Friday, July 18, 2008

Oil - Who's to Blame? Who's to Fix?

The topic being discussed (or is it disgust?) all around the world is the price of oil. $40 a barrel just a few short years ago, the price of oil was fastly approaching $150 a barrel - until an unexpected drop this week (Nearly 10% fall-off in 3 days).

I hear daily reports of democrats calling for alternative energy as the only means to end this crisis. I hear daily reports of republicans calling for increased drilling as the only means to end this crisis. This has turned into the ultimate political battle, each side blaming the other, but neither side fully stating to the American people what the cause is and the true implications it has on our society.

Let's begin by answering the question: Who's to blame?

Anyone in the know understands that crude oil is sold as futures on the Merchant Exchange, NYMEX. NYMEX is similar to the stock market, only instead of stocks, you are able to buy items at a price you expect to see at some future time. For instance, you can buy/sell a barrel of oil in August 2008, or August 2013. Depending on world events, the price of your future will fluctuate based on a market response to how that item will sell in the future. So who is to blame? The merchants, naturally. In a free market we have only ourselves to blame. It is we, the people who choose to buy and sell oil and gas (even at the pumps), who drive the market prices. Are we alone? Of course not. There is analysis of oil supply versus oil demand that drives the input into the sell of the futures...

What else drives the futures of sweet crude up? Congressional recognition of fables, such as human caused Global Warming - alarmists... This adds uncertainty into the future of the supply, and regulation of the use of the product. When carbon taxes are proposed, carbon based products (and carbon emitting products) are expected to increase in price, showing an offset. This forecast of gloom and doom drives the price up.

What drives the price down? The promise to ease restriction on the oil companies to explore oil reserves freely in the waters off the US. The oil may take some time to hit the market, but it is the prospect of increased supply that will add speculators to drive oil futures down, thus driving fuel costs down.

But will drilling for oil ease the cost in America? Possibly, but not by much. This is because of the higher oil demand around the world. American oil will be sold freely on a world market, so as demand increases in other regions, the increased supply will not add to a surplus, and futures will remain high. Who profits from this? The oil companies, of course. Is this a bad thing? No... it is the free market at work.

Inasmuch, there are two additional options in addition to increasing supply to meet the immediate demands. The first is nationalizing the oil fields in US territory. Pass a bill in congress and ram it down the throat of the president stating that all oil drilled in the US must be released to US markets only, and sold only as fuel for the United States. Am I advocating for this? Absolutely NOT. But this is the mentality of the American People who believe that Congress can fix the problem, or that the Presidential Candidates have some solution that will control the oil markets. The oil market is a private enterprise. Love it or not, you are not entitled to cheap gas... it is the will of the people that drives the market. Which brings me to my second option - lifestyle changes. The oil industry is not responsible for funding alternative energy, nor are they obligated. They are in the market for oil... not in the market for creating a technology that will put them out of business - where is the sense in that? Lifestyle changes will drive a need for alternative means of energy. An increase in consumer demand for Fuel Cells, Solar Panels on the Rooftops, heck- even rocket packs, will drive the market to innovation and creation in these areas of research. We need to be pro-active about what we want to see on the market. If we don't see something that will drastically change our lives, we should invent it. Turn off American Idol, and turn on the tool box... put together a prototype Electric Hummer, or solar powered scooter... then market it as a means of alternative transportation or energy... Be the change that you want to see!

We are to blame for the mess we are in. Not Congress. Not the oil industry.

We are the solution. Not regulation of the industry by the government - Socialism is never the correct answer. Free markets drive innovation... and this is a problem that we can only innovate our way out of. We need to... I hear we are running out of oil anyway... (let's see how the futures like hearing THAT!)


  1. I agree with your post overall. I agree that human-caused global warning is unproven and that carbon emissions are a silly thing to worry about. There are much more blatant and demonstrably harmful actions we could change instead.
    I also agree with your conclusion. The correct reaction to high oil prices is to reduce consumption. I'm happy to see that people are making changes and driving less. Oil is a limited resource. That's just a fact. The more sparingly we use it, the better.
    If government has any role, it's to ease the transition a little bit for people who can't afford to switch to alternative energies yet. Public transportation subsidies, maybe subsidize the solar panels.
    Oil consumption needs to fall. The difficulty is that it takes us years to move to closer-in houses and fuel-efficient cars. the end result, however, is good.

    Oh, one small point I dispute: "When carbon taxes are proposed, carbon based products (and carbon emitting products) are expected to increase in price"
    Carbon taxes would decrease demand, and therefore price, for carbon-emitting products. Products produced from them (which include the taxes in the cost of production) will have higher prices. Hence the reduced demand for both them and their carbon-emitting input.

  2. Who's t' blame? 'L seems to me that it's. . .

    Time For Some Campaignin'