Wheel Deal: October 2006
Decling Gas Prices
Don't Hold Your Breathe
By Doug Brauner
It always seems to happen in the produce section. Inevitably, I’ll be thumping a melon or squee zing a tomato, and from over my shoulder the question will be launched, “Hey, Czar, what’s the deal with gas prices? When will they come back down?”
There are so many problems with the “gas prices question” that I’m not sure where to begin, but, trust me, it has nothing to do with answering automotive queries while I’m assessing lettuce. That, I love. What drives me nuts, however, is that so many of you are in such deep denial over energy prices. Hence, I’ve decided to commit my inaugural column in Prosper to the topic, so none of you will ever again be confused while digging deep into your wallet to fill the family tank.
So strap yourself into your Barcalounger and prepare to be educated: Gas prices will never go back down. Whew, I said it, loud and clear. And, while I may feel better, I know you want an explanation.
The lack of gas (notice I say lack of gas and not lack of oil; there’s plenty of crude around, but we’ll talk about that in just a bit) has been brewing for some time. The guys who run the oil/gas companies have been waiting patiently to make their very calculated move to maximize profits. We are now feeling the burden of their wait every time we fill up.
Pork Bellies, Not
You’ve heard of gold being traded on the financial markets? Precious metals, pork bellies, cocoa and oil are all traded daily. Investors buy and sell futures contracts that ultimately determine the price of a barrel of oil. Many people believe oil companies set this price, but it’s actually not this simple. What the oil companies can control, however, is their ability to refine oil into gasoline.
There is no question that world oil supplies are dwindling as demand continues to grow. But just about any expert will tell you, geopolitical nuances aside, that oil can, and will, continue to flow for some time to come.
But we don’t pump oil into our family truckster. That’s where refinery capacity comes into play. And trust me, we don’t have enough.
Building a refinery is a daunting task if you’re a big oil company. It requires an extraordinary investment, and the return on those dollars spent can take years before the accountants are smiling. But what keeps stockholders happy are low costs coupled with high demand for existing product, and that’s exactly what we’re seeing right now.
As of August, five of the world’s largest energy companies reported combined second-quarter profits of more than $30 billion, a bounty fueled by worldwide economic growth and political instability that helped keep oil at more than $70 a barrel, according to the Associated Press. If you were making a record salary at work, would you start spending money and have the result be less pay? Of course not, but that’s exactly what a lot of us are expecting the oil guys to do.
When More Is Less
Ramping up refinery production would only increase supply. My eighth-grade economics teacher was a firm believer that more supply with consistent demand would result in falling prices, creating less profit for those making the gas. You don’t have to be a Wharton Business School grad to see why making “more” will ultimately make “less” for the oil companies.
Convinced yet that gas prices aren’t going down? Well, strap yourself to the nearest derrick, because there is a perfect storm of situations brewing that could easily force prices higher, a lot higher.
As of press time, unrest in the Middle East continues to worry already skittish investors. While oil supplies are adequate, our woeful refining capacity and resulting short-supply problem could be exacerbated by worldwide events well out of our control.
Concern about supply disruptions from countries such as Nigeria or Venezuela, as well as the continued threat of terrorism, worker strikes and even natural disasters, could create a domino effect and cause major shortages in this country. Depressed yet? Are you ready to bust out the Schwinn and start pedaling to work? It’s not a bad idea. Let’s face it, we created this problem, and we are going to have to solve it.
The best advice is old school and simple, but I’ll say it again: We need to stop driving. If Johnny has baseball practice and Sally has ballet lessons, find a way to carpool. Ditch the SUV and re-introduce your family to a sedan. Learn to drive a manual transmission.
Get a light rail pass. And stop racing from one red light to another. By gently accelerating and decelerating you can often realize a significant increase in overall fuel economy. Add perfectly inflated tires to that recipe and you’ll get at least a few dollars back every time you fill your tank.
So, next time I’m evaluating the merits of fresh versus canned corn, please feel free to sidle up and say, “Hi.” We can talk about anything you want. Just don’t mix gas prices with it.
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