Oil Prices Up Again! Ouch…

Q. I’m trying to follow some of the things you wrote about last year with the budgeting. But the gas prices keep going up and it blows all my savings amount.  Why is this happening?  I though we were still in a recession.

A. This is one of the great mysteries of life.  In the purest sense oil, and other commodities, would move up and down based on actual demand for the limited supply.  This is basic economics.  Unfortunately, it appears that there are several kinks in the system up and down the process that cause skyrocketing prices.  We know that gas is nothing but a refined oil product.  The higher the cost of each part of the system, the higher the ultimate cost to the consumer.  Oil prices have been climbing of late to nearly double the level they were just a few months ago.  This increases the raw cost of gas.  Most of the blame appears to be pointed at OPEC reducing their production and sticking to the stated quota. Second, refineries are not working at full capacity and are trying to maximize their profits by reducing production of gasoline when demand for fuel is down.  Thirdly, there is the delivery mechanism.  The cost to transport fuel continues to increase simply because it takes energy to move it whether by pipeline or truck.  Lastly, since the United States is not the sole consumer of oil products, we are at the mercy of other developing countries trying to get access to a limited supply of oil.

Unfortunately, there are two other pieces to this that are out of our control:  The investor and government spending.  As more and more funds and investors pile back into the market trying make a buck in commodities, it causes demand for ownership of those products to increase which increases the price.  Even though it appears that U.S. consumers are still driving less and conserving through downsizing their cars, it does little to stop the increase in prices.  If investors sense an increase in demand from a global perspective, even if it’s a rumor, the price will increase.  The other piece is the U.S. Government’s debt level.  The ability of our government to repay it’s debt is directly tied to the dollar’s value which is the currency that denominates oil prices.  As our government takes on incredible levels of debt, we see the markets questioning this and pondering inflation thus causing a weakening of the dollar.

In my opinion, each of these steps hurts the ultimate consumer.  Companies, individuals and countries at all levels of this process are so consumed with making a profit that they forget who pays the ultimate bill: the international consumer.  Some would say higher prices are a good motivation to increase conservation.  I say that only pads the pockets of the countries and companies who control the limited supply of these commodities.  I challenge everyone in the process to not only think of profit, but to think of smart alternatives that can be developed to give c0nsumers a choice of energy.