Monday, February 16, 2009

Oil Prices

The Washington Post reports:

Car ownership in China is exploding (and) China's demand for gas is much of the reason for the dramatic run-up in global oil prices.

China alone accounts for about 40 percent of the world's recent increase in demand for oil, burning through twice as much now as it did a decade ago. Fifteen years ago, there were almost no private cars in the country. By the end of last year, the number had reached 15.2 million.

The New York Times reports:

Bolstered by speedy economic development and industrialization, energy demand from Asia has been one of the main contributors to higher oil prices. Over the last two years, China and India accounted for about 70 percent of the increase in energy demand and the world’s energy needs would increase 55 percent by 2030.

And so we were informed on July 28, 2008 (by WaPo) and on November 7, 2007 (NYT) that the soaring rise in demand for energy in the Asian behemoths played a major role in rising gas prices.

After the latter report, as we all know, gasoline prices in the U.S.A. plunged.

We shouldn't have been surprised. Whatever the cause(s) of the runup last year in gasoline prices, it's hardly likely that the mainland Chinese and the Indians accomodated us in the second half of 2008 by drasticaly cutting their demand so we could buy $1.69 a gallon gas in Dearborn, Michigan or Las Vegas, Nevada.

Fortunately, we are not hearing the same wildly exaggerated and misleading claim for the rise in gas prices now going on nationwide- while the price of crude oil continues to tank (pun intended). Chris Kahn and John Porretto of the Associated Press explain:

The benchmark for crude oil prices is West Texas Intermediate, drilled exactly where you would imagine. That's the price, set at the New York Mercantile Exchange, that you see quoted on business channels and in the morning paper.

Right now, in an unusual market trend, West Texas crude is selling for much less than inferior grades of crude from other places around the world. A severe economic downturn has left U.S. storage facilities brimming with it, sending prices for the premium crude to five-year lows.

But it is the overseas crude that goes into most of the gas made in the United States. So prices at the pump will probably keep going up no matter what happens to the benchmark price of crude oil.

Those of us who like paying under $2.00 a gallon might ask: why not buy the better, cheaper oil?

The AP writers continue:

Historically, West Texas International crude has cost more. So nobody bothered building the necessary pipelines to carry it beyond the nearby refineries in the Midwest, parts of Texas, and a handful of other places.

And nobody (e.g., consultant, economist) at a major oil company could figure out that at some point the cost of oil from such places as the North Sea, Saudi Arabia, and South America would eclipse that from west Texas? No one thought that oil supplies to Americans would rise and prices decline if pipelines were constructed to transport the crude to the refineries and to market?

Attribute it to incompetence or to greed of the oil companies. Better yet, given the state of American capitalism (conveniently transformed into corporate socialism) call it just another example of the inefficiency of the free market.

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