they successfully weaned any one off anything? Besides, with a Mommy State Mother wouldn’t like it one little bit. She doesn’t want us to be weaned, because then the subversive idea that She is not all wise and is not the only source of food might gain currency. Perish the thought.

    Perhaps they, could allow — not build, not even encourage — just allow a few more nuclear power plants. And, until bright souls come up with some viable alternative(s) to fossil fuel, the big they could allow — not build, not even encourage — just allow some drilling in places where it is now and has for far too long been prohibited. The polar bears probably wouldn’t mind, and might even prefer it to being eaten due to food shortages and having their pelts used to keep us warm because of a lack of heating fuel.

    This should have been done a long time ago, while the big us drove around blissfully assuming that the big they knew all about an entirely foreseeable problem and would do the right thing to prevent it from occurring, in the fullness of time and after diligent studies, discussions, conferences, and rock concerts to save the world.

    If the big they would just sit down and shut up, perhaps the problem would cease to be insuperable.

    Dan

  • Clavos, aka Mr. Rogers

    “…nor have geological studies been done.”

    Not true. HUGE deposits have been confirmed about 250 miles south of NOLA and 150 miles west of Florida; so far offshore the platforms won’t even be seen by anything but ships.

    These deposits are deeper underwater than existing fields in the Gulf, so the extraction will be more expensive, but they are confirmed deposits.

  • http://www.utube.com/HABAKKUP Cary Ace Bowers Jr

    Operation Park It! More free time for all at home to solve all the problems,by not giving in to demand,President Bush said himself.more vacation time,less hour work weeks,we cut off greed,and corruption will fall,A free people want the idea of Babylon(The New)conservation by less opening of businesses,which use the most energies,The ability to restore morals at home,and conquer crime and the judicial extortion that exists..ect.log on go to the revolution.

  • Jonathan Scanlan

    Uh, guys, the concept and problem of Peak Oil doesn’t refer to the stage of running out. It refers to the end of cheep oil (i.e. the amount of energy it takes to dig out is now greater than the amount it will provide.

    In fact, I was having a chat with a fluids engineer and he was telling me that oil is lost even in the plumbing it from one place to another.

  • http://theugliestamerican.blogspot.com Andy Marsh

    Down $9 in two days for a barrel and when do you suppose we’ll see it at the pump? No where near as soon as we’d see if if it was a $9 upswing in price!

  • http://blogcritics.org/writer/dan_miller Dan Miller

    Andy,

    I remember that well. However, in Panama — for reasons I haven’t figured out — the down swings occur about as rapidly as the up swings. They seem to reflect what the gasoline stations paid the last time they had a fuel delivery.

    Dan

  • http://theugliestamerican.blogspot.com Andy Marsh

    Dan – that would be a lot more fair than it is right now. I don’t get how gas stations can differ in price from one corner to the next. I can show you a corner here in Va Beach with gas stations on 3 of the corners and the prices differ by twenty cents a gallon from one station to the next. It wouldn’t be so bad if I hadn’t seen them getting fuel from the same damned fuel truck a couple of weeks ago!

  • Clavos

    Dan, Andy,

    A lot depends on who owns the station in both your comments.

    In Panama, unlike the USA, the stations are probably all owned by entrepreneurs (as opposed to the oil companies themselves), which would account for their sensitivity to the wholesale price.

    In the USA, OTOH, most (but not all) stations are either owned by the brand they sell or a wholesaler of that brand in the specific market (VA Beach, e.g.). Far fewer are owned by small entrepreneurs, and even then the entrepreneur may own several stations in the market. This also explains, Andy, the wide variations in pricing of fuel off the same truck; they’re all paying different prices, depending on ownership of the station.

    Another point of interest: In most cases, the state makes far more money on your gallon of gas than the station owner does. Most small station owners are making less than a nickel a gallon.

  • http://theugliestamerican.blogspot.com Andy Marsh

    Alright Clavos, explain to me why the price changes in between deliveries. I understand that in a lot of cases, the station owner isn’t the one making a killing on what we pay at the pump, but I have a hard time understanding how he pays a price for so many gallons of gas, but turns around and sells it at 20 different prices over the next couple of weeks.

    What’s in his or her tanks at the station doesn’t change price after he purchases it, but his resale price is based on a price for a barrel of oil that’s not even out of the ground yet and won’t be for who knows how many years.

