Oil and the United States

Once again the price of oil is over $70, acutally it is at a high of $75, so again it has grasped the headlines and people are voicing their frustration and anger. Most of this is directed towards oil companies as price gouging. It is understandable that people feel ripped off by the companies but there are other factors that are playing a much more influential role in price increase. World events (ie. Iran) play a big role compounded by calls by Chavez threatening to blow up oil fields are big factors (BTW these calls are pure politics). Remember, Venezuela and South America are now to small for Chavez, he wants to be a world leader, but more on this in another post.

Less published reasons
China is becoming a huge oil importer now, but the recent increase in gas prices, to $2.94 when I filled up today, is also because of new federal regulations have called for a change in gas formulation. In other words gas is no longer supplemented with MTBE and it was predicted by the federal govt. and the oil companies that a price spike would more than likely occur. Other issues at play are the multiple gasoline requirements, which prevents selling gasoline from one region of the US in another. In addition to no new refineries haveing been built in the US since 1976, this past summers hurricanes, and large amounts of money entering the futures market.

Politics and the consumer
Bush in his State of the Union address laid out his new energy plan calling for energy independence (a good but unlikely goal), ironically John Kerry during the 2004 presidential elections was calling for this same thing. Consumers like myself are less concerned about politics and passing the blame around than our politicians actually doing something about this. However, Washington being Washington it is politics and democrats like Senator Charles Schumer (NY) see blaming oil companies and price fixing as scoring political points for the democrats. Again a prime example of how politicians like to take a complex issue and trivialize it into something very simple.

International Politics
It goes without saying that the political situation between Iran and the international community is having a large impact on oil prices. Knowing that the market is easily spooked by any potential shortfall in oil supply Chavez has taken it upon himself to try to drive up oil prices as much as he can. First, Venezuela is not producing the ~3.2 million b/d of oil as they claim, and Chavez has been unsuccessful at getting OPEC to cut supply to drive up prices and make up for Venezuela's budget shortfall. Secondly, Chavez has been campaigning hard for OPEC to recognize its tar fields as oil reserves which would make Venezuela with the largest reserves of oil in the world thus have a lot of power and say in the oil market, something other OPEC countries will likely not allow to happen, in particular Saudi Arabia. Because Chavez has been unable to get OPEC to recognize its tar fields as reserves or to cut supply he has resorted to a far more confrontational and dangerous way to move the oil markets. This method is to befriend Iran, the new international paria, by supporting its nuclear ambitions, holding high level government meetings, and seeking business venters. In addition, to Chavez claiming that oil will hit $100 and that if the "imperialists", USA, invade Venezuela he will blow up the oil fields. Like I said above Chavez doesn't want to be the leader of Venezuela or Latin America he wants to be the leader of the world and he is trying to do this with oil.

What does the US do?
Well there is little the US can do, especially when it comes to Iran and Venezuela. Instead our politicians should be laying out long term plans to decrease our dependence on oil and mandating an increase in car fuel efficiency, something they seem very reluctant to do. A short term remedy, although politically unpopular, is to publicly ask the American consumer to make a small sacrifice and try to use less energy, such as drive less and at slower speeds, use a fan instead of air conditioning, etc...

So to conclude this post I will simply say that we should expect oil to remain high for the foreseeable future, unless the oil futures markets decide that oil is no longer worth investing in.