Around 1 year ago, average oil prices stood at around $3.50/gallon. Currently they are 33 cents higher than last year, something which the
Huffington post notes equates to a $44 billion federal tax.
As in any year, and especially a US election year, high gas prices give rise to a plethora of opinions from politicians as to why they are doing so. While Recessions are typically the best fix for Oil Prices, you can be sure no politician will be suggesting that. However, some of the things they are suggesting the US do in order to lower prices in the long run, are in most cases, not bound to help much. Let's first look at what's causing prices to steadily rise and then close with two popular solutions, which will likely do little to temper this rise.
What are the major causes of oil prices going up?1. GeopoliticsOver the years, events in the Middle East have time and time again driven prices up. Most recently, the crisis in Syria has added much to the uncertainty of the region's stability, but tensions with Iran continue to be a main driver of high oil prices. The strait of Hormuz - through which 1/5 of the world's oil flows - was threatened with blockade by Iran, due to tensions with the US and the EU. This led to a great deal of
panic buying by traders in Europe and Asia and drove oil prices higher.
The current oil embargo by the US and the EU on Iran has resulted in it losing out on as much as
300,000 barels of crude export per day. While large oil importers such as India and China have stated they will not stop importing Iran's crude, the shear number of countries participating in the embargo has led to a lack of buyers for Iran.
So, while it is almost universally accepted that Iran does not have the capability to block the strait, in the face of superior US Naval force, potential Iranian backlash is
what speculators fear: the sabotage of an oil pipeline or internal hardliners taking matters in their own hands. Whatever the Islamic nation can do to raise the price of oil to cover their losses, analysts are fearing they will.
2. SpeculatorsCommodities Futures Trading Commissioner Bart Chilton recently told ABC that a "Goldman Sachs study last year stated that each million barrels of net speculative length in the markets adds as much as eight to 10 cents to the price of a barrel of crude oil." He further claimed that, on average, Wall Street will collect ca. 22% of the price the average US consumer pays at the pump. While the veracity of the statement has been contested by Wall Street (it's now suing the commission), Forbes contributor Robert Lenzner reported that "if there were no speculation in oil futures on commodities exchange, the price of a barrel of oil might be as low as $74.61", which equates to a speculative premium of more than $25.
The Arab Spring saw prices spike when traders
worried about oil shortages and recent tensions with Iran led to the panic buy described in the previous section. Saudi Arabia has pledged to match the oil exports that would have come from Iran,
leading to a four year high Saudi rig use. Even so, rapid responses to ultimately false price signals (like the
fabricated Iranian TV report that there had been a Saudi pipeline explosion) are sending prices up, telling us that the Markets are indeed on edge and indicating that speculation will continue to drive prices higher.
3. DemandIn the US, demand for gas is at a 12-year low and U.S. gas consumption so far in 2012 is at its
lowest point since 2000. This
graph from the Centre for Global Energy Studies shows that demand in Europe will actually decrease in the coming years, while in the US it will more or less flatten out. So where is this demand coming from? You probably know the answer already, and looking at the previous graph one can see that Asia (mostly China and India) will continue their path of major energy consumers. Citizens in China and India are
buying cars at ever increasing rates , while Brazil saw its
oil imports rise by 224% from Nov. 2010 - Nov. 2011.
These three countries (Brazil, India and China)
are easily making up for the drop in US demand, resulting in US based refineries exporting larger volumes of finished gasoline and diesel. In fact, recent increases in diesel exports can be partially explained by
India's shift to diesel fueled cars from the more expensive gasoline fuel.
What 'quick-fix' solutions won't drastically bring oil prices down?1. The Keystone XL PipelineThe Keystone XL expansion is expected to transport
800,000 barels per day from Alberta, Canada to the refineries of Texas, however the crude has already been earmarked for
export outside the US at higher global prices. Added to this, the Keystone XL pipeline is estimated to
increase prices in the midwest by 20 cents, because of drop in crude Midwestern refineries will receive from Canada.
A
recent article in Bloomberg lists the various opinions from different consultants on what direction prices will take if the Keystone XL is built. Quoting directly from the article: "Canadian producers will be able to charge more for their oil after Keystone XL is built, boosting revenues by $2 billion to $3.9 billion, Canada’s National Energy (TAQA) Board said in the 2010 report approving of TransCanada’s pipeline plan". It is mostly agreed that oil prices would rise in the Rockies and the Midwest, while those in the South might drop. Whether the net balance will be slightly negative or positive, it's pretty clear that the Keystone XL will not be a game changer for prices.
2. Taping into the Strategic Petroleum Reserve Other than the fact that there is no severe disruption in energy supply that would excuse opening up the SPR, the reserve contains only a little under 40 days worth of total US consumption of crude. What little the US would open up to the markets, hasn't been refined and
needs to be replaced. A short term reduction in prices, of the tune of 11 cents last time 60 million barels were opened up to the market, would not be expected to do much in the face of the recent volatility oil markets have been subjected to.
So, when it comes to lowering oil prices, don't listen to what most politicians are telling you these days. I'll
bet you $10,000 the issues at hand aren't so easily solved.