  • Clavos

    Andy,

    Stations (especially corporate ones) peg their prices to the spot price.

    I haven’t seen what you describe occur in this market, so I’m not familiar with the phenomenon.

    Here, the market is so competitive that the “low price” stations will sell out an entire delivery within a couple of days, getting deliveries twice, and in some cases, three times a week.

    I trade at a station which is owned by a Miami wholesaler; they have a chain of stations all around the city, and also supply other companies’ stations. Their stations’ prices vary from station to station (same day comparison), based on the competition in the immediate neighborhood, with one significant exception: the stations in the really poor neighborhoods (and this is true of ALL brands) are invariably among the highest priced in Miami. Why? I don’t know for sure, but my theory is that people in those neighborhoods either can’t or won’t shop around, so the prices are less elastic. Usually, the differences are less than a dime a gallon.

  • http://theugliestamerican.blogspot.com Andy Marsh

    I think what bothers me most is when I see gas prices in NJ cheaper than in VA. I understand transport costs and stuff like that, but I think the fact that NJ has to supply pump operators would outweigh any transportation costs.

    the other thing I see that bothers me is how gas is priced around interstates and in my area in particular, after you cross the CBBT, the gas prices in Virginia Beach on Northhampton Blvd., which is the road you hit right after you cross the bridge tunnel, the prices are 10 to 20 cents higher than anywhere else in Va Beach. As far as I’m concerned, practices like that are nothing more than price gouging. They know that folks from NY and NJ and PA just travelled about 350-400 miles and they need to fill up and they take advantage of it.

    Yeah, I know it’s free enterprise and all that, probably why I NEVER buy gas over there. Gas is usually cheaper on the eastern shore anyway, where fuel trucks have to drive down the eastern shore and then turn around and drive back dry because hazmat isn’t allowed on the CBBT.

    The other thing I’ve noticed, maybe it’s just me, but gas from some stations seems to burn a little faster than gas from other stations…I would assume this has something to do with the additives in the fuel, but I’m no engineer or chemist, so I don’t know for sure…

    I actually had a conversation with a WaWa store manager not to long ago about gas prices. In NJ, where there’s a WaWa on pretty much every corner, they’re known for having the cheapest gas prices. Since they’ve moved down to our area that’s not always the case, so I asked one day, why not. It was explained ot me that they price compare only stations in the very immediate area and make sure to equal or beat that lowest price. I explained to them that I drive a pretty set route and if I know there’s cheaper gas, I’m not gonna stop at their place. I got the look like…do you think I care?…

    Bottom line is, they know they’ve got us by the nads and they like the feel of it when they squeeze!

  • Clavos

    Andy,

    Differences in price from state to state are a result of the amount of tax charged by each state, which, as I mentioned before, is usually more than the station’s margin.

    As far as gas from one station burning faster than from another: that’s doubtful. Remember what I said upthread: the same company here in Miami supplies fuel to at least three different brands of stations from the same truck. This was true even 70 years ago, when my father, as a college student, worked summers on a fuel barge on the Erie Canal. He told me they would pump the same gas out of the same barge all up and down the canal. At each stop, they would hand the truck drivers a pack of dye; the color of the fuel being the only difference between brands.

    One other point. The spot price is not the future price of oil (or any other commodity). It’s defined by Wikipedia as:

    “The spot price or spot rate of a commodity, a security or a currency is the price that is quoted for immediate (spot) settlement (payment and delivery). Spot settlement is normally one or two business days from trade date.”

  • http://blogcritics.org/writer/dan_miller Dan Miller

    Here is one small comfort: Camel urine, which now sells for $4.00 per liter, is more expensive than gasoline. Yet, it has many salutary properties to which most of us are oblivious.

    “I have been using camel urine since I have been going to elementary school,” said Amal, a university student in Sanaa.

    “The first time a neighbour told me that she had been using it (urine) for many years, because it made her hair more beautiful and shiny. Now everyone in my home uses it.”

    The use of the urine is not just limited to women. Men have reportedly also been using it to prevent or stop hair loss.

    We must all be attentive to multicultural solutions to the serious problems which beset us.

    As fuel prices continue to rise, perhaps camel urine could become a viable alternative.

    Dan