Understanding the oil price problem
If you’re like me, every time you drive anywhere you check out the gas prices. Every time your car approaches empty, you inevitably cringe. It seems like highway robbery (no pun intended). After looking into the topic and researching it extensively, I came to a conclusion that the real cause of high gas prices aren’t the oil companies at all.
There are many reasons why gas prices are as high as they are. For the brevity of this article, I am only going to mention the three that have made the biggest difference. The first is the Iraq War which was started in 2003. You will remember that back in 2003 gas prices were consistently under $2.00 a gallon. Robert Collier from the San Francisco Chronicle writes, “War reduced Iraq’s production of oil, at a time of increased global demand.” Youssef Ibrahim of USA Today wrote that in 2004, oil production capacity in Iraq was cut from three million barrels to two million (a barrel holds about 30 gallons). Production continued to dip as Jim Krane of the Washington Post wrote in 2006, that Iraq’s oil production has declined to just one million barrels per day. As fighting continues to deteriorate the Iraqi homeland, oil production has suffered a harsh 67 percent drop from three million barrels down to one million.
Of course the lack of oil production isn’t only in Iraq. The Angola Press reports that “hostilities in Nigeria alone have caused a supply disruption of 675,000 barrels of oil per day.” This is just one example of how oil in the world is quickly decreasing while world population and demand continue to grow.
This brings me to the second key reason why gas is so darn expensive-demand. The International Herald Tribune reported that Fatih Birol, chief economist of the International Energy Agency, said in October 2007, that oil prices will remain high in the foreseeable future because of the rapid increase in demand from India and China. I mentioned previously about how oil production around the world is slumping by millions of barrels a day, and with an expanding automobile class in India and China there is greater global demand for oil than in years past. With a smaller supply and a greater demand, prices do tend to rise.
Unfortunately, this problem goes much farther than a simple supply and demand problem. The third key reason is the devaluing of the dollar. Whereas the dollar was once about equal to the Euro, it has fallen to equaling only about half of a Euro. This is because the value of the dollar has gone consistently down in the last few years. Ioannis Michaletos of World Press says, “as long as the dollar loses value, there is going to be a steady increase in the price of oil.” This makes sense economically. If the dollar is less valuable, it is able to buy less.
These are just three reasons why gas prices are as high as they are. There are many other reasons that go far beyond supply, demand and dollar values. But I will tell you what is not one of the reasons for high gas prices: greedy oil companies. It is true that Exxon makes a profit of $40.6 billion. A total that high can easily make you think of price gouged customers. This brings me to the concept of “profit margins.” A profit margin is a percentage of revenue that a company makes as profit. Deroy Murdock of Scripps News Service reports that Coca-Cola had a profit margin of 20.7 percent, and Microsoft had a profit margin of 27.5 percent in 2007. What do you think that the profit margin of oil companies must have been: 40, 50, maybe 60 percent? Murdock reports that it was a mere 8.3 percent.
Jerry Calbos made a great point in his column last week: before deciding a position on an important issue or policy we need to investigate and do the research to know what the facts say. Sometimes in our impatient, emotion-driven world we jump to wrong conclusions when we see something we don’t understand. Oil prices are going up, and many Americans immediately assume it is because of greedy executives instead of considering the impact that global and national events have had. The price of oil is a very important issue in America, and to be able to find the most suitable solution, we must first accurately understand the nature of the problem.
Posted by Colonnade Archives
on Apr 18 2008. Filed under Opinion.
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