Oil Demand and Supply

We’ve talked about gas and oil prices in a couple articles before. Recently, I ran across a new article online that got me to thinking about the whole gas and oil predicament again (like it ever left). Anyway, the article reports 4 energy analysts testified to the House Energy and Commerce Committee on Monday, June 23, about the potential impacts if the United States instituted a law limiting speculation in the energy futures market. These analysts stated that within 30 days of passage, the price of crude oil would drop roughly in half from the $130s to $60s per barrel. They continued to say that the savings would pass on to the cost per gallon and leave gas costing about $2.00. Is this a valid solution to our oil and gasoline crisis? Well, I’m going to give you my opinion, as always.

I’m sure if you’ve watched the news over the last 2-3 years, you know that the world’s poor nations are growing and the nations that were behind the technology curve are moving forward. Couple that with the increased demands of consumers in all nations and you have a serious supply and demand issue for one of the most important ingredients of commerce, oil. At least that is what we are led to believe. I can’t even keep a mental count of how many times I heard analysts stating that the world is at oil capacity. Every barrel created is being used. We are at the edge of supply versus demand. Being that we are at such a crossroads, this leads to the supply of oil costing more and more. Eventually, the cost of the product will become so high, that demand will have to revert to a more normal level. Assuming we are talking about rational people.

So demand will fall if we continue this pace? I would hope so, or we aren’t a rational society. If we consistently empty our wallets for fuel and other products impacted by high oil prices, then I would hope that we would be bright enough to look for an alternative solution. By replacing the demand of oil with the demand for an alternative, the demand for oil will in turn decrease and with it, the cost of oil will begin to follow suit. But that doesn’t really help us does it? We really don’t have an alternative at this time. We don’t have an alternative lined up for the next 5-10 years even if something were started today. Car manufacturers have hybrid cars coming out, we have E85 gasoline, and we have some battery powered vehicles. But none of that is readily available to the masses. Hybrid cars are still depending on gasoline, they just get more MPG using more effective methods of saving gas. E85, while made of ethanol for the most part, still utilizes gas. Battery driven cars don’t have the distance capabilities we desire at this point.

We are only talking about the vehicles at this point. What about all of the products that are utilizing oil in the manufacturing process? What about all the tools that require oil and oil products? What about the transportation of goods back and forth through our country? There are many, many issues facing the demands of oil and associated replacement with an alternative product. Even if we had an alternative product, would it save us money? The major problem with oil supply is that it is “limited.” It is a natural resource that is very expensive to find, refine, and disseminate to the world. Would our alternative be any different? What resource do we have that is so abundant that the impact of our extreme demand would not immediately price the new replacement similar to that of oil?

If we switch our demand to E85, the price of corn will increase. It already has. If we replace our demand with battery operated cars, our price of materials to build batteries will drive up the manufacturing costs to levels similar to our current gas crisis. How do we achieve a cheaper alternative? We have to focus on a resource that is readily renewable and not expensive to acquire. Water is a simple answer. How can water be an alternative to oil? I don’t have a clue. It’s an example of a resource that is readily renewable, easy to acquire, and is available in mass quantities for a very cheap cost. Are there other resources like this available to us? I’m sure there are. There could even be some man-made products. However, even man-made products will suffer a price increase from increased demand and limited supply over time.

Is there any hope? Sure. But we have to fund the engineers and scientists working on potential solutions now more than ever. We cannot be in this same position of unknown in the upcoming years or our economies will hit more than a recession. Every consumer product has felt the impact of our oil crisis. Increased transportation costs, increased manufacturing costs, and increased energy costs are affecting every single product in our life. Food has begun a steady increase in price. Energy costs for electricity and heating fuel have gone up by great percentages. Our basis costs of living are far outpacing our income growth. We cannot continue this path. Eventually, demand will have to subside without a replacement or not. People will be forced to make decisions that will not only hurt their families, but the communities they live in, and also our country. Our economy is dependent upon people spending money. If people begin to stop spending money on anything but the core products that sustain life, our market economy will implode.

After all that, we are back to our market. The article stated that the analysts believe that the United States could alter the futures market by instituting a law keeping speculation to a minimum in the energy markets. Is that fair? Not really. The market and capitalism is based upon free trade and earning what the market will allow. If the US changes the field and puts limits on the market, they are creating a different type of market. The speculators will of course leave the US markets and enter another market where their money will return the largest profit in return for their risk. What will this do to the US markets? You got it, the US market will undergo a serious correction with millions (billions) of dollars leaving our investment facilities and begin entering other foreign markets. Money has no loyalty. While the analysts are correct in that the price of oil will drop because of the restraints put into place, they are also missing the impact of doing such a thing to the rest of the market.

People invest money to make money. If you remove the ability to make money, the investors will leave and find a new market for their money. Our society keeps focusing on the wrong end of the issue. We need to focus on the demand side of the issue and not the supply issue. If we add supply, demand will eat the new supply in an instant with nothing but a small respite of lower prices. We MUST focus on the demand side and find an alternative to oil. That is the only TRUE way of returning our energy crisis to normalcy. Anything we do will take time to integrate and produce, more than likely, 5-10 years worth of time. Do we have that kind of time with the state our economy and world is in? I don’t know. Demand will only continue to increase and unless someone finds an ocean of oil that can be tapped easily in the near future, we are on pace for $6 per gallon gas in the next 2 years.

Citation: http://www.marketwatch.com/