Feeling The Gas Crunch - Blast Congress
As the price of gas hits $4.00 this is good time to examine the important reasons why. So if you can, turn off your emotions for just a bit so we aren't drawn to any pretense. Later you can turn the switch back on and and put those emotions to good use because there is something you can do about it. If you want to.
How Oil Is Priced Traded
Oil is bought and sold based on available reserves. Oil, like other commodities, is based on a Future Contract. This means the buyer agrees to purchase the oil by a specified date and the seller has to prove he has the goods to deliver. This may seem like madness because the oil is sold before it's pumped out of the ground but it has its advantages. The buyer gets a lower price and makes a profit by selling it at market value. The seller acquires cash in hand faster to reinvest and doesn't have the cost of storing millions of barrels of oil.
Oil is seen as a limited resource. It is based on the assumption that one day there will be no more oil and the wells will be dry. While this is not true as oil wells around the world are refilling with newer oil, it is difficult to factor this into the equation since the rate of refill is unknown. On the other side of the coin, this is not yet politically accepted.Most of the worlds oil is supplied by the Mideast. Without argument, the Mideast is and has been unstable for centuries with continuous battle and wars. In addition, it is the home of the Oil Producing Exporting Countries known as OPEC. OPEC accounts for about two-thirds of the world's reserves. While its control of price has diminished somewhat in recent years they have enough power to influence world prices by controlling production.The net result is that fear drive the price by oil traders. The lack of oil brought on by war, a slow down in production by OPEC, or the lack of enough reserves.
Falling Dollar And Inflation
Much has been said about the falling dollar, the cause, and the effect on oil. There has also been much finger pointing as to why. The dollar will continue to fluctuate and each fluctuation has both positive and negative results. The bottom line is that the dollar is worthless as are other currencies because there is no economic standard behind it to stabilize it.Governments control the value of their currencies and hence control inflation rates. When there is too much money in circulation inflation rises because prices rise due to high demand. Conversely, when there is too little money in circulation, prices drop since there is now there is not enough money to purchase goods and services, as a result, prices drop.There are other factors that contribute to inflation including nation debt, exchange rates, production and raw material costs, and international lending. However, by far it is the printing of money. As long as governments continue to print worthless paper, it will always we worth less in the future.Even though the dollar is weak and buying less its impact has been minimal.
Supply And Demand
The demand for oil has dramatically increased in recent years. India and China may still lag the United States in Technology, but they are no longer third world countries. Russia is in the fray too for all the oil it can get and control. Russia has also been pressuring Iran to rebuild its oil industry. These countries are importing mass amounts of oil putting a strain on the supply. OPEC has responded by pumping somewhat more oil while maintaining their customers are satisfied.Russia and China have been actively seeking and acquiring unique trade agreements with oil suppliers around the globe. These trade agreements will guarantee oil at a reduced price circumventing OPEC and the world's reserves.If this trend continues then there will be plenty of oil for Russia and China. What's leftover will be available for the US and the rest of the world at highly inflated prices. Adding more oil reserves to the world market is the only way to offset these special contracts.
The big oil companies have been ordered to sit in front of the Senate Judiciary Committee several times in recent weeks. These Senators who are self anointed kings, sit high upon their self made thrones, look down. and disrespect everyone who has come before them. It is an inquisition of showmanship designed to mislead the voters into thinking that they are doing their job and they mean business.Here's why.In the first quarter of 2008, oil companies made a profit of $36 billion and paid $138 billion in taxes not including severance, sales and use taxes. Oil companies made 8 cents on the dollar, the same as all other manufacturers but were taxed at a higher rate. Corporations pay about 35% in taxes while oil pays 40%.Oil executive were scolded for making millions. Yet if the executives gave up their millions it would not amount to a hill of beans. Gasoline prices would still be the same because oil is priced before they get their hands on it. Exxon may be pumping out the oil but some government owns the well outside the US.The problem here it that a good show works and is great for the evening news. Congress in all their self righteousnesses has not found anything wrong with the big oil companies and probably won't in the future. Windfall profits or not, this is the chosen path to fix the problem. Unfortunately, if it isn't broken - can't be fixed.
Congress has regulated oil since day one. Every aspect of oil from drilling wells to distribution is regulated. Congress has even mandated that corrosive ethanol be added to gasoline and they want to add more. While some of this regulation may be worth while, most of it is plain stupidity and based on misinformation.We are in an oil crunch yet Congress refuses to acknowledge it or is displaying an immense lack of knowledge of supply and demand. Congress totally refuses to allow the recovery of oil from the great reserves in the United States.Drilling ANWR is forbidden due to the environment. It is a desolate land of tundra and there are no trees there. Modern drilling techniques require only 2,000 square feet of land and that would add 1 million barrels of oil per day to the world reserves. But according to Senator Schumer of New York, it makes more sense to sue OPEC to increase their output the same.Of the over 3,000 platforms in the Gulf of Mexico, not one leaked a drop of oil during or after the rage of Katrina. No word is ever mentioned how these platforms gave the fishing industry a much needed boost.The outer continental shelf contains 115 million barrels of oil and 635 trillion feet of natural gas. Recovering this reserve alone would push the US from 11th to 4th in world reserves. In the meantime the Rocky Mountains contain huge deposits of shale oil.Congress wants oil too but they want it from other countries. Congress also wants the millions of dollars provided to them by the Sierra Club and other environments groups. These groups think that there is no price to pay for protecting the environment. Sadly, they are so wrong. The fact is that environmental accidents are far and few in between and the cleanup is exceptional.The glaring fact here is simple. Congress will not allow drilling in the US but there needs to be a boost in reserves for prices to come down. There is no other solution. So long as Congress continues on its current path, we will pay more and more to heat our homes, cook our food, and fuel our cars. High oil prices are living proof that supply and demand works.Now, before you turn your emotional switch back on there is one more thing you should know. Do you know how much gas costs in Saudi Arabia? Its $0.50 a gallon – read it! - that's 50 cents a gallon!Now the question is – have you had enough? If you want cheap gas like the Saudis, you know where to go – Congress!
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